After Russia’s attack on Ukraine, an unprecedented series of sanctions was imposed on the aggressor. For example, around half of the Russian Central Bank’s foreign exchange reserves were frozen and Russian banks were excluded from the global banking communication system SWIFT. Many experts warned that the use of financial sanctions as a weapon would have a negative impact on the position of Western currencies in the international monetary system and lead to its rapid regionalisation and fragmentation. However, the latest figures published by the European Central Bank (ECB) in this year’s report on the international role of the euro show that nothing of the sort is happening. This is good news for Europe, because the impact of sanctions – including on the countries that impose them – is closely being watched by other potential aggressors, including China. However, the role of the single currency in the international financial system needs more attention.
The creation of the common currency was not geopolitically motivated, but mainly by the desire to eliminate exchange rate fluctuations in an increasingly integrated single market. Currently, more than 500 million people live in countries where the euro or currencies pegged to it are officially in circulation. The single currency is the second most important currency in the international monetary system after the US dollar. But what are the benefits of further strengthening its international role? What challenges stand in its way? Answers to these questions are particularly important right now. For the growing geopolitical rivalry between China and the United States and the gradual decline of the West’s share in the global economy raise the question of the euro’s role in a changing but still dollar-dominated international financial system.
Stable currency with structural problems
In principle, there is a consensus that a stronger international role for the euro would benefit European economies. It would lower the cost of raising capital, have a stabilising effect on the European debt market, reduce exchange rate risks, strengthen the autonomy of monetary policy and have a positive impact on the political standing of the European Union (EU). In the first decade of its existence, the euro also came close to dethroning the dollar, but the crises in the eurozone abruptly interrupted this trend. Since then, the euro has occupied a stable second place in the international monetary system after the dollar.
The problems in strengthening the international role of the euro reflect the challenges of integrating the EU politically and economically as such. Central to this is the diversity of the member states’ economies, many of which face enormous structural problems. Moreover, there is no single state behind the single currency, and it is hard to imagine that one could emerge. The financial markets, which are seen as key to the widespread use of a currency, are fragmented in Europe and lack transparency for international investors. The Capital Markets Union project is making relatively slow progress.
Despite a considerable increase in the issuance of common debt instruments, the EU does not have a safe asset that is comparable to what the United States has. Only Germany, the Netherlands and Luxembourg have the highest credit ratings. The second- and third-largest countries in the Eurozone – France and Italy – have serious structural problems and difficulties in stabilising their public debt. In addition, Europe is dependent on the US financial infrastructure, for example in payment card systems. Although the political–military alliance with the United States appears stronger than ever today, it is unclear how the political situation there will develop in the future. Donald Trump’s presidency has shown that Europe should develop its own independent financial infrastructure. However, this is a very complex and time-consuming process that requires close cooperation between governments, financial institutions, regulators and technology providers.
A global euro: Overcoming national hurdles
For many years, efforts to use the euro internationally were also hampered by conflicting interests among member states. Some member states, including Germany, took the view that the internationalisation of the currency should be the result of market forces and not a deliberate action taken by European institutions. However, strengthening the international position of the euro does not require a meta-agreement between member states. What is needed is more of a commitment from them to solve the structural problems of their own economies and more ownership of important EU projects – Banking Union, Capital Markets Union, digitalisation and green transformation – all of which are progressing too slowly. The digitalisation of the economy requires comprehensive measures, from support for the development of European payment systems to better informing citizens about the opportunities and risks associated with digital investments, for example. A key challenge will be to bring the ECB-led Digital Euro project to the implementation phase. This project has the potential to develop a much-needed payment infrastructure in Europe.
Even if security policy issues, the EU enlargement process and institutional issues currently dominate the European agenda, it should not be overlooked that the basis of European integration is the economy. The EU internal market exists in symbiosis with the common euro currency. Both projects are far from complete and require much more political attention and thinking beyond partisan or national interests. However, this will be difficult in the near future, as the EU and member states are facing a series of elections at the European, national and regional levels.
