2023

The euro as an
international currency
THE SECOND MOST IMPORTANT CURRENCY AFTER THE DOLLAR
EMMA AUÑÓN VIZCAÍNO
It is said that the euro might under some conditions eventually overtake the dollar. “It is unlikely that
some other currency will supplant the dollar as the world’s premier currency… There is no plausible
alternative for the number position” (Eichengreen and Frankel, 1996).

This essay will examine to ascertain the determinants to compare relative importance of the
international roles of the euro and the dollar and some other currencies. To follow this, we will study
some indicators that hold these shares in the stock market, a brief history of how the pound lost status
and the dollar became the leading international currency. Finally, some upsides and drawbacks of the
international leading currency countries.

The share of the euro in the stock of global exchange reserves increased slightly in 2021, it held 20.6%
at the end of 2021, it had a 0.5% increase compared to the previous year, when measured at constant
exchange rates. However, the share of the euro decreased by 0.6% at current exchange rates due to
the depreciation of the euro exchange rate against the US dollar. In the last years, the share of the
euro in foreign exchange reserves remain steady regarding a moderately narrow range. Foreign official
investors gathered euro-denominated reserves despite the low interest rates prevailing in the euro
area compared to other European economies.

Regarding data of foreign currency-denominated bonds implies that the volume of international bond
broadcast increased in 2021, with euro-denominated securities accounting for an increasing share of
issuance. This increase was generated between strong bond issuance globally boosted by the global
economic recovery from earlier disturbances caused by the pandemic and fiscal and monetary policy
support in large economies. Inhabitants of the United Kingdom are the ones that use more the euro-
denominated international bonds, ahead of US inhabitants. Which means that London still has an
important role as a centre for exchange of euro-denominated funding despite Brexit.

The share of the euro as an invoicing currency for extra-euro area trade diminished slightly in 2021.
The relatively large share of euro invoicing in euro area exports and imports has major implications
for the pass-through of exchange rate changes to trade prices and volumes.

The choice of invoicing currency for international trade has consequences for exchange rate
elasticities. For instance, countries with widely used currencies, such as the euro area or the United
States, trade fittings to exchange rate changes declare themselves mainly in exports but only to a small
degree in imports. The reason is because if prices are assembled in an international currency, for
example the euro, exchange rate variations would immediately translate into changes in export prices
faced by customers in their own domestic currency, prompting demand for euro area exported goods
and services.

The euro is widely used in global currency markets by several countries and regions outside the
European Union. Some of these countries and regions are the Principality of Monaco, Andorra, some
regions in the eastern coast of Canada, certain French overseas territories. Kosovo and Montenegro,
use the euro as a de facto domestic currency, because they do not have any agreements with the EU.
The main reason these territories outside the euro area linked their currencies is because the stable
monetary system behind the euro makes it attractive ‘anchor’ currency.

Seignorage could be seen an advantage of having other countries to hold one’s currency. Seignorage
is the low-interest loan accruing to the US when foreign central banks hold their reserves as dollars.
In other words, being able to borrow abroad large amounts in its own currency. This determination of
Asians and others to continue financing the US current account deficit in the future is to some extent
related to the dollar’s continued role as the main international reserve currency. The US has obtained

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more on its investments abroad than it has had to pay on its liabilities. This American role of the
world’s banker would get through the loss of the dollar as leading international currency.

Based on history, the pound sterling was the main international currency of the gold standard period.
Historians estimated that 60 to 90 per cent of the world’s trade was invoiced in sterling in the 19th
century. In 1899 the share of pound in foreign exchange holdings of official institutions was more than
twice the total of the nearest competitors, the franc, and the mark, and much greater than the dollar.
In 1914, the rank was $425.4 million pounds, $275.1m in francs, $136.9m in marks, and $55.3 in other
currencies (Lindert, 1969).

The pound holds its dominant position as key currency in the interwar period. In 1940, the degree of
foreign-owned liquid sterling assets duplicated the value of foreign-owned liquid dollar assets.
Britain’s gradual loss of key currency status was due to the gradual loss of political and military pre-
eminence outweighed the British economy in size. The development of the financial system lagged.
Although, it was not until 1913 that the United States established a central bank. Hence, the US went
from being a net debtor to net creditor while the UK went otherwise. The main causes were than UK
was in debt after World War I and had to borrow money from the US. The dollar was the only currency
to remain convertible into gold at a fixed price into the 1920s.

During the initial period of “dollar shortage,” the European and other currencies were not convertible
into gold. The Europeans and others measured their economic recovery from the wartime destruction
by their onward primary capability to gain dollars through enhancing trade balances. Although, they
could just gain dollars by controlling balance of payments excess with the United States.

On the one hand, some disadvantages of this international role for the country issuing the currency
can be larger fluctuations in demand for the currency. This will enhance the level of capital mobility.
However, Central Banks are concerned that internationalization will make it more difficult to control
money stock. A growth in the ratio of demand for the currency: this is the other side of seignorage. In
the 1960s, Japanese and German governments were worried about the possibility of foreign residents
being available, an affluence of capital would prompt the currency to appreciate and give exporters
less competitive on world markets. As well as burden of responsibility. The actions of the monetary
authorities in the leading international currency country must consider the effects that their actions
can have on world markets rather than set monetary policies on national interests.

On the other hand, some advantages of having an international currency can be strong dollar
advantage for the other countries like improving prospects for their firms that export to the United
States or that compete with imports and an adverse shift in their terms of trade, higher prices for
imported inputs like oil that have prices set in dollars, upward pressure on wages. Besides,
convenience for the country’s residents, the global use of the dollar, as with the global use of English
language is an advantage that American businessmen tend to take for granted. Furthermore, political
power and prestige and more business for the country’s bank and other financial institutions, the
currency in which banking is conducted and the nationality does not have to be the same.

In conclusion, real growth has been slower in Europe than in the United States. However, the euro
might in the future surpass the dollar as the world’s leading international reserve currency. The US
macroeconomic policies could eventually undermine confidence in the value of the dollar through
inflation and depreciation. This depreciation of the dollar could have profound consequences for the
functioning of the international monetary system, but for now on the dollar is still the main
international currency for exchange rates in the world.

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REFERENCES

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finance.ec.europa.eu/euro/use-euro/euro-outside-euro-area_en

• The international role of the euro. (2022, junio). European Central Bank.

https://www.ecb.europa.eu/pub/pdf/ire/ecb.ire202206~6f3ddeab26.en.pdf

• Will the Euro eventually surpass the dollar as leading international reserve currency? (2005,

Julio). National Bureau of Economic Research.

https://www.nber.org/system/files/working_papers/w11510/w11510.pdf

• European Central Bank. (2007, 3 Julio). The euro as an international currency: implications

for exchange rate policy.

https://www.ecb.europa.eu/press/key/date/2007/html/sp070703.en.html

• The road to adopting the euro: Monetary Policy and exchange rates regimes in EU candidate

countries. (2002, decimetre). Board of Governors of the Federal Reserve System.

https://www.federalreserve.gov/pubs/ifdp/2002/741/ifdp741.pdf