Maligned at home, the Euro joins the US Dollar as a true global currency
The euro and the U.S. dollar are the only currencies to put stress on the global financial system when they strengthen, research by the Bank for International Settlements shows
The founders of the euro dreamed that one day their currency would join the dollar on a truly global pedestal. The euros’ many critics sneered.
But according to new research, that day may have arrived.
Since 2008, and the financial crisis, the euro has behaved like the dollar as a crucial funding currency for global investors, according to research published on November 15, 2016, by BIS the Basel-based Bank for International Settlements, That is not the case with other major currencies, from the pound to the yen, the research showed.
Countries and central banks held 20 % of their allocated reserves in euros during the second quarter of this year, according to the International Monetary Fund. More than 23% of outstanding debt issued in foreign currency is denominated in euros, data by the European Central Bank shows.
A lot of the euro’s clout comes from its eastern European neighbours, who borrow and deposit in the currency, as well as its use invoicing trade with and between the Eurozone, the world’s largest trading bloc, according to ECB figures.
At home, the euro has long had its critics.
Many economists say the single currency has been a millstone for Southern European nations like Italy, Greece and Spain. Without their own currency their ability to boost their economies through their own fiscal policy has been limited. Making their exports competitive is also harder while sharing a currency with stronger economies like Germany.
To be sure, the dollar retains its status as the top global currency. Those ECB numbers also show that around 58 % of debt issued in foreign currency is denominated in the greenback.
University of California professor Benjamin J. Cohen, an expert in money, has defined the U.S. dollar as “the only Top Currency,” the one which dominates all others.
“Just below are what, with just a bit of tongue in cheek, I call Patrician currencies,” he said in 2011. “Most prominent among these is of course the euro,” but also the Japanese yen. But the euro may be leaving a bigger mark since the global financial crisis.
Just as with the dollar, BIS research finds that a stronger euro curtails the amount of bank lending that goes on across borders as global risk appetite falls. This pushes up borrowing costs in many countries and can hamper their economies.
It also increases stress in financial markets. Since 2008, currency-swap markets have potentially allowed investors to make free money with borrowed funds, but banks have been increasingly unwilling or unable to lend to them—likely because of stricter regulation. BIS data shows that their inability to act becomes more apparent as the dollar and the euro strengthen, because funding becomes costlier for lenders operating in global markets. That doesn’t happen with other currencies.
The euro’s increasing global heft has benefits: It can provide extra strength and liquidity, as well as lowering transaction costs. But it also drawbacks. Like in the U.S., eurozone policy makers need to increasingly take into account the international consequences of their monetary policy.
For better or worse, countries like Spain and Greece are no longer the only ones bound to the Euro.