The European Central Bank wants to stimulate the use of the euro as an international currency by giving foreign central banks better access to euros in times of crisis.
ECB President Christine Lagarde said this on Thursday in a press conference after a board meeting. At this meeting, the ECB left interest rates unchanged at 2 percent.
With the decision, about which the ECB will announce more in a few days, the central bank is responding to the eroding confidence among investors in the US dollar. The dollar is now by far the most important international reserve and payment currency. The dominant position of the dollar is partly due to the crucial role in the international financial system of the American central bank, the Federal Reserve (Fed), which lends dollars through ‘liquidity lines’ in periods of financial turmoil. The Fed did this, among other things, during the financial crisis (2008) and during the recent corona crisis. The fact that countries know that they can turn to the Fed in times of need strengthens the popularity of the dollar.
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The ECB also has similar, but less frequently used, emergency facilities, which Lagarde now wants to improve. She called being able to provide liquidity “one of the characteristics of a strong currency.” Lagarde spoke of “opening access” and “making more attractive” the euro liquidity lines for central banks “outside the eurozone and outside Europe.”
The central bank is responding to the eroding confidence among investors in the US dollar
Although the details of the decision are still missing, she said it concerns so-called repo lines. A foreign central bank can borrow liquidity (money) in euros from the ECB. Collateral must also be provided that is also in euros, for example government or corporate bonds from euro countries.
Currently, the ECB only has such repo lines with central banks of European countries that do not belong to the eurozone: Romania, Hungary, Albania, Andorra, North Macedonia, San Marino, Montenegro and Kosovo. The amount of liquidity that can be offered is limited to a maximum per country.
In addition to the repo lines, the ECB also has so-called swap lineswhere collateral is accepted in currencies other than the euro. Swap lines are in many cases unlimited. These credit lines will not be expanded now, Lagarde said. The ECB has swap lines with the Fed and with the national central banks of the United Kingdom, Canada, Japan, Switzerland, Denmark, Sweden and China.
Open emergency counters more
Some economists have long been calling for the ECB to open up its liquidity emergency counters more. But the theme is sensitive within the ECB, because the central bank traditionally operates more cautiously than the Fed. Monetary policy in Frankfurt is aimed at price stability in the eurozone, the Fed behaves more like a kind of central bank of the world. . “We are bound by monetary goals,” said Lagarde, suggesting that the ECB cannot go as far as the Fed with its extensive swap lines.
The position of the dollar in the international financial system is still dominant. More than 56 percent of central banks’ foreign exchange reserves consisted of dollars in the second quarter of last year, according to the International Monetary Fund. Ten years ago that was significantly more: 66 percent. The euro is in second place, with 21 percent, followed by the Japanese yen (5.6 percent). After the British pound (4.8) and the Canadian dollar (2.6), the Chinese renminbi (2.1) comes in sixth place. The dollar is also still the number one international payment method in cross-border trade transactions.
Under Lagarde’s leadership, the ECB has increasingly advocated a stronger international position for the euro as a reserve and payment currency.
Under Lagarde’s leadership, the ECB has increasingly advocated a stronger international position for the euro as a reserve and payment currency. Then Europe can borrow more cheaply, European companies are less susceptible to currency fluctuations, and also more resistant to international financial sanctions, Lagarde said in a statement last May. speech in Berlin.
China also wants to give its currency, the renminbi, a stronger international role. Chinese leader Xi Jinping recently said he wants a “strong currency” that is “widely used in international trade and currency transactions,” backed by a “powerful central bank,” reports include CNN.
Economic reforms
In addition to opening liquidity lines, the ECB also wants to promote the euro as an international currency in other ways. The ECB is working on a digital euro, in effect a digital version of the banknotes issued by the ECB. It may also be possible to make international payments with this in the future. At a political level, the digital euro has been approved by the Member States, but the European Parliament still needs to approve it.
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To get international investors more interested in the euro, the ECB is also urging governments to implement economic reforms. The European internal market must be strengthened for more economic growth, which should bring more profits to companies and therefore more returns to investors. More progress must be made in the formation of a single European capital market, which should make euro investments more tradable. Lagarde is also a fervent supporter of it eurobondsgovernment loans issued at EU level. Foreign investors can invest in this, which should further strengthen the role of the euro.
EU leaders will meet informally on February 12 to discuss European competitiveness. All of them, Lagarde said, will receive a letter from her containing a “checklist” of what is needed to strengthen the European economy. “Eurobonds are certainly on this checklist,” said Lagarde.
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