Euro 2023: The Resilience of the Euro in the International Monetary System

Despite the onset of Russia’s war in Ukraine, rising economic sanctions, and increased geopolitical risks in 2022, the international role of the euro remained resilient. The euro maintained its position as the second most important currency globally, with its share across various international currency use indicators averaging close to 20%.

This resilience was notable given rising global inflationary pressures, partly due to war-related energy and food price increases. These pressures led to tighter monetary policies and higher interest rates across major economies.

The report examines the future of the international monetary system post-invasion, finding no substantial changes in international currency use yet. However, it emphasizes that international currency status shouldn’t be taken for granted. European policymakers must create conditions for the euro to thrive, primarily through a deeper and more complete Economic and Monetary Union (EMU) and advancements in the capital markets union. Further European economic and financial integration is crucial for bolstering the euro’s international role in a potentially fragmented world economy.

The euro’s share in global official foreign exchange reserves rose to 20.5% in 2022, when measured at constant exchange rates. The US dollar’s share declined, while the renminbi’s remained stable.

While interest rates on highly-rated euro area government bonds became positive in 2022, they remained lower than in other major economies. This difference might have discouraged rebalancing towards euro-denominated assets.

A strong dollar and rising policy interest rates led official reserve managers to actively manage their portfolios, largely offsetting valuation effects from exchange rate and bond price movements.

The euro remained the second most actively traded currency in global foreign exchange markets. Its share in global foreign exchange settlements increased slightly in 2022, reaching almost 38% in the fourth quarter.

However, the latest BIS Triennial Survey indicates a slight decline in the euro’s share in global foreign exchange turnover since 2019, due to stronger growth in trading of other currencies like the US dollar and the renminbi.

The euro’s share in the outstanding stock of international debt securities increased to 22% in 2022, measured at constant exchange rates.

The volume of international bond issuance decreased significantly in 2022, including euro-denominated bonds. However, the euro’s share in foreign currency-denominated bond issuance remained stable at around 25%.

The share of the euro in outstanding international loans and deposits continued to rise in 2022, reaching around 19% and 18%, respectively.

The euro’s role as an invoicing currency for extra-euro area trade remained largely stable in 2022.

Net shipments of euro banknotes outside the euro area decreased significantly in 2022, reaching a ten-year low.

The initial surge in demand for euro cash following the war in Ukraine reversed in the second half of 2022 due to rising opportunity costs of holding cash and geopolitical developments.