Is the promotion of an international role of the Euro feasible?

ABBL Published 17.05.2019

Each year, the European Commission, along with the European Central Bank, organizes a joint conference on European financial integration and stability. The international role of the Euro and the related challenges of scaling up the use of the EU currency were the topics addressed this year to the market participants and academics.

On 12 September 2018, during the State of the Union Address, the European Commission President Jean-Claude Juncker described the intention of fostering the role of the EU currency in the world.

 

The euro is 20 years young and has already come a long way – despite its critics. It is now the second most used currency in the world with 60 countries linking their currencies to the euro in one way or another. But we must do more to allow our single currency to play its full role on the international scene.

As was often mentioned during the conference, the Euro is already considered successful being the second most important international currency after the dollar. Indeed, in 2017 about 30% of the value of international transactions was invoiced or settled in euro, compared to about 40% for the US. Moreover, the euro accounts for around 20% of the foreign exchange reserves of central banks worldwide.

However, despite the successes, in order to increase the importance of the EU currency and to promote its use in the international market, both EU institutions, market participates and academics recognized, to a certain degree, a series of actions that need to be taken in order to provide further opportunities for the euro’s international use.

First of all, a deeper integration coming from the completion of the Banking Union and the Capital Market Union was seen by most as a necessary step in order for the euro to fulfill its potential on the international stage. More specifically, by putting in place the missing puzzles such as the European deposit insurance scheme (EDIS), the EU could increase the confidence in the EU financial sector, and therefore in the euro. On the other hand, a stronger and more integrated capital market would foster the attractiveness of the euro.

If the EU wants the euro to be competitive, it needs a big and deep European financial sector. According to attending market participants, the EU should strengthen the liquidity and the resilience of the European market infrastructure. Indeed, the US turnover is around 6 hundred billion a day, while in the EU is about 20 billion a day. Therefore, the difference in terms of liquidity is very large.

The implications and risks stemming from persistent fragmentation of the euro area financial markets was also recognized as an obstacle to the promotion of the euro in the international sphere. Together with it, setting up policies that help markets to increase in size and eliminating cross-border barriers between capital markets was seen as key to the success of the CMU. FinTech and fast digitalization of the banking sector was mentioned as a policy area where further harmonization is needed. Indeed, a fully harmonized market would foster financial stability, resilience and the EU’s credibility as rule-maker.

Finally, the panelists argued that a wider and stronger EU financial market that would raise the worldwide usability of the EU currency needs as fundamental base a secure system which would guarantee financial stability. The use of safe assets are therefore considered an essential tool in this endeavor. However, despite the recognition of its importance, it became clear during the discussions that ideas on how to create and promote safe assets in the EU are, for the moment, quite vague also from an EU institutional perspective.

The conference was an important arena of discussion on the feasibility of the promotion of the euro in the international market. However, a crucial question remained: how is it possible to increase the international use of euro if the European Union has not put in place strong risk sharing mechanisms and cohesion policies that would tackle divergences?

By Elona Morina, European Affairs, ABBL & ALFI

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