The international role of the euro, June 2024

The international role of the euro remained broadly stable in 2023. The share of the euro across various indicators of international currency use tracked in this report remained above 19%, close to the average since its introduction in 1999. And the euro remained the second most important currency globally.

This stability was notable in an environment of still-elevated global inflationary pressures and tight monetary policies among major central banks, which led to higher relative interest rates on some of the main international currencies. Geopolitical tensions, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, also continued to raise risks of a more fragmented international monetary system.

Although the data so far show no evidence of substantial changes in the use of international currencies, we need to remain vigilant to any cracks that start appearing. Some countries are increasingly seeking to use units other than the major invoicing currencies for international trade as well as alternatives to traditional cross-border payment systems. The accumulation of gold as a reserve asset has continued, most notably in countries closely linked to Russia, as well as official investments in non-standard reserve currencies. Overall, this suggests that the international currency status of the euro should not be taken for granted.

This changing landscape increases the onus on European policymakers to create the conditions for the euro to thrive. Its international role is primarily supported by a deeper and more complete Economic and Monetary Union (EMU), including advancing the capital markets union (CMU), in the context of the pursuit of sound economic policies in the euro area. The Eurosystem supports these policies and emphasises the need for further efforts to complete EMU. Deeper European economic and financial integration, together with enhancements in cross-border payment systems between the euro and other currencies, will be pivotal in increasing the resilience of the international role of the euro in a potentially more fragmented world.

The ECB will continue to monitor developments and publish information on the international role of the euro on a regular basis.

Christine Lagarde
President

This 23rd annual review of the international role of the euro presents an overview of developments in the use of the euro by non-euro area residents in 2023. This was a year that saw continuing geopolitical tensions, increases in policy interest rates and inflation declining from high levels in major advanced economies.

On balance, the international role of the euro remained broadly stable in 2023. A composite index of the international role of the euro – computed as a simple arithmetic average of the share of the euro across a broad range of indicators – decreased by 0.7 percentage points (p.p.) in the year to the fourth quarter of 2023 at constant exchange rates, while it remained broadly stable at current exchange rates, at above 19%. The resilience of the international role of the euro in the past decade stands in contrast with the decline in the share of the euro area in global output (Chart 1). The euro remained well established as the second most important currency in the international monetary system (Chart 2).

The share of the euro in global official holdings of foreign exchange reserves decreased in 2023. In the review period, the share of the euro in global foreign exchange reserves decreased by one percentage point at constant exchange rates (and by almost half a percentage point at current exchange rates) to 20%, levels last seen in 2020 (blue line in Chart 3, panel a, Table 1 and Table A1 in the statistical annex). By contrast, the shares of the US dollar, Japanese yen and other non-traditional reserve currencies increased. The share of the US dollar increased marginally at constant exchange rates by 0.3 p.p. to 58.4%, remaining close to recent lows. The share of the yen increased slightly by 0.6 p.p. to 5.7%, whereas that of the Chinese renminbi declined by 0.2 p.p. to 2.3%, close to 2020 levels.^[1] Box 1 provides further evidence on global investments by sovereign wealth funds and their purchases of equity stakes over the past two decades. It shows that the share of euro-denominated equities accounted for only around 9% of such investments, about half the share of the euro in global foreign exchange reserves.

The diversification of global reserve portfolios into non-traditional reserve units continued. The share of reserve currencies other than the US dollar and the euro increased by 0.4 p.p. at constant exchange rates in 2023. At above 20%, it now surpasses the share of the euro, pointing to the growing importance of non-standard units in global official portfolios, which, beside the Chinese renminbi, include the Australian dollar, the Canadian dollar and various other currencies, such as the Korean won, the Singapore dollar, the Swedish krona and the Norwegian krone (see the red line in Chart 3, panel a).^[2]

In absolute terms, after accounting for valuation effects, euro-denominated reserve assets are estimated to have declined in 2023. Considering all currencies, official reserve managers held about €11.2 trillion (USD 12.3 trillion) in total foreign exchange reserves at the end of 2023, slightly more than in 2022. However, estimates by ECB staff suggest that, after accounting for valuation effects, official reserve managers were net sellers of euro reserve assets, to the tune of around €100 billion. Instead, they purchased reserve assets denominated in US dollars, Japanese yen, Australian dollars and Canadian dollars (see the green bars in Chart 3, panel b).^[3] In particular, there were purchases of yen-denominated reserve assets by official investors, presumably aimed at offsetting the yen’s depreciation over the review period.

The net sale of euro-denominated reserve assets can be ascribed to some extent to transactions by large holders of euro reserves. Investment decisions by large official holders of euro-denominated reserves, such as the Swiss National Bank (SNB), have a significant influence on the share of the euro in global foreign exchange reserves. In 2023 the share of the euro in the foreign exchange reserves of the SNB remained stable at 37%. However, the SNB intervened in support of the Swiss franc during the review period, resulting in a decline in overall foreign exchange reserve holdings.^[4] ECB staff estimates suggest that SNB holdings of euro-denominated reserves declined by €35 billion – accounting for around a third of global net sales of euro by official managers in 2023.^[5] The importance of large official holders of euro-denominated reserves can also be seen from a decomposition of changes in the share of the euro in foreign exchange reserves at country level into three components: (i) shifts in preferences that changed the share of the euro in the foreign exchange reserves of countries disclosing the currency composition of their foreign exchange reserves; (ii) wealth effects, which account for changes in total reserves held by official investors; and (iii) a residual term which captures a mix of shifts in preferences and wealth effects in countries that do not disclose the currency composition of their foreign exchange reserves.^[6] Chart 4, panel b, shows the results of this decomposition from 2015 to 2021, a period for which data on the currency composition of foreign exchange reserves is available for a relatively large sample of countries.^[7] The 1.5 p.p. increase in the share of the euro over this period was driven by large wealth effects (9 p.p.) reflecting the accumulation of reserves by Switzerland and Russia, by far the two largest holders of euro-denominated reserves, each holding around 40% of their total foreign exchange reserves in euro, which is about twice the average share globally. In contrast, shifts in preferences point to a reduction in the appeal of the euro in the remaining countries between 2015 and 2021 – this factor contributed negatively (-1.5 p.p.) to the share of the euro. The residual term also contributed negatively (-6 p.p.). Holdings of reserves in euro of the Central Bank of Russia accounted for around 8% of global reserves in euro before they were immobilised in 2022. This suggests that sanction-related measures might be relevant to the share of the euro in global foreign exchange reserves going forward.

Higher euro area interest rates did not translate into a stronger role for the euro as a reserve currency. In the review period, short-term interest rates in the euro area increased by 330 basis points (b.p.), while long-term interest rates increased by 150 b.p.. Evidence from a survey of official reserve managers conducted in mid-2023 suggested that the return of euro area interest rates to positive territory might strengthen the global appeal of the euro as a reserve currency.^[8] However, as pointed out above, official reserve managers sold euro-denominated reserves. It needs to be stressed that, while euro area short-term interest rates turned positive, they remained almost 200 b.p. lower than in the United States and about 100 b.p. lower than those on other major reserve currencies, with the exception of the yen (Chart 4, panel a). Indeed, most recent survey data show a relative decline in the attractiveness of the euro as a reserve currency, even though a majority of official managers continued to consider a potential increase in the share of the euro.^[9] Respondents to this survey cited weak growth prospects in the euro area, lack of supply of highly-rated assets and centralised debt issuance as potential factors hindering investment in euro-denominated assets. In line with this, the share of highly-rated euro area government debt securities in global supply of such highly-rated government debt securities has declined (Chart 5).

Geopolitical risk is expected to be an increasingly important consideration for official reserve management decisions in the next decade. According to the latest HSBC survey of 91 central banks in April 2024, accounting for 65% of global foreign exchange reserves, “geopolitical escalation” is the most important risk affecting the management of reserve portfolios, in particular decisions on investment location, counterparties and currency of denomination.^[10] An earlier survey published by the Official Monetary and Financial Institutions Forum (OMFIF) in June 2023 suggested that more than 80% of respondents considered geopolitics as one of the top three factors affecting reserve management over the next five to ten years. This compares with less than 20% in 2021 (Chart 6, panel a). The same survey suggested that close to 40% of central banks planned to increase their holdings of renminbi in the next ten years – more than for any other currency. Respondents pointed to “diversification” and “China’s growing role in the global economy” as the main reasons to increase their exposure to the renminbi.

To date, interest in the euro among official investors in BRICS Plus countries, excluding Russia, has remained stable. Chart 6, panel b, shows the evolution of the holdings of the official sector (including central banks, sovereign wealth funds and other government bodies) in BRICS Plus countries, excluding Russia, of euro-denominated debt securities issued by the euro area government sector, as reported in ECB Securities Holdings Statistics for custodians resident in the euro area.^[11] It is notable that the holdings in question increased by more than €50 billion to about €610 billion over the review period. The increase was larger than the increase in total holdings of foreign currency-denominated securities in these countries, resulting in a higher euro share in spite of the rise in geopolitical tensions in the review period.^[12]

Accumulation of gold by central banks continued in 2023, driven by diversification considerations and as protection from geopolitical risks. Central banks purchased more than 1,000 tonnes of gold in 2023, close to the historical record of the previous year.^[13] China – at over 225 tonnes – was the largest purchaser, followed by Poland, Singapore and Libya (Chart 7). Kazakhstan, a member of the Russia-led Eurasian Economic Union, was the largest seller of gold reserves in 2023. Survey data suggest that two-thirds of central banks invested in gold for purposes of diversification and one-third to protect against geopolitical risk.^[14]

Other indicators of the international role of the euro point to declines, albeit limited, in the position of the euro. These indicators include the outstanding stock of international deposits, the outstanding stock of international loans, and global foreign exchange settlements. The share of the euro in these market segments fell by between 1.4 and 4 p.p. in 2023 when measured at constant exchange rates (see Chart 8).^[15] With the exception of international deposits, these changes were not particularly large, at less than one standard deviation of changes in the corresponding variables since 1999. The share of the euro in foreign currency bond issuance declined by more than 2 p.p., though issuance volumes in euro remained broadly stable (Chart 9). The decline in the share of the euro reflected buoyant issuance of bonds denominated in US dollars, which was up 13% in volume terms compared to the previous year and whose share increased by more than 1 p.p. This trend was driven by issuers of US dollar-denominated bonds resident in the euro area and other advanced economies, notably regional development banks (Chart 10). In emerging markets, lower issuance by China of US dollar bonds was compensated by other countries, such as Saudi Arabia (USD 22 billion), possibly reflecting funding requirements for the country’s Vision 2030 investment plan.

Turning to global payments, the role of the euro remained stable in the review period. Developments in the value of euro payments settled between banks in T2 did not show structural breaks in the review period.^[16] In particular, the monthly value of global customer and interbank euro payments in T2 involving at least one bank located outside the euro area remained in line with previous years (Chart 11).^[17] This indicates that the global reach of euro payments remained stable in contrast to the share of the euro in global payments processed in Swift – a global messaging network used by financial institutions – which suggests a notable decline in the course of 2023.^[18] The share of payments processed in euro by Swift (excluding intra-euro area payments) fell indeed to around 13% at the end of 2023, from 32% at the end of 2022. However, the apparent decline in the review period was due to technical factors and did not reflect real changes in the preferences of market participants for the euro in the area of global payments.^[19] The decline coincided with the launch of the Eurosystem’s new T2-T2S platform^[20] and with the move to a new Swift messaging standard – two technical factors which drove the changes in the data reported.^[21]

At the same time, risks of potential fragmentation of global payment systems continued to emerge. Anecdotal evidence suggests that some of the BRICS Plus members continued to explore ways of using their own currencies to invoice international trade transactions and settle cross-border payments in search of alternatives to the currencies of countries sanctioning Russia (Table 2). This is important for the global use of currencies: recent theoretical models suggest that international invoicing currency choices can spill over to currency choices in other dimensions through economies of scope and feedback loops between financial and trade-related decisions.^[22]

Since its invasion of Ukraine, Russia has pursued multiple initiatives to de-dollarise and de-euroise its foreign trade. Russia has promoted the use of national currencies in bilateral trade with other BRICS Plus economies and with countries in Asia and the Middle East to by-pass the currencies of sanctioning countries – notably in international trade in oil and other commodities of which Russia is a major exporter.^[23] For instance, as of March 2023, 80% of bilateral trade between Iran and Russia was settled in national currencies, according to Russia’s Deputy Prime Minister.^[24] According to Russian sources, 20 countries have joined the System for Transfer of Financial Messages (SPFS), the local alternative to Swift developed by the Bank of Russia.^[25] Despite Russia’s efforts to promote the rouble, the Chinese renminbi appears to be emerging as the potential leading vehicle currency in this evolving regional payment landscape. For instance, in June 2023, Pakistan started to pay for imports of discounted Russian crude oil in the Chinese currency (see Table 2). Bilateral trade between Russia and India is a further case in point. Initially, India tried to promote use of the Indian rupee to settle trade transactions with Russia. However, by mid-2023, major Indian refineries started to use the Chinese renminbi to pay for imports of Russian crude oil (see Table 2).^[26] There is also evidence of a redirection of Russia’s trade towards China – now accounting for around 40% of total Russian trade – which is supporting invoicing of transactions in non-sanctioned currencies (Chart 12, panel b).^[27] Use of the renminbi as a vehicle currency in Russian trade, i.e. with countries other than China, remains more limited.^[28]

The gradual rise in the role of the renminbi in international trade invoicing might ultimately lead to more diversified currency patterns, at least in some regions. Renminbi internationalisation could take place through China’s trade and financing links.^[29] The share of the renminbi in the invoicing of China’s trade increased to around one quarter for goods (one-third for services) in 2023 (Chart 12, panel a). The renminbi is now the third most important currency in global trade finance, with a 5% share, after the US dollar (83%) and the euro (7%) (Chart 13, panel a).^[30] A caveat is that this is not an accurate proxy for international payments, since it includes domestic payments. Moreover, Hong Kong accounts for a majority of offshore renminbi transactions (80%), which points to a strong regional role for the renminbi.^[31] Activity in the Chinese renminbi-based Cross-border Interbank Payment System (CIPS) continued to grow in the review period, reaching around USD 4.8 trillion by the end of 2023 (Chart 13, panel b). The number of direct participants in the system increased from 77 to 139 over the review period, whereas the total number of participants (direct and indirect) increased from more than 1,300 to almost 1,500.

Finally, the development of digital currencies could influence the role of various currencies in cross-border payment patterns. For instance, China has made efforts to allow for greater international acceptance of the digital yuan (e-CNY), China’s central bank digital currency (see Box 2). In parallel, BRICS countries announced their intention to explore the development of a platform (BRICS Bridge) to link central bank digital currency initiatives within the group. Turning to crypto-assets, in March 2024 the Russian news agency Tass reported that the BRICS are working on a crypto-asset and blockchain-based common platform to settle international trade transactions, albeit with no reference to the BRICS Bridge project (Table 2). Whether these developments will influence currency patterns in global payments remains uncertain, as much will depend on the actual take-up and scalability of the various initiatives.

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