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SPEECH

Unleashing the euro’s untapped potential at global level

Introductory remarks by Fabio Panetta, Member of the Executive Board of the ECB, Meeting with Members of the European Parliament

• Today, I would like to briefly present the main findings of our recent report on the international role of the euro.
• Next, I will discuss monetary policy considerations associated with a stronger use of the euro internationally, before moving on to the polices that could unleash the euros untapped potential at global level.
• I will stress the alignment between policies that will strengthen the euros role internationally and policies that will make the euro area more robust and fit for the future.

The role of the euro in global markets

• This is one of the main findings of the 19th annual review of the international role of the euro, which we published on 9 June 2020.
• In some areas, however, such as the global green bond market, the euro has had a head start relative to the US dollar.
• In 2019, for instance, almost half of global green bond issuance was denominated in euro.
• In the future, the swift implementation of an EU taxonomy of sustainable economic activities would provide a credible and standardised framework, ensure greater investor confidence and also contribute to strengthening the international role of the euro.

The effects of international currency status on the ECB’s monetary policy

• [2]This position reflected two differing views one that emphasised the economic benefits of international currency status, and another that emphasised the costs.
• With rapid financial globalisation, rising challenges to multilateralism and the adoption of new monetary policy frameworks by major central banks, the relevance of some of the traditional effects of international currency status has declined, while other effects have become more apparent.
• For instance, international currency status strengthens the transmission of monetary policy, notably if stronger use of a currency as an international funding unit amplifies the cross-border effects of monetary policy impulses.
• Through spillback effects, the resulting impact on demand across the world may give monetary policy a wider, and possibly larger, domestic impact.
• Moreover, international currency status lowers exchange rate pass-through, which helps shield inflation from foreign shocks.

Unleashing the euro’s untapped global potential

• The euros global potential has not been fully realised, however.
• Moreover, as I have also stressed recently, the euros international role will grow only if we can better share its benefits, or privilege.
• A global currency requires a central bank that acts as a credible backstop to safeguard liquidity conditions in the financial system.
• The Eurosystem repo facility for central banks (EUREP)[4] reflects the importance of the euro in global financial markets and will support the smooth transmission of our monetary policy.
• Looking beyond the immediate aftermath of the pandemic crisis, the acceleration of the digitalisation of money may have implications for the euros global role.
• But, if the CBDC is allowed to be used outside the euro area, it is likely to have implications for the global monetary and financial system too.
• For instance, the euros international role could be strengthened if the CBDC represented an attractive payment vehicle or store of value for non-euro area residents.
• It could have implications for capital flows and the exchange rate of the euro, with potential knock-on effects on euro area and global economic developments.

Conclusions

Foreword

• On balance, these developments resulted in a stabilisation in the international role of the euro.
• On the one hand, the euros share in outstanding international loans increased significantly.
• On the other hand, the share of the euro in outstanding international debt securities declined, albeit international debt issuance in euro continued to increase in volume.
• In doing so, these measures should in turn also serve to safeguard the attractiveness of the euro globally.
• The ECB will continue to monitor developments in and publish information on the international role of the euro on a regular basis.

1 Main findings

• On balance, adjusting for exchange rate valuation effects, a composite index of the euros international role remained essentially flat in the review period at a low level (see Chart1).
• The share of the euro across various indicators of international currency use averaged around 19% close to historical lows.
• The euro remained unchallenged as the second most important currency in the international monetary system (see Chart2).


Chart 2 The euro remains the second most important currency in the international monetary system Snapshot of the international monetary system (percentages)

• Other indicators suggest that developments in the global attractiveness of the euro were mixed in the review period.
  • On the one hand, issuance of international bonds denominated in euro rose, with the share of the euro increasing by more than 1 percentage point. Low interest rates in the euro area continued to support the use of the euro as a funding currency – even after adjusting for the cost of swapping euro proceeds into other currencies, such as the US dollar. This encouraged issuance by US borrowers and international borrowers from a broad range of economic sectors, such as manufacturing, construction and financial institutions. On the other hand, the share of the euro in the outstanding stock outstanding of international debt securities, which tends to adjust more gradually, and depends additionally on net redemptions and developments in money market instruments, declined by 0.3 percentage points.
  • The share of the euro in international loans by banks outside the euro area to non-euro area borrowers also increased in 2019, by a full percentage point. Volumes of euro-denominated loans by banks outside the euro area to non-euro area borrowers were twice as large as in the aftermath of the global financial crisis in 2009. Volumes of all outstanding cross-border loans denominated in euro were around 3% higher compared to 2018, suggesting that deleveraging by euro area banks, which had been a feature of developments in the years after the global financial crisis, no longer acted as a drag on the use of the euro in international loan markets.
  • The share of the euro as an invoicing currency for extra-euro area transactions in goods remained broadly unchanged relative to last year, while its share in transactions in services declined.
  • The share of the euro in outstanding international deposits remained broadly stable.
  • The stock of euro banknotes circulating outside the euro area was also broadly stable in 2019.
  • Large official reserve holders were among the main purchasers of euro-denominated assets.
  • Anecdotal evidence suggests that purchases of reserve assets could reflect various motives, including exchange rate management and currency diversification decisions.
  • The share of the US dollar, the leading global reserve currency, declined further to a two-decade low, suggesting that the trend towards gradual diversification of global reserve portfolios continued.
  • Accumulation of gold by official reserve holders grew unabated, which indicates that central banks are exploring alternatives to the traditional major currencies.
  • Almost50% of global foreign exchange turnover in the euro was undertaken in the United Kingdom, against approximately 13% in the euro area.
  • Table1 The international role of the euro from different perspectives Summary of data in this report

2 Key developments

2.1 Use of the euro as an international reserve

• The share of the euro in global official holdings of foreign exchange reserves remained broadly stable in 2019.
• At constant exchange rates, the share of the euro in globally disclosed holdings of foreign exchange reserves rose modestly, by 0.2percentage point between the end of 2018 and the end of 2019 the second consecutive year of increase (see Chart3).
• Chart3 The share of the euro in global foreign exchange reserves remained broadly stable in 2019 Developments in the shares of the euro, US dollar and other currencies in global official holdings of foreign exchange reserves (percentages; at constant Q42019 exchange rates)
• The trend towards gradual diversification of global reserve portfolios also continued.
• At constant exchange rates, the share of currencies other than the euro and the US dollar increased by 0.7percentage point in the review period (see Chart4).
• The increase primarily reflected purchases of official reserve assets denominated in Japanese yen, often considered a safe haven currency, the share of which rose by 0.4percentage point to nearly a two-decade high.
• The share of other non-traditional reserve currencies was stable.
• Motives underlying the purchases in question varied across central banks, including exchange rate management, currency diversification decisions and, in some cases, perhaps geopolitical considerations.
• [4] In line with this interpretation, holdings of euro-denominated foreign exchange reserves by the SNB increased by over EUR20 billion in 2019.
• Together China and Russia sold a combined USD204 billion worth of US Treasury debt securities amid concerns about unilateral sanctions and international trade tensions in 2018.
• Several countries increased their exposures to US Treasury securities in 2019, such as Japan and some euro area countries.
• Chart5 China and Russia have reduced their exposures to US Treasury securities since 2018 Sales of US Treasury securities by selected countries (net amounts in USD billions)
• Accumulation of gold by official reserve holders continued unabated over the review period, suggesting that central banks globally are exploring alternatives to the major currencies.
• The share of gold in total global reserve holdings increased markedly, to 12% a six-year peak.
• Chart6 Accumulation of gold by official reserve holders continued unabated Changes in global official reserve holdings of gold and foreign currency (amounts in USD billions)
• Since gold prices increased by close to 18% last year, the increase in gold holdings partly reflects valuation effects.
• However, official reserve managers also increased their real physical holdings of gold in vaults and storage facilities by over 500tonnes in 2019 in line with a trend that started a decade ago with the global financial crisis (see Chart7).
• Chart7 Holdings of physical gold by official reserve managers continued to trend upwards Developments in global official holdings of gold (in metric tonnes)

2.2 The euro in global foreign exchange markets

• The BIS Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets in 2019 released by the Bank for International Settlements (BIS) indicates that trading in foreign exchange markets totalled USD6.6trillion per day in April2019, up from USD5.1trillion in April2016.
• More than half of the rise in foreign exchange trading is attributable to transactions in foreign exchange swaps.
• [8] In line with global reserves, transactions in global foreign exchange markets became more diversified.
• [9] Chart8 The share of the euro in global foreign exchange turnover increased somewhat in 2019 Share of the euro in global OTC foreign exchange transactions, on a net-net basis (percentages, in April of the corresponding year shown on the x-axis)
• Foreign exchange trading is increasingly concentrated in a small number of large financial hubs.
• In 2019, the top five trading locations accounted for 79% of global foreign exchange transactions.
• This largely reflects the role of the City of London, which plays a pivotal role across a range of financial markets, and is the worlds largest venue for foreign exchange trading.
• The role of the City of London was even more pronounced in foreign exchange transactions against the euro, with a share of almost 50% (see Chart9).
• Most foreign exchange transactions vis-a-vis the euro took place outside the euro area, i.e.in London or in other locations.
• Chart9 Most foreign exchange transactions in euro take place outside the euro area, notably in the City of London Share of selected countries in global foreign exchange transactions in euro in 2019 (percentages)


The primacy of the City of London as a trading venue for the euro is a long-standing phenomenon and has grown further still over the past three years, with its share increasing by almost 5 percentage points, against 14 percentage points since 2001 (see Chart 10). Chart 10 The importance of the City of London for foreign exchange transactions against the euro has grown over the past three years Developments in the share of selected countries in global foreign exchange transactions in euro, 2001‑2019 (percentages)

• The share of the euro in global foreign exchange settlements declined somewhat over the past year.
• Data on foreign exchange transactions settled in the CLS system provide additional quantity-based evidence on the role of the euro in the foreign exchange markets.
• [12] Chart11 The share of the euro in global foreign exchange settlements declined in 2019 Share of foreign exchange transactions settled in CLS (percentages)

2.3 Use of the euro in international debt and loan markets

2.3.1 The euro in international debt markets

• The share of the euro in the stock of international debt securities declined by 0.3percentage point in 2019, standing at around 22% at constant exchange rates (see Chart12 and TableA4).
• By contrast, the share of the euro declined by almost 9percentage points over the same period.
• [14] Chart12 The share of the euro in the stock of international debt securities declined in 2019 Currency composition of outstanding international debt securities (percentages; at Q42019 exchange rates)
• An examination of granular (i.e.security-by-security) data on international issuance of foreign currency-denominated debt securities suggests that the share of US dollar-denominated issuance was broadly stable, while the share of euro issuance increased for the second consecutive year.
• In 2019 the total volume of foreign currency-denominated debt issuance increased by almost 4%, to just under USD2trillion, thereby partly reversing the marked decline observed in 2018 (see the left panel of Chart13).
• Issuance of debt securities denominated in US dollars increased by just 2%, or USD26 billion, while issuance in euro increased by 10%, or USD44billion.
• Chart13 The share of the euro in international issuance of foreign currency-denominated debt securities further increased in 2019 Currency composition of foreign currency-denominated debt issuance (left panel: USD billions; right panel: percentages)
• By contrast with emerging markets, US dollar-denominated debt issuance in advanced economies declined in 2019.
• [19] US borrowers were among the most active issuers of euro-denominated debt securities in 2019, as in earlier years.
• The cost of synthetic dollar issuance via the euro remained therefore broadly unchanged, which might have supported issuance of international euro-denominated debt securities by US borrowers.
• [21] Overall, euro-denominated international bond issuance stood at over USD470 billion in 2019, its highest level since 2008.
• [22] Chart14 Emerging market borrowers drove US-dollar denominated international debt issuance in 2019, while US borrowers were the most dynamic issuers of euro-denominated debt Regional breakdown of US-dollar denominated (left panel) and euro denominated (right panel) international debt issuance (USD billions)
• The composition of international issuance of euro denominated debt by security type has changed substantially.
• Issuance of short-term debt, and asset- and mortgage-backed securities, which were widespread in the years preceding the global financial crisis, remained more limited in 2019.
• Chart15 International issuance of euro-denominated debt securities reached the highest level since the global financial crisis, driven by corporate borrowers International issuance of euro-denominated debt securities, by security type (USD billions)
• 2019 also saw a shift in the sectoral composition of international issuance of euro-denominated debt securities.
• [23] Sovereign issuance continued to account for approximately 10% of total international issuance of eurodenominated debt securities.
• Chart16 Construction and manufacturing firms accounted for a larger share of issuance of euro-denominated international debt securities in 2019, with financial institutions remaining the most active issuers Sector breakdown of euro-denominated (left panel) and US-denominated (right panel) international debt issuance (percentages)
• Box1 The role of the euro in global green bond markets Prepared by Lena Boneva and Fabio Tamburrini A green bond is a type of fixed-income security whose proceeds are earmarked to finance investment projects with an environmental benefit.
• [24] While the global green bond market is still relatively small, it has been growing rapidly in recent years.
• Global green bond issuance was only USD9.1billion or 0.2% of total bond issuance in 2014; that figure grew to approximately USD205billion or 2.85% of total issuance by 2019.
• In 2019 more than half of global issuance was concentrated in the EU and almost half of global green bond issuance was denominated in euro (see left panel of ChartA).
• The leading role of the euro does not simply reflect the prevalence of green bond issuers based in the euro area.
• ChartA Almost half of global green bond issuance is denominated in euro; issuance of euro-denominated green bonds breakdown by issuer residence Currency breakdown of green bond issuance in 2019 (left panel) and developments of the share of euro area and non-euro area issuers of green bonds in euro (right panel) (percentages)

2.3.2 The euro in international loan and deposit markets

• The share of the euro in international loan markets continued to rise in 2019.
• [29] At the same time, the share of the US dollar in international loan markets declined by more than 1percentage point, albeit it remained the leading currency in international loan markets by a large margin.
• Chart17 The share of the euro in outstanding international loans increased in 2019 Currency composition of outstanding amounts of international loans (percentages; at Q42019 exchange rates)
• The ECBs accommodative monetary policy stance may have continued to support the euro in international loan markets.
• Similarly, volumes of all outstanding cross-border loans denominated in euro were around 3% higher compared to 2018.
• [31] The increase in the supply of euro-denominated funding outside the euro area is also likely to have boosted euro lending by banks outside the euro area.
• Chart18 Volumes of international loans denominated in euro continued to increase in 2019 Amounts outstanding of international loans denominated in euro (billions of US dollars; at current exchange rates)
• An examination of granular (i.e.security-by-security) data on international issuance of foreign currency-denominated debt securities suggest that international loan issuance declined in 2019, primarily due to a fall in US dollar-denominated loans (see Chart19).
• By contrast, euro-denominated investment-grade loan issuance increased by more than 40% in 2019, to almost USD90 billion, the highest level observed since 2011.
• As a consequence, the share of the euro in total investment-grade loan issuance increased from 10% in 2018, to almost 17% in 2019.
• Overall, the share of euro-denominated international loan issuance remained well behind that of the US dollar, which accounted for around 80% of both investment grade and leveraged loan issuance.
• Chart19 Volumes of US dollar-denominated international loans declined in 2019, unlike euro-denominated loans Breakdown of US dollar-denominated (left panel) and euro-denominated (right panel) international loans by type (USD billions)
• The share of the euro in outstanding international deposits remained stable in 2019.
• The share of the euro in the stock of international deposits stood at just under 19% in 2019, at constant exchange rates (see Chart20 and TableA7).
• Chart20 The share of the euro in outstanding international deposits remained stable in 2019 Currency composition of outstanding amounts of international deposits (percentages; at Q42019 exchange rates)

2.4 Use of the euro as an invoicing currency

• The share of the euro as an invoicing or settlement currency for extra-euro area trade remained broadly unchanged in 2019 for transactions in goods, but declined for those in services.
• 61% of extra-euro area exports and 51% of extra-euro area imports of goods were invoiced in euro in 2019 (see the left panel of Chart21 and TableA8).62% of extra-euro area services exports were invoiced in euro in 2019, down from 64% the previous year.
• [33] Chart21 The share of the euro in the invoicing of extra-euro area transactions in goods remained broadly stable in 2019, but declined for those in services Share of the euro in the invoicing of extra-euro area trade in goods (left panel) and in the invoicing of extra-euro area trade in services (right panel) (percentages)
• Patterns across euro area countries point to a positive correlation between invoicing transactions in goods and invoicing transaction in services in euro (see Chart22).
• The correlation between the shares of international transactions in goods invoiced in euro and international transactions in services invoiced in euro is positive, albeit stronger for exports than for imports.
• Chart22 Euro invoicing in external transactions of euro area members goods versus services Share of the euro in the invoicing of extra-euro area trade in services and goods: exports (left panel) and imports (right panel) (percentages of total exports)

2.5 Use of euro cash outside the euro area

• The stock of euro banknotes shipped to destinations outside the euro area remained broadly stable in 2019.
• [34] This suggests that foreign demand for euro cash outside the euro area has remained resilient, much as it is in the euro area.
• Entities in euro area neighbouring countries remained the main exporters and importers of euro banknotes, accounting for around 64% of both sales and purchases.
• Chart23 Foreign demand for euro banknotes remained broadly stable in 2019 Net monthly shipments of euro banknotes to destinations outside the euro area (EUR billions; adjusted for seasonal effects)


Chart 24 In 2019 euro banknotes were mainly exported to, and imported from, euro area neighbouring regions Sales (exports, left panel) and purchases (imports, right panel) of euro banknotes – breakdown by destination (percentages)