A Global Euro
When Emmanuel Macron observed last year that “our Europe is mortal; it can die,” he gave _expression_ to long-gathering European anxieties about the bloc’s decline. Today, national politics and supra-national complacency leave the EU flailing, but there are opportunities to take on a larger global role.
As the US resiles from various functions pertaining to the global hegemon and declares open hostility towards Europe, an opportunity arises for the EU to become a true reserve currency issuer. A more global euro would allow countries to avoid, or at least hedge against, US financial sanctions. An international euro would also strengthen relationships with other countries and curtail US efforts to preserve and impose fossil-fuel dominance on much of the world.
Europe has all the resources required to do this, and below Shahin Vallee sets out exactly how to make it happen. Rather than leaving the task to the ECB—which lacks the political mandate to drive such a move—the Commission must take on the issue and bring it to member states for a comprehensive decision. — Kate Mackenzie and Tim Sahay
A profound sense of uncertainty dominates the question of the international monetary order today. Trump’s presidency in the US, the growing Sino-American rivalry, and widespread sanctions against Russia’s Central Bank reserves are all contributing to the general indeterminacy. The rise of crypto assets, digital currencies and the return of precious commodities as a potential store of value have prompted some to predict the demise of a fiat based monetary order powered by fractional reserve banking at home and offshore money creation abroad.
After decades acting as the anchor of the global monetary order, the role of the dollar has now come into question. The promotion of stablecoins and other advanced commercial cryptocurrencies have been designed to expand the dollar’s global role, but the outcome of this cryptomercantilism remains to be seen. China has its own internationalization strategy built on the expansion of its central bank’s bilateral swap network to advance renminbi invoicing and the creation of a fully digital payment system backed by a digital currency.
Europe’s strategy is yet to emerge. There is an opportunity for European leaders—not just central bankers—to seize the moment to expand Europe’s global monetary role. A stronger role for the euro would likely enhance European resilience, be it by expanding protections from US sanctions, by helping to insulate Europe’s economy from swings in foreign exchange rates, or by securing better financing conditions for European governments, businesses, and households. But a stronger role for the euro, which doesn’t preclude some costs, will require a degree of planning and policy coordination across member states, as well as between fiscal and monetary authorities—both of which are so far lacking.
A roadmap for Europe
In a speech in June, ECB President Christine Lagarde stated her ambition to create what she called a “global euro.” Doing so, she argued, would require strengthening three main “foundational pillars”: geopolitical credibility, economic resilience, and legal and institutional integrity. In the aftermath of such proclamations, few plans have been made to achieve these ends.
One obstacle is the fact that this agenda will require much more than the ECB alone. It will need a “whole of government” approach, with the cooperation of various other European institutions and national governments. Yet neither at the European Commission, nor at the Eurogroup meeting of euro area finance ministers, nor at the European Council where heads of state meet, has a real discussion about internationalization taken place. That conversation has so far been left entirely to the ECB, which cannot possibly deal with all the various dimensions of the critical, and urgent, decisions required to make the euro truly global. Political leaders and policymakers need to be presented with a clear plan, ideally prepared by the European Commission and the ECB, so that the Eurogroup and eventually the European Council can properly assess the costs, benefits and trade-offs associated with the euro’s internationalization.
This plan should rest on five critical pillars:
Swap lines
In times of national and international financial crisis, countries often need rapid access to hard currency—usually, this means the US dollar. Since the Global Financial Crisis, the Federal Reserve has had a standing line to selected (mostly wealthy) countries to swap virtually unlimited amounts of their own currency for dollars. It is one way that the global dollar system is maintained. The People’s Bank of China has also been increasing its provision of renminbi swaps in recent years, particularly to countries with Chinese sovereign debt or to trading partners. This provision has helped to increase the appeal of settling international transactions in the Chinese currency.
By comparison, Europe’s network of swap lines is incomplete and inconsistent, even within the EU. Countries outside the eurozone such as Denmark, Sweden and Switzerland can access swap lines; unlimited, in the case of the Swiss National Bank. The Bank of England also enjoys an unlimited swap line. Meanwhile Hungary and Poland can only access euro repo lines, a less generous arrangement which requires collateral. At the onset of the war in Ukraine, the ECB refused to provide a swap line to the National Bank of Ukraine, which would have helped it to stabilize its financial system at a time of acute stress. In keeping with that risk averse tradition, in 2010 the ECB also refused to offer a swap line to the Central Bank of Latvia but agreed to extend one to the Swedish Riksbank, which eventually provided euros to Latvia directly and indirectly via its own commercial banks.
The EU has the largest network of trade agreements in the world, and Europe is the number one trading partner for seventy-two countries, which together represent almost 40 percent of world GDP. Much of that trade is denominated in USD, but if these invoices were denominated in euros instead, with guaranteed swap lines in the European currency, and if trade deals included provisions to encourage settlement in euros, the impact would be significant.
Swap lines can play a critical role for emerging economies in financial distress and while the Fed and the PBoC have both used their financial might to provide political and financial support to several such countries, the ECB has not. It could, however, establish “zones of influence” in which it extends bilateral swap lines in times of crisis to a selected set of critical economic and geopolitical partners. This function is in tension with the concept of a fully independent central bank, but it is something that a truly global currency issuer in a contested and fragmented financial system must be prepared to underwrite.
Finally, swap lines may also prove necessary to backstop critical pieces of market infrastructure like central clearing houses that settle securities. The ECB sought to mandate that all euro clearing services be located in the EU but it was undermined by a European Court of Justice decision, and so most of the important euro clearing houses have remained based in the UK and the US. As a consequence, the measures ensuring liquidity rely on a high degree of cooperation between the ECB, the Bank of England, and the Federal Reserve. In light of the recent geopolitical instability, Europe might question the reliability of these arrangements.
Payment system
Technology to create a stable and sovereign public digital payment system now exists, and China’s Central Bank Digital Currency and its full international payment system has almost no dependency on foreign-controlled systems. This means China is able to clear transactions outside of the reach of the US—a strong asset in a fragmented world. The EU has much to gain by developing a similar system.
At present, though, Europe has no sovereign digital payment system and its entire architecture depends on US service providers. In the case of US-imposed sanctions, neither the most modest retail transaction (transiting Visa or Mastercard), nor the largest private-sector operation going through SWIFT and cleared through CHIPS, would be capable of bypassing them. Even Europe’s TARGET system, which enables settlements between the region’s banks, runs on US software and service providers. While these risks have so far been marginal, they can no longer be ignored. This is a critical vulnerability that must be addressed.
One possible area of development in this context is the EU’s project to build out its central bank digital currency (CBDC), which is a response in part to the rise of cryptocurrencies globally. But the European CBDC is held back, in part by lobbying from European banks who fear losing retail deposits that provide them an important source of cheap funding. Despite the ECB’s efforts to reassure European banks, the final legislation will likely bow to banks’ concerns by prescribing a €3000 limit on holdings of digital euros, which will severely limit their ability to function as a true store of value or means of payment for large transactions.
The CBDC, or digital euro, is now part of a broader set of initiatives to establish a more solid European payment infrastructure, including the Pontes project to enable distributed ledger settlements that are interoperable with TARGET, and the longer-term Appia project, which is a more extensive distributed ledger that will serve as a real interconnector between tokenized—or commercially-created—financial assets and digital central bank money. The Eurosystem is also working on interlinking its TARGET payment with foreign systems to enable robust and public international payments.
While these are positive initiatives, they are not comprehensive enough, nor (in the case of the more ambitious Appia project) are they being implemented rapidly enough to create the global and sovereign payment system that Europe needs. Accelerating these public payment systems initiatives should be a steadfast priority for the ECB, European governments, and co-legislators alike.
Stablecoins
There are two main views about stablecoins—a cryptocurrency pegged to another asset (such as the dollar). One is the view implicit in the US GENIUS Act, which encourages the unfettered private issuance of stablecoins so as to bolster the international demand for the dollar, as well as for underlying US assets. Another view is that stablecoins, which are collateralized by assets such as US Treasury bonds in order to maintain their price peg, pose a risk to financial stability because of the uncertainty around the ability to maintain the price peg—par convertibility risk. In Europe, the latter view has prevailed.
Indeed, the EU has chosen to tightly regulate the issuance of stable coins and in particular to prevent the fungibility of USD stablecoins issued in the US (which account for the vast majority of stablecoin issuance) and the EU. In a report last month for the European Parliament, Daniela Gabor explained why fungibility between US and EU issued coins could create faultlines in the transatlantic financial system. In the FT, Richard Portes explained how this exposes the EU to considerable risk. Europe may well intend to guard against these risks, but those intentions have already been undermined thanks to the French capital markets supervisor (AMF), which has decided to de facto allow fungibility for Circle stablecoins issued in Europe and in the US. The ECB has rightly objected to this decision, and the episode illustrates the lack of an effective consensus in Europe about the use of stablecoins and its interaction with the international role of the euro.
Europe has little to gain from stablecoins, neither as a means to accelerate internationalization of the euro, nor as a means to modernize Europe’s payment infrastructure. As Helene Reys has explained, stable coins are also part of a technological privilege in that each stablecoin is native to a certain technological ecosystem and gives access to a certain universe of technological and financial services. The European finance ecosystem isn’t conducive to the sort of large crypto and decentralized finance universe that exists in the US. Therefore the demand for European stablecoins, which are mostly a means to such an investment universe, is likely to remain very limited. Europe could adopt China’s approach and largely exclude the role of privately issued stablecoins. This would probably require an even tighter regulatory regime than the EU’s existing MiCAR framework.
If this tighter regulation of private stablecoins is pursued, the publicly-issued digital euro, or CBDC, would have a greater role in wholesale and household transactions, and perform full functions of investment, savings, and store of value. However the current CBDC roadmap won’t deliver this.
A true safe asset
The US dollar’s role is supported by the vast, deep and liquid market of outstanding US Treasuries, which have for decades been the default global “safe asset” that serve as a global benchmark and store of value for the entire financial system. Europe has the capacity to also become a large issuer of safe assets by significantly increasing its common debt issuance—which is currently too balkanized and sporadic—to meet the safe-assets demand of a true global reserve currency issuer.
A unified common issuer for Europe, a vast and predictable borrowing program, and a clear stream of non-recourse tax revenues to back them would lower borrowing costs and create the larger pool of safe assets that internationalization necessitates. The forthcoming EU budget negotiations due to be finalized by the end of 2027 could deliver this, but would require new bold proposals by the European Commission, including a reform of the European Stability Mechanism and the transfer of its borrowing power and resources to the EU budget. This is necessary for a much larger program than the current €750bn NGEU. The integration of other existing borrowing programmes (SAFE, SURE, MacroFinancial Assistance Facility) under one roof would enable the creation of a sovereign, safe asset interest-rate curve. To bolster the use of these safe assets by global reserves managers, the ECB could, like the Federal Reserve, play the role of custodian for foreign central banks. These services could even be extended to offer vault services in Europe for precious commodities like gold, thereby ensuring the physical holdings on European soil under a more stable and predictable legal system than that of the United States.
Capital markets integration
The issuance of this deep and liquid safe asset market would go alongside an integrated European capital market. The ECB has long advocated for a framework to support this, starting with the creation of an integrated capital markets supervisor (a European Securities and Exchange Commission, or the capital markets equivalent of the single supervisor for banks created in 2014). But the dozens of roadmaps for a capital-markets union have each been shelved because they couldn’t summon the legal and political integration required. The creation of a new supranational EU legal regime—as suggested by Mario Draghi and others—would likely help overcome this hurdle, but no serious progress has been made on this front.
Opportunities, however, are available. Europe’s traditionally bank-dominated financing environment is becoming more diversified with non-bank financial institutions (NBFIs) taking a bigger role. But reaping the benefits of a more diverse and agile capital market requires integration of the European capital markets, which are currently fragmented along national lines. Beyond a single supervisor, this will have to mean a change and expansion in the role of the ECB’s operational framework, including expanding the list of eligible counterparties for repo and reverse repo operations to include non-bank financial institutions (NBFIs), something no capital markets union plans currently foresees.
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The existing monetary order can no longer be taken for granted. But while stablecoins will certainly increase the demand for the dollar assets that back them (US Treasuries mostly), they are also likely to introduce more instability as the par convertibility of these newly created and poorly regulated stable coins is highly uncertain. A run on stablecoins could eventually create profound doubts not only about the associated crypto ecosystem, but also about the broader US dollar fiat system. Stablecoins could be the greatest boost to the US dollar, which is the hope of the current administration, but they could also turn out to be a thorn in its side. The IMF has been coy about the risk to the global financial system, but the Bank of International Settlements and, more recently, the European Systemic Risk Board have been more vocal.
China, for its part, has opted for the expansion of its currency for trading and settlement by combining a strong central bank digital currency and fully sovereign payment system with a broad network of bilateral swap lines to increase trade settlement in renminbi. It has ruled out any role for privately issued coins outside of the control of the government.
Europe seems to be stuck between these two approaches, without a clear strategy for internationalizing the euro. If Europeans are serious about growing the international role of the euro, they will need to do much more than rely on the efforts and goodwill of the ECB. Political coordination and legislative action will be necessary, as will the work of the European Commission and the Eurogroup. So far, however, there is little appreciation of the scale of the challenges ahead and the speed at which the international system is moving.