Scant Evidence of Monetary Fragmentation in Wake of Ukraine War, ECB Says

21 June 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The European Central Bank said on Wednesday that anecdotal evidence of a shift away from the dollar and the euro to alternative reserve currencies was not indicative of a broader trend towards a fragmentation of the global monetary order.

In its annual report on the international role of the euro, the ECB said that there was ‘no significant evidence that geopolitical fragmentation risks have led to a reduction in the level of demand for major reserve currencies’ such as the dollar and the euro.

This was despite the fact that ‘[a]necdotal evidence, including official statements, points to the intention of some countries to develop the use of alternatives to the currencies of countries that applied sanctions’ in the wake of Russia’s invasion of Ukraine last year.

‘The implications of a more fragmented international monetary system would be potentially significant’, the ECB said, warning that ‘lower demand for foreign exchange reserves could contribute to increasing exchange rate volatility.’

There was nonetheless a trend towards diversification of foreign exchange reserves, the ECB said, with diversification into nontraditional currencies, which began in the wake of the 2008 global financial crisis, continuing in 2022, ‘but at a slower pace compared with previous years’. The ‘trend has not accelerated visibly since Russia invaded Ukraine’, the report concluded.

Russia’s geopolitical allies have however increased their gold holdings in the wake of recent sanctions, the ECB noted. According to the report, ‘the closer countries are geopolitically to China and Russia compared with the United States, the more they increased the share of gold in their official foreign reserves [in 2022] – a pattern that was particularly apparent in Belarus and some central Asian economies.’

The ECB announced that the ‘international role of the euro was resilient in 2022’, as the share of the euro in global holdings of foreign exchange reserves ‘increased by 0.5 percentage points to 20.5% in 2022, when measured at constant exchange rates.’

‘The share of the euro increased across most other market segments, such as in foreign exchange settlements and in the outstanding stocks of international debt securities, loans and deposits’, the ECB said.

‘Despite a succession of new shocks, the international role of the euro remained resilient in 2022’, ECB President Christine Lagarde said in the report. ‘However, international currency status should not be taken for granted. This new landscape increases the onus on European policy makers to create the conditions for the euro to thrive.’