Trade tensions boosted international role of euro, ECB reports

President of the European Central Bank Mario Draghi arrives at the Eurogroup meeting in Luxembourg. [Julien Warnand/EPA]

Trade tensions, challenges to multilateralism and unilateral sanctions might be bad for the economy but they have helped boost the global use of the euro, the European Central Bank reported on Thursday (13 June).

“It’s primarily the diversification out of the dollar which benefits the euro,”  ECB board member Benoit Coeure told reporters in Frankfurt.

According to the ECB assessment, “financial turbulence in some emerging market economies, growing concerns about the impact of international trade tensions and challenges to multilateralism, including the imposition of unilateral sanctions” benefited euro’s global performance.

Some central banks, notably Russian, “might have started to consider reducing their positions in financial assets exposed to the risks of unilateral actions,” the ECB’s report on the international role of the euro stated.

ECB highlighted that the euro’s share in global foreign exchange reserves, debt issuance and deposits and outstanding loans increased in 2018, while its role as an invoicing currency remained stable.

While the euro is still the second most important currency, after the US dollar, the ECB report stressed that its global role improved for the first time since the financial crisis.

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Tensions with the US

In his State of the Union address last September, European Commission President Jean-Claude Juncker announced his intention to push for the internationalisation of the euro before the end of his mandate.

This could be a potential source of conflict with the US as the euro grows to the detriment of the dollar, and Donald Trump has already attacked ECB monetary policy for devaluing the euro.

Trump’s tweet revived the fears of a possible currency war as the US administration is already studying how to impose additional duties on countries that devalue their currencies.

“The European Central Bank is not targeting the exchange rate of the euro,” said vice-president for the euro, Valdis Dombrovskis, who recalled that the EU lender’s role is limited to ensuring price stability. “At the end of the day, it’s markets that determine the exchange rate of the euro vis a vis other currencies,” Dombrovskis pointed out.

“The purpose of this work is not to antagonise anyone, it is to see how the euro can play a more prominent role in global markets and what are the factors hindering it,” the vice-president for the euro stressed.

Pierre Moscovici, the Commissioner for economy, added: “It is necessary that we build, not against anybody but for the sake of Europe”.

Completing the EMU reform

The European Central Bank also looked at the progress in further strengthening the Economic and Monetary Union in the past few years as a factor for boosting the international role of the euro, as it improved the currency resilience and attractiveness for foreign investors.

EU finance ministers are meeting in Luxembourg on Thursday with the aim of finalising a broad agreement on the EMU reform.

Advancing on the Banking Union and the Capital Markets Union “is fundamental for strengthening the international role of the euro,” Dombrovskis said ahead of the meeting. However, this remains an outstanding task on the leaders’ agenda.

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EU finance ministers will try to close a deal on deepening the Economic and Monetary Union, including a tentative new budget for the eurozone, during the Eurogroup meeting on Thursday (13 June) in an inclusive format. 

[Edited by Zoran Radosavljevic]

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