WHEN THE European Union launched the euro two decades ago, economists wondered if this novel currency might pull off a feat none other had managed in the post-war period: to challenge the mighty American dollar. However, reserve managers at the world’s central banks, as well as business folk the world over, largely stuck with the trusty greenback. Now Europe is having another go at establishing the bona fides of the euro beyond its borders. A significant step was taken on June 15th when $20bn worth of bonds was issued as part of the Next Generation EU (NGEU) scheme to boost European economies. Those bonds could yet rival American Treasury bonds as a safe asset of choice.
Currencies exist mainly to facilitate the transactions of people and businesses within the borders of the places that issue them. But having an international presence helps in myriad ways. For firms, having imports and exports denominated in their local currency rather than, say, the dollar, means less disruption when exchange rates inevitably see-saw. Issuing a currency that foreigners want to hold can make it easier for governments to raise money from them at cheap rates. That in turn drives down the cost of borrowing for firms and banks.
The euro is widely available outside the 19 countries that formally use it. About two dozen countries link their own currencies to it in some way, albeit mainly former European colonies and close neighbours. Between a third and half of all euro banknotes by value are held outside the euro area, according to the European Central Bank (ECB). Nevertheless, by the conventional measures used to gauge international usage, it is a distant runner-up to the greenback.
Around a fifth of all foreign-exchange reserves accumulated by central banks, and a similar percentage of cross-border loans and bonds, are denominated in euros—the share for the dollar is about 60%. The euro’s share of payments for transactions is much closer to that of the dollar (see chart), unsurprisingly given that the EU is the world’s biggest importer and exporter of goods and services. Still, commodities like oil remain mostly priced in dollars.
In its first few years the single currency looked as if it might rival the post-war champion. By 2007 the euro even became the most popular currency in which to issue foreign-currency denominated debt (for example by multinationals). It was not to last. The financial crisis that started that year prompted skittish investors to fall back on the dollar as their currency of choice. The euro zone miasma that ensued, during which the very survival of the single currency came into question, seemed to vindicate their decision. Depending on the measure used, the euro has since flatlined or lost importance.
Europe now wants to have another crack, if not at overtaking the dollar, at least reducing the latter’s dominance. Two changes in circumstances mean there is a chance the euro could gain ground.
The first is America’s changing attitude to international economic policymaking—at least under the presidency of Donald Trump. His brand of jingoist protectionism jarred with the obligations incumbent on the issuer of the world’s reserve currency. Even under the more conciliatory Biden regime, Europe frets that its interests will not always be aligned with America’s. Relying on the dollar is perceived as an even greater potential vulnerability than before.
In March, euro zone leaders said that boosting the currency’s international use would help them achieve “strategic autonomy”. The EU has been particularly irked to discover that businesses in the region were in effect forced to abide by American sanctions that Europe opposed, for example on Iran. America has used the need of big banks to have access to dollars to police their behaviour far beyond its shores. Those that have fallen foul of American edicts have incurred large fines.
Critics see this extra-territorial prerogative as an undue weaponisation of the dollar. That has encouraged a change of mind among those who have traditionally been resistant to boosting the international role of the euro. In times of crisis, global reserve currencies tend to spike as investors seek a safe haven. Such unpredictable capital flows worried German monetary policymakers in the age of the Deutschmark; their scepticism carried over to the ECB. It has historically sought to “neither hinder nor foster” an international euro, but is now seen as more amenable to the idea.
The second change came, unexpectedly, as a result of the pandemic. Whereas the last global recession brought the euro to the precipice, on this occasion the swift actions of the ECB and national governments to support their economies were well received. Such battle-hardening has boosted the credibility of the euro in a crisis—a key attribute of a global currency.
Better yet, part of the bloc’s economic response to the crisis has tweaked the architecture of the single currency in ways that should bolster its international attractiveness. A big step was the creation of the NGEU scheme and the subsequent bond issuance. The bonds are effectively backed by the balance-sheet of all EU member states, thus making them roughly akin to America’s Treasury bonds. This is a relative novelty in Europe, where borrowing has mostly been done by national governments, whose creditworthiness vary. The new pan-EU bond creates a way for investors to save in euros without taking credit risk (as they might if they were lending to Italy, say).
The absence of such a “safe asset” had been one element hampering the use of the euro internationally. All manner of cross-border operations, from central-bank reserve management to companies borrowing money in a foreign currency, are underpinned by a liquid risk-free benchmark. The bonds of Germany have served as an imperfect proxy until now, but the NGEU issuance “contributes to making the euro a better substitute for the dollar,” says Reza Moghadam of Morgan Stanley, a bank.