The international role of the euro, June 2021

This 20th annual review of the international role of the euro published by the European Central Bank presents an overview of developments in the use of the euro by non-euro area residents.

The report covers developments in 2020. This period was characterised by the outbreak of the coronavirus (COVID-19) pandemic, a contraction in global economic activity unprecedented in living memory and exceptional global policy support. On balance, however, these developments did not result in a significant change in the international role of the euro. In particular, the euro’s share in outstanding international loans, in the stock of international debt securities and as an invoicing currency for extra-euro area imports of goods remained broadly stable. The share of the euro in global foreign exchange reserves declined, as did the share of the euro in foreign currency-denominated debt issuance and in outstanding international deposits. The euro remained a key currency in international green bond markets, a small but rapidly growing segment of international debt security markets.

The international role of the euro is primarily supported by a deeper and more complete Economic and Monetary Union, including advancing the capital markets union, 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 Economic and Monetary Union. The relative resilience of the international role of the euro despite the pandemic shock stands in contrast to the significant decline observed in the wake of the euro area sovereign debt crisis. To some extent, this development may reflect the effectiveness of the unprecedented policy support measures and coordinated approach that have prevailed in the euro area during the COVID-19 crisis. At the same time, the fact that the global appeal of the euro remains broadly stable at a low level suggests that only further resolute policy measures and reform efforts would enable the euro to realise its global potential.

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

Christine Lagarde
President

The international role of the euro remained broadly stable in 2020. This period was characterised by the outbreak of the coronavirus (COVID-19) pandemic, a contraction in global economic activity unprecedented in living memory and exceptional global policy support. On balance, however, these developments did not result in a significant change in the international role of the euro.

A composite index of the euro’s international role remained broadly stable over the review period at a low level (Chart 1). Adjusting for exchange rate valuation effects, the index declined slightly by 0.3 percentage points. At current exchange rates, it remained unchanged overall. The share of the euro across various indicators of international currency use was close to historical lows, averaging around 19%. The euro remained unchallenged as the second most important currency in the international monetary system (Chart 2).

The share of the euro in global foreign exchange reserves decreased by 0.7 percentage points over the review period (Table 1). Survey evidence suggests that low or negative interest rates are a concern among official reserve managers globally. The low level of interest rates in the euro area compared with other major economies may therefore have discouraged official reserve investors from increasing the exposure of their bond portfolios to the euro. The share of the US dollar, the leading currency, in global foreign exchange reserves was stable over the review period. It remained close to a two-decade low, in line with previous trends towards gradual diversification of global reserve portfolios. Considering other structural factors, recent ECB staff research suggests that economies with a large share of the euro in official foreign exchange reserves typically have strong trade and financial linkages with the euro area and use the euro as an anchor currency (Box 1).

Other indicators of the international role of the euro seem to have been affected more noticeably during the pandemic period.

The share of the euro in foreign currency-denominated debt issuance decreased by around 2 percentage points. Declining global risk aversion over the summer and easier global financial conditions led to a marked increase in global bond issuance, notably from emerging market economies that traditionally issue in dollars in global debt markets. Demand for US dollar-denominated fixed-income securities by large institutional investors based in the United States remained an important factor supporting the US dollar in these markets. Box 2 provides evidence of a strong US dollar bias in the portfolio of US-based fixed-income funds, mainly at the expense of the euro. Only about 8% of the assets managed by a sample of large global bond funds domiciled in the United States are denominated in euro, while the largest share of their holdings is denominated in US dollars – in line with the standard home currency bias phenomenon.

• The share of the euro in international deposits declined by 3 percentage points over the review period, whereas deposits in US dollars increased sizeably. One reason for these developments was that non-bank financial institutions disposed of illiquid assets globally and parked the proceeds in US dollar bank deposits amid the dash for cash that followed the outbreak of the pandemic.
• Cumulative net shipments of euro banknotes to destinations outside the euro area declined by about 2 percentage points, and extra-euro area transactions in euro banknotes by wholesalers halved owing to the travel restrictions introduced following the onset of the pandemic. A regular survey conducted by the Oesterreichische Nationalbank (OeNB) in central, eastern and south-eastern European countries points to mixed developments in household demand for euro cash in the region during the pandemic (Box 3). At the same time, recent ECB staff research suggests that between 30% and 50% of the value of euro banknotes is held outside the euro area, which is higher than previously estimated (Box 4).

The remaining indicators point to a relative resilience in the global attractiveness of the euro over the review period.

• The share of the euro in the stock of international loans by banks outside the euro area to non-euro area borrowers remained broadly stable, decreasing marginally by 0.1 percentage points. The share of the euro in foreign currency-denominated loans in central, eastern and south-eastern European countries increased by a full percentage point.
• The share of the euro as an invoicing currency for extra-euro area imports of goods remained unchanged relative to last year.
• The share of the euro in the stock of international debt securities declined slightly by 0.2 percentage points, less than in international bond issuance, as it tends to adjust more gradually and depends additionally on net redemptions and developments in money market instruments. The decline in the share of the euro in foreign currency-denominated deposits in central, eastern and south-eastern European countries was comparable.
• Finally, over half of the green bonds issued globally over the review period were in euro. For international issuance (i.e. bond issues by non-nationals), the share of the euro stood at about one-third – a significant increase compared with five years earlier and higher than the euro’s share in the issuance of international bonds of about 20%.

At the Euro Summit on 25 March 2021, leaders of euro area countries stressed that they “support strengthening the international role of the euro with a view to enhancing our strategic autonomy in economic and financial matters while preserving an open economy, contributing to the stability of the global financial system, and supporting European businesses and households”.^[1] The relative resilience of the global appeal of the euro described in this report is noteworthy given the scale of the pandemic shock. It contrasts with earlier major crisis episodes, such as the euro area sovereign debt crisis, which was associated with a marked decline in the global attractiveness of the euro.^[2] To some extent, this development may reflect the effectiveness of the unprecedented policy support measures and coordinated approach that have prevailed in the euro area. At the same time, the stability of the share of the euro across various indicators of international currency use – currently well below the levels that prevailed before the global financial crisis – suggests that only further resolute policy measures and reform efforts would enable the euro to realise its global potential.

Therefore, the policy implications that the Eurosystem has stressed in the past remain fully valid. The international role of the euro is primarily supported by a deeper and more complete Economic and Monetary Union (EMU), including advancing the capital markets union, 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.

This year’s report contains three special features. The first special feature considers the implications for the international role of the euro of the European Union (EU) and ECB policy responses to the pandemic. It stresses that national fiscal policies, the facilities set-up at the EU level and the ECB’s monetary policy all contributed towards a strong and cohesive economic recovery from the pandemic crisis, thereby supporting the resilience of the euro area and the international role of the euro. The special feature shows that EU bond issuances planned under the Next Generation EU (NGEU) programme would significantly increase the amount of highly-rated euro-denominated assets and represent a further step towards establishing a common European safe asset. This would help foster financial deepening and capital market integration in the euro area and, in turn, the international role of the euro. However, insofar as NGEU remains relatively modest in size compared with bond markets in other major currencies and is a temporary initiative, it is unlikely to fundamentally change the global status of the euro at this stage. At the same time, NGEU is linked to investment and structural reforms that are expected to increase the growth potential of the euro area and its internal cohesion, increasing the resilience of the euro area economy to shocks and thereby the attractiveness of the euro as global investment currency. Furthermore, the ECB´s monetary policy measures in response to the pandemic have been swift and forceful. They have helped stabilise the euro area economy in the face of an exceptionally large shock. In addition, the measures taken by the ECB to provide euro liquidity to non-euro area central banks have helped to forestall potential adverse impacts of the crisis on the euro area. The knock-on effect of all these measures has been to support the global appeal of the euro over the review period. Finally, the special feature includes three boxes on the recent Communication by the European Commission on the European economic and financial system (Box 5), the effectiveness of the ECB’s euro liquidity lines to foreign central banks (Box 6) and the demand of non-euro area investors for Support to mitigate Unemployment Risk in an Emergency (SURE) bonds issued by the European Commission (Box 7).

The second special feature examines how the issuance of a central bank digital currency (CBDC) could impact the international role of currencies. It stresses that the global appeal of currencies depends on fundamental economic forces which digitalisation is unlikely to alter. However, characteristics that are specific to digital means of payment, including safety, low transaction costs and bundling effects, could promote the international adoption of a currency. These features may combine to create positive feedback loops in the use of a currency as a means of payment and store of value and thus have effects on its global appeal. Moreover, the specific design features of a CBDC would be important for its global outreach and, ultimately, the international role of the currency in which it is denominated. Design features could influence the ability and incentives of non-residents to use a CBDC as means of payment, unit of account and/or store of value. The special feature presents model simulations by ECB staff using a new structural macroeconomic model which allows the effect of the different economic mechanisms at play to be quantified (Box 8). The simulations suggest that a CBDC supports the use of a currency in cross-border payments but is not necessarily a game changer. Fundamental forces, such as the stability of economic fundamentals and size, remain the most important factors for international currency status.

The third special feature presents a new dataset that offers a comprehensive and up-to-date understanding of the use of major currencies in global trade invoicing. It confirms earlier findings on the dominant role of the US dollar in invoicing globally and the overall stability of the use of major currencies in global trade invoicing. At the same time, the special feature also points to several new stylised facts. First, both the US dollar and the euro have been increasingly used as vehicle currencies – i.e. the currency of neither the exporter nor the importer, but of a third country. This is indicated by the fact that invoicing in the currencies in question has remained broadly stable, notwithstanding the decline in the shares of the United States and the euro area in global trade. Second, the euro is used as a vehicle currency mainly in Europe and some parts of Africa, which suggests that, even if the US dollar is the dominant currency globally, the euro plays a leading role in these regions. Third, some European countries have seen significant shifts towards euro invoicing, which indicates that inertia in patterns of international trade invoicing can be overcome. Finally, empirical estimates suggest that standard theoretical mechanisms that foster the use of a large economy’s currency – i.e. strategic complementarities in price-setting and integration in cross-border value chains – underpin the use of the euro for international trade invoicing (Box 9). These findings suggest that preserving the euro area’s openness to trade and the European value chain between the euro area and the rest of the EU, as well as regions neighbouring the EU, are important for the prospective role of the euro as a global invoicing currency.

2.1 Use of the euro as an international reserve and investment currency

The share of the euro in global official holdings of foreign exchange reserves declined in 2020. The share of the euro in global official holdings of foreign exchange reserves decreased by 0.7 percentage points in 2020, to 21.2%, when measured at constant exchange rates. By contrast, the share of the euro increased at current exchange rates, owing to the appreciation of the euro exchange rate against the US dollar by around 9 percentage points over the review period (Charts 3 and 5). The US dollar remained the leading global reserve currency. Its share in globally disclosed reserves remained stable, at around 59%, when measured at constant exchange rates. At the same time, the share of the US dollar declined by almost 2 percentage points at current exchange rates. These developments suggest that the weakening of the US dollar exchange rate, which followed the acute phase of the pandemic crisis in March 2020, encouraged official reserve managers to increase their US dollar holdings more than their euro holdings in an attempt to stabilise, at least partially, the share of the US dollar in their portfolios.^[3] In line with this, purchases of US dollars by official investors reached an estimated USD 280 billion during the review period, compared with an estimated USD 30 billion for purchases of euro-denominated reserves.^[4] From a longer-term perspective, the share of the euro in global official holdings of foreign exchange reserves remained broadly stable at a relatively low level compared with the levels prevailing before the global financial crisis and the euro area sovereign debt crisis.

Survey evidence suggests that low or negative interest rates remain a concern among official reserve managers globally. According to a regular survey of official reserve managers conducted by a global financial institution, almost 70% of respondents mentioned low or negative yields in fixed-income markets as one of the main concerns relevant for their investment strategy, excluding the COVID-19 crisis.^[5] Interest rates in the euro area remained lower than in other major economies, which may have discouraged official reserve investors from adding to their bond exposures in euro (Chart 4). Average euro area 5-year government bond yields stood at -0.6% in 2020, while the 1-month deposit rate hovered around -0.5%. By contrast, the US 5-year government bond yield and the 1-month deposit rate both averaged around 0.5% in 2020. Interest rates in all other major economies were in positive territory during the review period, with the exception of Japan. As regards structural factors important for global reserve allocation, recent ECB staff research suggests that economies with strong trade and financial linkages with the euro area and which use the euro as an anchor currency have a larger share of the euro in official foreign exchange reserves (Box 1).

The trend towards gradual diversification of global reserve portfolios continued in 2020. At constant exchange rates, the share of currencies other than the euro and the US dollar increased by 0.7 percentage points over the review period (Chart 3). The increase largely reflected purchases of official reserve assets denominated in Chinese renminbi, the share of which increased by 0.3 percentage points, and in Canadian dollars, with an increase of 0.2 percentage points. The share of other major reserve currencies was broadly stable (Chart 5).

The onset of the COVID-19 pandemic led to a large sell-off of US Treasury securities by foreign investors, including official investors, in March 2020, which reversed in the course of the year as liquidity conditions improved. Official holdings of US Treasury securities declined by around USD 150 billion in March 2020, while private holdings declined by USD 130 billion (Chart 6, left panel).^[6] Dislocations in the US Treasury market at the peak of the pandemic-related turmoil have been linked to a dash for cash by non-financial corporates, which were in turn redeeming shares by money market funds, and by leveraged investors, such as hedge funds.^[7] At the same time, official investors have also taken part in these developments intervening in the foreign exchange markets to counter capital outflows. The sell-off of US Treasury securities by official investors was large by historical standards and unprecedented in the context of market turmoil. Arguably, oil exporters needed to raise cash to balance their budgets as oil prices slumped, so they intervened together with central banks in other emerging market economies to shore up their currencies. Indeed, excluding euro area investors, the largest declines in holdings of US Treasury securities by private and official investors in March 2020 were by Saudi Arabia and Brazil (Chart 6, right panel).^[8] As market turmoil subsided and liquidity conditions improved after the Federal Reserve System took policy measures, foreign investors reaccumulated US Treasury securities throughout the rest of the year. By the end of 2020 official investors had increased their holdings of US Treasury securities by more than USD 100 billion.

2.2 The euro in global foreign exchange markets

The euro exchange rate strengthened over the course of 2020. The euro exchange rate vis-à-vis the US dollar was volatile in the first months of the COVID-19 crisis amid broader market volatility. However, it then entered a period of consistent appreciation from May onwards. Overall, the euro appreciated by around 9% against the US dollar and by over 7% in nominal effective terms over the review period (left panel of Chart 7). The appreciation of the euro effective exchange rate also reflected, among other factors, the weakness of several emerging market currencies and the pound sterling.

The appreciation of the euro against the US dollar primarily reflected the loosening of monetary policy in the United States following the onset of the COVID-19 pandemic and, subsequently, the rebound in global risk sentiment. Estimates obtained from a daily Bayesian vector autoregression (BVAR) model, where structural shocks driving the USD/EUR exchange rate are identified via sign restrictions, suggest that the appreciation of the euro against the US dollar over the review period can be largely ascribed to the loosening of the monetary policy stance of the Federal Reserve in response to the COVID-19 shock and stronger global risk appetite as the global economy began to recover from the shock (right panel of Chart 7). These developments led to a reversal of the flight-to-safety that characterised the immediate aftermath of the outbreak of the pandemic and have been instrumental in weakening the US dollar against most currencies.

The introduction of the pandemic emergency purchase programme by the ECB and the announcement of Next Generation EU also supported the euro exchange rate by countering market perceptions of potential fragmentation risks, which had weighed on the euro in previous crisis episodes. Overall, the resilience of the euro exchange rates could indicate that investors exhibited a greater tendency to maintain or even increase their euro-denominated asset positions despite turbulent conditions in global financial markets.^[15]

Evidence on the role of the euro in the foreign exchange market based on quantities suggests that the share of the euro in global foreign exchange settlements increased in 2020. Quantity-based data on foreign exchange transactions settled in the CLS system can provide suggestive evidence on the role of the euro in the foreign exchange markets.^[16] At almost 39% in December 2020, the share of the euro in global foreign exchange settlements increased by over 3 percentage points compared with the level observed in December 2019 (left panel of Chart 8), primarily reflecting a noticeable increase in the share of the euro towards the end of 2020.^[17] While this increase came largely at the expense of the US dollar, the data are volatile, and such developments are not unprecedented. Over the year as a whole the US dollar remained the leading currency in the foreign exchange market by a wide margin, as it was involved in about 90% of all settlements in December 2020, while the euro remained the second most actively settled currency.^[18] Volumes of euro settlements increased by over 12% in 2020 compared with the previous year. Volumes of settlements in euro were at record highs in March 2020 at the peak of COVID-19 shock, before declining to less elevated levels towards the end of 2020 (right panel of Chart 8).

2.3 Use of the euro in international debt and loan markets

The euro in international debt markets

The share of the euro in the stock of international debt securities declined slightly in 2020, falling by 0.2 percentage points to stand at around 23% at constant exchange rates (Chart 9 and Table A4).^[19] The share of the euro has declined since the mid-2000s by over 9 percentage points. By contrast, the share of the US dollar continued to rise, by 0.6 percentage points over the review period. The US dollar now accounts for about two-thirds of total international debt issuance at constant exchange rates. This increase in the share of the US dollar occurred despite temporary – but severe – strains in global US dollar funding markets at the height of the COVID-19 shock in March 2020.^[20]

Developments in international issuance of foreign currency-denominated debt securities are consistent with this picture. The total volume of foreign currency-denominated debt issuance continued to increase over the review period, by 6%, to just over USD 2 trillion (left panel of Chart 10). This increase was largely attributable to a strong rise in issuance volumes of debt securities denominated in US dollars (USD 220 billion), whereas issuance volumes in euro decreased slightly (by USD 16 billion). As a result, the share of the US dollar in global issuance increased from approximately 60% in 2019 to 67% in 2020 – higher than the previous peaks of 2016 and 2017. By contrast, the share of the euro decreased by about 2 percentage points over the review period, to less than 22%. International issuance of foreign currency-denominated debt securities in currencies other than the US dollar and the euro decreased more significantly, by almost 30%. Their share therefore declined by about 5 percentage points over the review period, to stand at about 11%.

Much of the increase in the issuance of international US dollar debt securities was driven by emerging market borrowers on the back of the accommodative monetary policy in the United States and the rebound in global risk sentiment after the peak of the COVID-19 shock. Despite the disruption to the real economy arising from the COVID-19 pandemic and associated lockdown measures, central bank actions, combined with substantial fiscal support measures, managed to restore orderly conditions in global financial markets. In particular, the US Federal Reserve responded by introducing a number of measures, including swap lines and emergency lending programmes, which served to ease tensions in US dollar funding markets.^[21] Global risk aversion declined markedly in the second half of 2020, and the associated easing in global financing conditions prompted a marked increase in global debt issuance, in particular by large corporates, including foreign currency-denominated debt.^[22] This was particularly evident in the case of issuers in emerging market economies, which have traditionally obtained funding from global debt markets in US dollars. This is confirmed by granular (i.e. security-by-security) issuance data, as US dollar-denominated debt issuance by emerging market borrowers increased by almost 13% in 2020 (see the green line in the left panel of Chart 11). Favourable US financing conditions also led to an increase in US dollar-denominated debt issuance in advanced economies, where the increase was concentrated in issuance by more highly-rated investment-grade corporate borrowers.^[23] Together with supply factors, strong demand for US dollar-denominated fixed-income securities by large institutional investors based in the United States remained another important factor supporting the US dollar in international debt markets (Box 2).

The small decline in the issuance of euro-denominated debt securities was primarily due to a reduction in issuance by US borrowers, which was volatile over the review period. Issuance of euro-denominated debt by US borrowers, who were the largest issuers in 2019, decreased by more than 20% to around USD 120 billion in 2020 (see the light blue line in the right panel of Chart 11). However, the annual figure masks a surge in euro-denominated issuance in the first quarter of 2020, when it reached USD 50 billion, the highest quarterly volume since the global financial crisis. However, by the fourth quarter of 2020 US issuance of euro-denominated debt securities fell to below USD 10 billion – the lowest level in a decade. Euro-denominated issuance by US borrowers may have been dampened by the relative easing in financing conditions for US dollar-denominated debt issuance in the second half of 2020, as described above. In line with this, the interest rate differential between the United States and the euro area narrowed following the policy interest rate cut of the Federal Reserve in early March 2020.

The combined issuance of euro-denominated debt securities by borrowers from advanced economies outside the United States increased. Although borrowers from the United Kingdom reduced their issuance of euro-denominated debt by around USD 5 billion, Japanese issuers and issuers in other advanced economies increased their own issuance by around USD 22 billion. Issuance of euro‑denominated debt securities by emerging market borrowers declined slightly and volumes remained relatively small.^[24] Overall, euro-denominated international bond issuance decreased slightly to USD 459 billion in 2020.^[25]

There was a sizeable shift from financial to sovereign issuers in the sectoral composition of international issuance of euro-denominated debt securities in 2020. Although financial and other services firms remained the most active issuers of euro-denominated international bonds, their share decreased by 9 percentage points, to 46%, in 2020 (left panel of Chart 12), in line with the continuous decline observed since 2018. By contrast, the share of sovereign issuers increased by more than 6 percentage points over the review period. They now account for about 16% of total international issuance of euro‑denominated debt securities, which reflects the increase in public sector budget deficits and debt issuance that followed the lockdowns and fiscal support measures associated with the pandemic.^[26] Issuance of US dollar-denominated international bonds exhibited a broadly similar pattern, albeit less pronounced, with an increase of close to 2 percentage points in the share of public sector issuers, while the share of financial and other services firms declined by 2 percentage points (right panel of Chart 12). One factor that may have dampened the decline in the share of financial services is that banks were more likely to issue US dollar-denominated debt than euro-denominated debt between April and December 2020 compared with previous years, as recent research shows.^[27]

The euro remains a key currency in international green bond markets, which have grown rapidly over the past decade. Global issuance of green bonds reached more than USD 250 billion in 2020 – a sevenfold increase relative to 2015.^[28] Over half of total global green bond issuance was denominated in euro in 2020, although a sizeable share of this was attributable to euro area issuers. International issuance of green bonds, i.e. issuance in a non-local currency based on the issuer’s or the issuer parent’s nationality, also exhibited a strong and steady increase in market size in recent years. While this increase has been common to most major currencies in recent years, 2020 saw relatively rapid growth in international US dollar-denominated green bond issuance, consistent with the broader trends in international US dollar-denominated bonds described above (left panel of Chart 13). By contrast, volumes of euro-denominated international issuance of green bonds decreased marginally, along with the share of the euro (by about 4 percentage points). Still, the euro accounted for over one-third of total international issuance of green bonds in 2020, which is higher than the share of the euro in international debt issuance of about 22%. This was a threefold increase compared with 2016 (right panel of Chart 13).

In terms of breakdown by issuer, international issuance of green bonds in US dollars remained dominated by emerging market borrowers, whereas borrowers from non-euro area EU Member States and other advanced economies were the largest issuers of green bonds in euro. Issuance of international US dollar-denominated green bonds by emerging market borrowers stabilised at around USD 17 billion in 2020 after increasing for several years. Emerging market borrowers accounted for around half of total issuance of international US dollar-denominated green bonds in 2020 (see the green line in the left panel of Chart 14). China accounts for the lion’s share of emerging market economies’ green borrowing in US dollars – about one-third – but Indonesia, Chile, Hong Kong, Saudi Arabia and Brazil are also active borrowers in this market. Issuance by the euro area and other advanced economies continued to increase substantially, from around USD 5 billion in 2019 to USD 8 billion in 2020. As regards international issuance of euro-denominated green bonds, borrowing from non-euro area EU Member States and other advanced economies remained dynamic, with their issuance increasing by about 40% and 30% respectively in 2020 (see the blue and red lines in the right panel of Chart 14). As a result, their combined share reached two-thirds of total international euro-denominated green debt issuance in the review period. At the same time, UK and US issuers reduced their issuance of euro-denominated green bonds, which explains why international euro-denominated green debt issuance declined moderately in 2020.

The euro in international loan and deposit markets

The share of the euro in international loan markets remained broadly stable in 2020. At constant exchange rates, the share of the euro in international loan markets decreased marginally by 0.1 percentage points in 2020, remaining just over 16% (Chart 15 and Table A6).^[29] The share of the US dollar in international loan markets declined for a second year in a row by 1.4 percentage points. Nonetheless, the US dollar remained the leading currency by a large margin, accounting for around 54% of international loans.^[30] The share of the Japanese yen declined marginally. The share of the remaining currencies increased by 1.6 percentage points, to reach around 27% of international loans extended in 2020.

The volume of international loans denominated in euro continued to increase despite the onset of the COVID-19 pandemic, reflecting both the ECB’s accommodative monetary policy stance and the resilience of euro area banks in comparison to previous crises.^[31] In absolute terms, the volume of euro-denominated loans by banks outside the euro area to non-euro area borrowers increased by 12% in 2020, continuing the rising trend observed since 2016. In the years following the global financial crisis a combination of factors, such as deleveraging by euro area banks and regulatory efforts to reduce exposures to foreign loans, led to a decline in the volume of international loans denominated in euro (Chart 16).^[32] By contrast, euro area banks were significantly more resilient in the face of the pandemic shock and were able to provide inter-office funding to extra-euro area branches and subsidiaries, rather than withdrawing to their home market as they did in the global financial crisis.^[33] In addition, the ECB’s accommodative monetary policy stance may have helped to support euro-denominated funding in international loan markets, by allowing euro area banks to channel funds to their foreign branches and subsidiaries.^[34] Finally, the increase in the supply of euro-denominated funding outside the euro area, including access to euro liquidity through swap and repo facilities provided by the Eurosystem to non-euro area central banks (Special Feature A, Box 7), is also likely to have supported lending in euro by banks outside the euro area.^[35]

The share of the euro in outstanding international deposits declined by 3 percentage points in 2020. The share of the euro in the stock of international deposits stood at 17% in 2020 at constant exchange rates (Chart 17 and Table A7), its lowest level since 2016.^[36] By contrast, the share of the US dollar in outstanding international deposits increased by 1.7 percentage points, to almost 54%. These developments reflect a marked increase in the volume of US dollar-denominated deposits at the peak of the pandemic, rather than a decline in euro-denominated deposits and in the attractiveness of the euro as an international store of value. Recent research suggests that non-bank financial institutions disposed of illiquid assets and parked the proceeds in US dollar bank deposits amid the dash for cash. Growth in US dollar deposit funding could also reflect the drawdown of committed credit lines by non-financial firms with the US affiliates of non-US banks, which leads automatically to a grossing-up of balance sheets.^[37] Higher US dollar-denominated deposits therefore partly reflected an increase in precautionary holdings amid shortages of US dollar funding and liquidity in the dash for cash in March 2020.^[38] More broadly, the policy measures by the US Federal Reserve in response to the COVID-19 shock, including asset purchases, substantially increased US dollar liquidity, which would also be expected to contribute to an increase in US dollar-denominated international deposits.

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 decreased in 2020 for most transactions in goods and services. Some 60% of extra-euro area exports of goods were invoiced in euro in 2020, down from 61% in 2019. At just over 51%, the share of extra-euro area imports of goods invoiced in euro remained unchanged in 2020 (left panel of Chart 18 and Table A8). 61% of extra-euro area services exports were invoiced in euro in 2020, down from 63% the previous year. Likewise, 52% of extra-euro area imports of services were invoiced in euro in 2020, half a percentage point less than in the previous year (right panel of Chart 18). Looking back over the medium term, the share of the euro as an invoicing or settlement currency for extra-euro area trade has remained stable and close to the levels observed a decade ago. Box 5 describes initiatives by the European Commission to support the use of the euro in international trade, including through the development of euro-denominated instruments and benchmarks, and to foster its status as an international reference currency in the energy and commodities sectors. Special Feature C provides further insights on the role of the euro as an invoicing currency for global trade. It shows, among other things, that the euro is used as vehicle currency not only in Europe but also in parts of Africa, suggesting that the euro plays a dominant role in some regions, even if the US dollar is the dominant currency globally.

2.5 Use of euro cash outside the euro area

The COVID-19 pandemic had some impact on foreign demand for euro cash outside the euro area. On the one hand, net registered shipments of euro banknotes to destinations outside the euro area declined by 2% over the review period – a magnitude not unprecedented in recent years (Chart 19). However, data collected from banknote wholesalers, which act as intermediaries between the national central banks of the Eurosystem and financial institutions outside the euro area, suggest that the pandemic had significant effects on extra-euro area transactions in euro banknotes. Sales (exports to regions outside the euro area) of euro banknotes halved in 2020, while purchases (imports from regions outside the euro area) fell by about 40% owing to travel restrictions imposed in response to the pandemic. Entities in countries neighbouring the euro area remained the main exporters and importers of euro banknotes (Chart 20), as the volumes of banknote exports and imports to these countries declined less significantly than elsewhere. The effect of the pandemic on household demand for euro cash was also visible in some central, eastern and south-eastern European economies in which tourism revenues play a major role (Box 3). These developments aside, recent ECB staff analysis provides new estimates for foreign demand for euro banknotes which aim to capture banknote migration via non-registered channels, such as tourism and remittances. According to these estimates, between 30% and 50% of the value of euro banknotes was held outside the euro area in 2019 – higher than previously thought (Box 4).

A EU and ECB policy responses to the COVID-19 pandemic and the international role of the euro

By Charlotte Grynberg and Maurizio Michael Habib

The coronavirus (COVID-19) pandemic triggered a strong policy response by European Union (EU) policymakers and the ECB to counter the economic fallout of the crisis. Several elements of the policy reaction, such as the launch of new EU borrowing programmes by the European Commission and the ECB´s policy response, may have implications for the global status of the euro. Moreover, in January 2021 the European Commission launched a new strategy to foster the international role of the euro.^[55] The purpose of this special feature is to review these policy initiatives and analyse their implications for the international role of the euro.

The EU policy response to the COVID-19 pandemic and its implications for the international role of the euro

The fiscal policy response at the EU level to the economic fallout of the COVID-19 pandemic crisis was forceful and complemented policies at the national level. At the national level, euro area countries activated the fiscal policy lever to counter the economic impact of the pandemic, including fiscal emergency packages and extensive liquidity support measures in the form of tax deferrals and State guarantees. The budgetary impact of discretionary fiscal measures, amounting to around 4% of euro area GDP on average, is unprecedented compared with previous crisis episodes.^[56] Crucially, national government measures have been complemented by the launch of a range of new facilities to be financed at the European level through debt issuance by the European Commission. Notably, these facilities include the temporary Support to mitigate Unemployment Risks in an Emergency (SURE) programme, providing financial assistance of up to €100 billion in the form of loans from the EU to affected Member States, and the Next Generation EU (NGEU), a €750 billion temporary instrument to support the post-pandemic economic recovery, which is expected to become operational in summer 2021 at the earliest. NGEU issuance will imply a maximum debt-based fiscal expansion of around 1% of GDP on average in the euro area over the period 2021-24, assuming that the support is used at the national level to finance additional expenditures.^[57] To a large extent, the proceedings from these bond issuances will finance investment and structural reforms by EU countries that are expected to lift the growth potential of the EU economies and reduce divergences in the euro area.^[58] When designing their country plans, Member States need to allocate at least 37% of the funds to support the green transition and at least 20% to support the digital transformation. The NGEU programme therefore has the potential to increase both the resilience of the euro area economy to global shocks and the attractiveness of the euro as a global investment currency.

The new EU bond issuances will constitute the largest ever euro-denominated issuance at supranational level, raising the attractiveness of the euro as an investment currency for international investors, in particular official ones. The bond issuances under the SURE and NGEU programmes contribute to increasing the global supply of safe assets, as the EU currently enjoys the highest creditor status by the majority of rating agencies.^[59] Indeed, the first issuances of SURE bonds, amounting to almost €40 billion in the course of 2020, attracted considerable attention from investors, including non-euro area investors, whose share in total take-up of the new bonds at issuance ranged between 31% (20-year tenor) and 60% (5-year tenor). The higher take-up by international investors at the short end of the maturity structure is positively correlated with the higher share of central banks and official investors participating in these issuances, since these institutional investors have a lower tolerance for risk than other market participants (Box 7). This confirms the potential for these EU bond issuances to bolster the status of the euro as a major international reserve currency.

The new EU bond issuances will increase the amount of highly-rated euro-denominated assets and could represent a further step towards establishing a common European safe asset. Currently, a significant amount of highly-rated national government debt is already available in the euro area. However, the euro area government bond market is fragmented among different bond issuers with a wide range of credit ratings and different levels of liquidity, potentially discouraging foreign investors (Chart 21). Moreover, the insufficient depth of segmented euro-denominated bond markets discourages foreign issuers from issuing international bonds denominated in euro. The establishment of a well-designed common European safe asset could bring substantial benefits in terms of enhancing financial integration and stability, fostering financial development and allowing markets to develop a proper euro area term structure.^[60] In turn, this will support the international role of the euro. To deliver these benefits, a common safe asset should have a very high credit standard, be resilient to idiosyncratic shocks and have sufficient size and liquidity. The new EU bond issuances represent a first step in the direction of establishing a European safe asset. They are expected to increase the safest tranche of euro area government bonds – currently around €2.2 trillion as of the third quarter of 2020 – by almost 40% over the next few years.^[61]

Nevertheless, as new EU bond issuances are still relatively small on a global scale and are also temporary, they are unlikely to fundamentally alter the international role of the euro, in particular its position as a global safe asset. Over the past two decades, a relative scarcity of safe assets – liquid assets that maintain or increase their nominal value even in the worst state of the world – has emerged.^[62] On the demand side, this has been driven by several factors, such as international reserve accumulation and demographic factors, as well as rising global risk aversion and sizeable asset purchase programmes by the major central banks since the global financial crisis. At the same time, on the supply side, issuance of safe assets did not keep pace with rising demand, remaining relatively stable compared with world GDP over the past twenty years and only recently increasing above its long-run average owing to the large public debt issuance triggered by the COVID-19 crisis (Chart 22, left panel). To a large extent, safe assets are mainly in the form of US dollar-denominated securities. For instance, US dollar-denominated securities accounted for more than 70% of the securities included in the Bloomberg Barclays Global Aggregate – Aaa index, a global market benchmark for safe bonds, whereas euro-denominated securities accounted for only 16% in 2020.^[63] Notably, the share of the euro in global safe assets has halved since the global financial crisis, as the debt of a number of euro area economies was downgraded (Chart 22, right panel). The size of planned EU bond issuances will not fundamentally alter the relative currency shares in the supply of global safe bonds and, so far, EU bonds have not been included in the sovereign segment of broad bond indices. In addition, the temporary nature of the new EU facilities is a drawback for establishing these bonds as a benchmark in the portfolio of risk-averse global investors. Recent evidence has shown that there are three main factors that make government bonds a safe asset: (i) the quality of institutions of the issuing economy, (ii) the size of the debt market, and, importantly, (iii) the past track record of government bonds in hedging global risk, i.e. whether the asset behaved like a safe asset in the past.^[64] At the same time, government debt needs to be sustainable to receive a sufficiently high rating. While EU bond issuances will certainly possess the first characteristic, namely a strong credit quality, they rank below the US dollar as regards the second characteristic – size – and, crucially will not satisfy the third factor as long as they remain a temporary facility and do not have an established track record as a hedge against global risk, even though issuance of new bonds under this programme is likely to continue for decades once refinancing transactions of maturing bonds are taken into account.

The ECB policy response to the COVID-19 pandemic and its implications for the international role of the euro

Since the start of the COVID-19 crisis in early 2020 the ECB has taken monetary policy measures to dispel tail risks in financial markets, ensure credit supply and stabilise the euro area economy. Notably, ECB monetary policy measures include three elements, two of them directly aimed at the euro area economy – asset purchases and lending operations – and a third element – the provision of euro liquidity to non-euro area central banks through swap and repo lines – aimed at preventing indirect negative spillback effects from non-euro economies to the euro area. First, in March 2020 the ECB expanded the asset purchase programme and launched the pandemic emergency purchase programme (PEPP) in order to stabilise financial markets, contribute to easing the overall monetary policy stance and counter severe risks to the outlook for the euro area. The PEPP had an initial envelope of €750 billion, which was increased twice in the course of 2020, reaching an overall envelope of €1,850 billion in December 2020. Second, the ECB revised the structure and pricing of longer-term liquidity refinancing operations to provide banks with access to central bank liquidity and support the supply of credit to the euro area economy during the pandemic. In particular, the ECB lowered interest rates during the pandemic period, increased the borrowing allowance, added new operations and expanded the range of eligible collateral for targeted longer-term refinancing operations (TLTRO III), and introduced new pandemic emergency longer-term refinancing operations (PELTROs).^[65]

The provision of euro liquidity to non-euro area central banks through swap and repo lines represents the third element of the ECB strategy to forestall the potential adverse implications of the COVID-19 crisis on the euro area economy. By ensuring that euro funding is available to counterparties outside the euro area, the Eurosystem’s swap and repo agreements help the ECB fulfil its monetary policy objectives. In particular, they prevent euro liquidity shortages from morphing into financial stability risks, avoiding forced asset sales and negative spillback effects stemming from the use of the euro by non-euro-area residents as a funding or investment currency.^[66] Since the start of the pandemic crisis, the ECB has reactivated existing swap lines and established new swap and repo agreements with the central banks of several EU countries and non-EU countries in southern and eastern Europe. Finally, the ECB set up a new temporary Eurosystem repo facility (EUREP) to provide euro liquidity to a broad range of non-euro area central banks (Figure 1 for an overview and Box 6 for details), which did not meet the criteria for a bilateral liquidity line under the ECB´s framework. Even though these liquidity lines have only been drawn sporadically and for relatively small amounts, there is evidence that their sheer availability has been successful in mitigating stress in euro funding markets, preventing a tightening of lending and financing conditions in economies with strong economic and trade ties to the euro area (Box 6).

The ECB’s response to the crisis may have had the side effect of supporting the international role of the euro. First, a global currency benefits from a central bank that acts as a credible backstop to safeguard liquidity conditions in the financial system in times of stress. According to recent research, a link exists between central bank policies in global downturns and firms’ debt currency choice in international markets.^[67] By providing ample liquidity during the COVID-19 crisis, the ECB countered the negative effects of the pandemic shock to the euro area economy, enhancing the stability of the euro, which, in turn, can support its international status. Second, through its swap and repo lines, the ECB was one of the major central banks that offered access to its currency at the international level. The ECB provided liquidity lines for monetary policy purposes. By providing an effective backstop to private currency markets, the risk of fluctuations in euro funding costs in international markets for non-euro area residents is diminished. In turn, this may increase the attractiveness of financial and commercial contracts based on the euro and enhances confidence in euro asset markets.^[68] The attractiveness of a currency in global banking and financial markets and its use as an invoicing currency for trade reinforce each other.^[69] There is also evidence that currency swap lines and international currency usage are positively correlated. However, the direction of causality between the two is debated. Some observers see currency swap lines as an “exorbitant duty” and responsibility of a central bank that issues an international currency. Others claim that currency swap lines themselves foster international currency status. In any case, it might be plausible to assume that currency swap lines and international currency status tend to reinforce each other.^[70]

Concluding remarks

National fiscal policies, the facilities that have been set up at the EU level and the ECB’s monetary policy have all supported a strong and cohesive economic recovery from the COVID-19 crisis, thereby enhancing the resilience of the euro area and the international role of the euro. EU bond issuances planned under the NGEU programme will significantly increase the amount of highly-rated euro-denominated assets and represent a further step towards establishing a common European safe asset. This will help to foster financial deepening and capital market integration in the euro area and, in turn, the international role of the euro. However, insofar as NGEU remains relatively modest in size compared with bond markets in other major currencies and is also a temporary initiative, it is unlikely, at this stage, to fundamentally change the global status of the euro. At the same time, NGEU is linked to investment and structural reforms which are expected to increase the growth potential of the euro area and its internal cohesion, thereby increasing the resilience of the euro area economy to global shocks and boosting the attractiveness of the euro as a global investment currency. Furthermore, the monetary policy measures taken by the ECB in response to the pandemic have been swift and forceful. They have helped to stabilise the euro area economy in the face of an exceptionally large shock. In addition, the measures it has taken to provide euro liquidity to non-euro area central banks have helped to forestall potential adverse implications of the crisis on the euro area. All these measures had a knock-on effect of supporting the global appeal of the euro over the review period.

Ultimately, the global attractiveness of the euro is primarily supported by a deeper and more complete EMU, including advancing the capital markets union. Similarly, pursuing sound economic policies in the euro area is important for the euro’s global attractiveness. Completing banking union would make the euro area more resilient, while progress towards a capital markets union would contribute to deeper and more liquid financial markets. In turn, this would indirectly support the international use of the euro as an international investment, financing and settlement currency.

B Central bank digital currency and global currencies

By Massimo Ferrari and Arnaud Mehl

The Report on the digital euro set out several scenarios in which the need to issue a digital euro may become important.^[83] For example, in the event that the use of cash in the euro area declined significantly, in order to provide access to central bank money in an increasingly digital economy, or if foreign digital money were to largely displace existing domestic currency means of payment. Fostering the international role of the euro is not a prime motivation for issuing a digital euro. However, if the use of a digital euro in cross-border payments were allowed – a decision that remains to be taken – this would also have implications for the international role of the euro.

Against this background, this special feature examines how issuance of a central bank digital currency (CBDC) could impact the international role of currencies. It stresses that the global appeal of currencies depends on fundamental economic forces which digitisation is unlikely to alter. However, features specific to digital means of payment, including safety, low transaction costs and bundling effects, could ease international adoption of a currency. These features may combine to create positive feedback loops in the use of a currency as a means of payment and as a store of value and have effects on its global appeal. Moreover, the specific design features of a CBDC would be important for its global outreach and ultimately the international role of the currency in which it is denominated. Design features could influence the ability and incentives of non-residents to use the CBDC as a means of payment, unit of account and/or store of value. The special feature presents model simulations by ECB staff using a new structural macroeconomic model, which allows the effect of the different economic mechanisms at play to be quantified. The simulations suggest that a CBDC supports the use of a currency in cross-border payments but is not necessarily a game changer. As noted already, fundamental forces, such as the stability of economic fundamentals and size, remain the most important factors for international currency status.

Why a CBDC matters for international currency status

The global appeal of a currency depends on fundamental economic forces, which digitalisation is unlikely to alter. Such determinants include, for instance, the size of the issuing economy in terms of global trade and finance, the soundness of economic policies, financial market depth and liquidity, and inertia in international currency use.^[84]

However, features specific to digital means of payment could ease international adoption of a CBDC. One such feature is safety, as a CBDC would be a claim on the balance sheet of the central bank of issue. This might increase both its appeal for domestic users and its attractiveness for retail trade transactions across borders and as a store of value, i.e. the CBDC units held for future payments, such as in a digital wallet. Safety helps to mitigate the risks associated with traditional forms of payment for cross-border transactions in goods and services, which involve, for instance, counterparty risk in correspondent banking relationships.^[85] Low transaction costs are another feature. A CBDC would have the potential to widen access to payment services, promote financial inclusion and lower mark-ups of traditional intermediaries. If made interoperable with non-domestic payment systems, it could contribute to filling gaps or correcting inefficiencies in cross-currency payment infrastructures, including for transfers of remittances. Lastly, programmability and bundling effects are other features specific to many digital means of payment. Bundling effects are related to the fact that they can be bundled with complementary services, giving rise to economies of scope and convenience benefits. For example, it has been suggested that a CBDC could facilitate the digitalisation of information exchanges in payments through e-invoices, e-receipts, e-identity and e-signature, allowing intermediaries to offer services with higher value added and technological content at lower cost.^[86] It could also benefit end-users by giving rise to products that would compete with those offered by big tech firms.

These specific features may combine to amplify positive feedback loops in the use of a CBDC as a means of payment and as a store of value. Recent research suggests that a currency’s role as an invoicing or payment unit acts as a complement to its role as a store of value, resulting in positive feedback loops.^[87] For instance, a large share of internationally traded goods is invoiced in US dollars and, therefore, demand for US dollar-deposits is also strong.^[88] Since global demand for safe US dollar-denominated claims is strong, firms have an incentive to borrow in US dollars. In turn, this encourages firms to continue to invoice trade in that currency, because doing so increases certainty about their future revenues in US dollars, which can be used to pay back debts. A CBDC could affect this feedback loop in two ways. First, low transaction costs and bundling effects could increase its appeal for invoicing cross-border transactions – as a means of payment and as a unit to settle current transactions. In other words, this could increase the pool of retail trade transactions in goods and services that can take place digitally across borders and facilitate an expansion of global e-commerce.^[89] Second, the safety of the digital euro could increase its appeal as a store of value and as a unit to settle future claims and transactions (as stressed above, as units held in digital wallets in view of future purchases of goods and services across borders). Complementarities between the CBDC’s role as a payment unit and as a store of value could be significant, and the resulting effect on the global appeal of the currency in which it is denominated would be stronger.

The availability of a CBDC could facilitate currency substitution in third countries with instable currencies and weak fundamentals. It might facilitate digital “dollarisation” in such countries, leading to the full or partial replacement of their currencies with the CBDC for local payments, as a savings vehicle and, ultimately, as the unit of account. This would strengthen the global status of the currency in which the CBDC is denominated but would also reduce monetary policy autonomy in the economies concerned.

Finally, attention should be paid to the risks to stability that might arise if a central bank does not offer a digital currency. One concern could be a situation in which domestic and cross-border payments are dominated by non-domestic providers, including foreign tech giants potentially offering artificial currencies in the future. Not only could this threaten the stability of the financial system, but individuals and merchants alike would be vulnerable to a small number of dominant providers with strong market power,^[90] and the ability of central banks to fulfil their monetary policy mandate and role as lender of last resort would be affected. Issuing a CBDC would help to maintain the autonomy of domestic payment systems and the international use of a currency in a digital world.

Implications of alternative design choices for a CBDC

The specific design features of a CBDC would have implications for its global outreach and ultimately the international role of the currency in which it is denominated by influencing the ability and incentives of non-residents to use it as a means of payment, unit of account and/or store of value. These features include: (i) interoperability of the CBDC with non-domestic payment systems, (ii) anonymity of users, (iii) potential restrictions on use by non-residents, (iv) the CBDC’s remuneration, and (v) the underlying transfer/settlement mechanism, including modalities for offline payments.

Design choices related to interoperability with non-domestic payment systems are likely to have a significant impact on a CBDC’s global outreach.^[91] A CBDC could be designed to interoperate and facilitate cross-border and cross-currency payments.^[92] In the latter case, the foreign exchange rate leg of the payment transaction is particularly challenging to arrange. Unlike domestic payments, which can be settled in central bank money, it would involve two currencies – the CBDC and another foreign CBDC – which cannot be settled with a common asset, and requires an exchange rate to be fixed and sufficient market liquidity. Interoperability would underpin cross-border use and could be designed according to three options:

• One option would be to reduce barriers by enhancing compatibility features between domestic and foreign CBDCs. This would allow diverse CBDCs to coexist with harmonised payment messages, harmonised encryption standards, harmonised regulatory standards (such as harmonised know-your-customer checks and legal entity identifiers) and with overlapping operating times.
• Another option would be to interlink the domestic CBDC with other CBDC systems. This would allow diverse CBDCs to coexist with a shared technological interface or a shared centralised clearing system. Participants in one system could make direct payments in the other system, thereby reducing transaction costs and increasing the transparency of foreign exchange conversion costs.^[93]
• A final option consists of integrating CBDC systems in a single payment system. Multiple CBDCs would coexist within a single payment system infrastructure and a single set of rules.^[94] One benefit of this option would be to nest the foreign exchange conversion leg of the payment transaction in the payment system and to provide simpler cross-border technical and compliance requirements.

Of the three possible interoperability options, enhancing compatibility features requires the least effort in terms of global cooperation, suggesting that it might be able to be implemented by a relatively larger number of CBDCs. A single payment system would require more significant global cooperation efforts and is perhaps feasible for a smaller number of CBDCs.

Trade-offs between the benefits and costs of anonymity would have further implications for the global outreach of the currency in which a CBDC is denominated. Anonymity would bring benefits to users who value privacy and consumer protection. It would help to save on the costs of obtaining the identities of users through potential third-party infrastructure providers, such as internet providers. If anonymity were embedded in a security token (for instance, a smart card), this would make the use of a CBDC closer to that of a traditional banknote. In turn, anonymity might help increase the attractiveness of the CBDC to non-residents. Taking the euro as an example, a large share of euro banknotes – which are an anonymous means of payment – circulate outside the euro area. On the other hand, anonymity would prevent the identity of users being verified, thereby preventing its use being restricted for legitimate policy objectives.^[95] For instance, anonymity would have to be balanced against the need to restrict cross-border flows to prevent large and volatile investment flows into the CBDC or to build safeguards against its misuse for the financing of terrorism, money laundering and other cross-border criminal activities by (non-)residents. Transparency or selective privacy would enable better compliance and know-your-customer checks to be implemented, thereby controlling illicit payment flows, for instance for large transactions. These safeguards would strengthen the reputation and credibility of the digital euro.

Restrictions would weigh on the global attractiveness of a CBDC. Introducing restrictions could help combat illicit payment flows and reduce the use of the CBDC as an investment vehicle, especially for large-value transactions. Restrictions are easier to implement if bank accounts are used to transact in digital currencies (see below). Alternatively, limits to individual holdings could be introduced through direct quantitative constraints, in other words by putting a ceiling on the amount of a CBDC that non-residents could use.^[96] Information would possibly need to be acquired and verified before confirming payment with the CBDC to enforce the limits. However, restricting the access of non-residents to the CBDC would reduce its convenience for cross-border payments, if it were not interoperable with foreign payment systems. This would affect remittances and would not be in line with the G20’s objective to enhance cross-border payments. Limits on large-value transfer should apply not only for individual transactions but also for the value transacted over a certain period to prevent them being circumvented through the use of repeated, smaller-value transfers.

The global appeal of a CBDC would likely depend on its remuneration. Remuneration can be used to incentivise or disincentivise use of the CBDC as a store of value and indirectly also as a means of payment by domestic or foreign users (if they were allowed to use the CBDC). Non-residents could potentially find the CBDC particularly attractive as a store of value, leading to capital inflows and excessive upward pressure on the exchange rate. A design choice that aims to incentivise users to use the CBDC as a means of payment, and not as a form of investment that competes with other financial instruments, would introduce a tiered remuneration system in which the remuneration rate on CBDC holdings in excess of a given threshold would be set at unattractive levels.^[97] Whether this would significantly reduce the attractiveness of the CBDC as a global store of value would depend on the price elasticity of demand from non-residents. In an extreme scenario that is typical of stressed financial conditions, where such demand is price-inelastic, the disincentive effects of a tiering system on decisions by non-residents as to whether to hold the CBDC might be lessened.^[98]

Whether a CBDC would be designed as a bearer instrument or as an account-based instrument might also have an impact on the international attractiveness of the currency in which it is denominated.^[99]

• A bearer CBDC (also referred to as a token-based or value-based CBDC) would reduce the need to use third-party infrastructure (such as internet providers in the case of offline use), would be compatible with full anonymity and easy to scale. These features could combine to increase the global attractiveness of the CBDC. A bearer CBDC would also be well-suited to providing offline payments, which would increase its convenience as a means of payment and presumably increase its attractiveness to non-residents. By contrast, as indicated in the ECB’s Report on a digital euro, a bearer CBDC that was designed to be fully anonymous would be less well-suited for introducing effective holdings and/or transaction limits, since the identity of users would be unknown – as they are for banknotes. This could undermine the fight against illicit payment flows to the detriment of the reputation and credibility of the CBDC.
• By contrast, an account-based CBDC would make it easier to restrict access to non-residents who intend to use it for illicit payment flows. However, this might reduce its attractiveness to non-residents compared with a bearer CBDC if, for instance, it meant that there were no possibilities to make offline payments.

Conclusion

The Eurosystem has not yet decided whether to go ahead with a digital euro project and, if so, whether the use of a digital euro in cross-border payments would be possible. If this was the case, a digital euro could also help support the use of the euro in cross-border payments by reducing the frictions and costs of euro-denominated cross-border payments. However, this would not be a motivation for issuing a digital euro and the effect it would have depends on design choices.

Moreover, the introduction of a digital euro would not necessarily be a game changer for the international role of the euro, which will continue to depend to a large extent on fundamental forces, such as stable economic fundamentals, size, and deep and liquid financial markets. A digital euro could contribute to strengthening the global appeal of the euro, but would not change the fundamental forces that define international currency status. From a global perspective, the roadmap for enhancing cross-border payments established by the G20, which includes a CBDC-related dimension, is an important forum for cooperation among central banks to discuss potential elements of a common framework on cross-border usage of a CBDC with a view to avoiding undesired effects.

C The euro as an invoicing currency for global trade

By Georgios Georgiadis, Helena Le Mezo and Arnaud Mehl

This special feature presents a new dataset that offers a comprehensive and up-to-date understanding of global trade invoicing patterns within the major currencies. It confirms earlier findings on the globally dominant role of the US dollar in invoicing and the overall stability of invoicing currency patterns. At the same time, the special feature also points to several new stylised facts. First, both the US dollar and the euro have been increasingly used as vehicle currencies, as indicated by the fact that invoicing in the currencies in question has increased notwithstanding the decline in the shares of the United States and the euro area in global trade. Second, the euro is used as a vehicle currency in Europe and some parts of Africa, which suggests that, even if the US dollar is the dominant currency globally, the euro has a dominant role regionally. Third, some European countries have seen significant shifts towards euro invoicing upon joining the euro area or the European Union, which indicates that inertia in patterns of international trade invoicing can be overcome. Finally, empirical estimates suggest that standard theoretical mechanisms that foster the use of a large economy’s currency – i.e. strategic complementarities in price-setting and integration in cross-border value chains – underpin the use of the euro for international trade invoicing.

A new dataset on patterns in global trade invoicing

In a recent paper, European Central Bank (ECB) and International Monetary Fund (IMF) staff assembled the most comprehensive and up-to-date panel dataset of trade invoicing currency patterns for major currencies.^[106] This dataset provides the respective annual shares of exports and imports invoiced in US dollars, euro, home currencies, and other currencies for 102 countries over the period 1990-2019.^[107]

Overall, the countries in the dataset account for about 75% of global trade. Although coverage is sparse for the 1990s, it is quite comprehensive in more recent periods. In total, the dataset includes nearly 1,200 country-year observations for both imports and exports. The data are obtained from official sources through central banks’ websites and via requests sent to central banks, statistical offices and customs/revenue authorities. The dataset covers a diverse sample of countries. It includes 40 countries from Europe, 20 from Asia, 22 from Africa, 11 from Latin America, 4 from Oceania, 3 from the Middle East and 2 from North America. The country coverage is also diverse in terms of income levels: 35 countries are advanced economies and the remaining 67 are emerging market and developing economies.

The new data contribute to earlier efforts to assemble cross-country datasets of trade invoicing currency patterns along several dimensions. Compared with the study by Gopinath (2015), the dataset includes twice as many countries and, perhaps more importantly, also a time dimension. Relative to earlier datasets, it covers two to four times as many countries and has more systematic coverage over time.^[108] It is noteworthy that, compared with these earlier studies, the new dataset contains information on a much larger number of emerging market and developing economies, for which vehicle currency use is more relevant. The substantial improvement in cross-country coverage of trade invoicing data is one of the paper’s main contributions.^[109] Finally, data quality is significantly improved for European Union (EU) countries compared with existing datasets by using information obtained within the Eurosystem to ensure that definitions of invoicing currency data are harmonised with regard to trading-partner composition. This contribution is important, because data on European countries account for a large share of the new and earlier datasets.

Stylised facts on global trade invoicing patterns

The dataset’s broad time-series coverage allows several stylised facts about the evolution of global and regional trade invoicing to be documented. The new data confirm previous findings on the US dollar’s dominance and on the overall stability of invoicing currency patterns in global trade.^[110] They include intra-euro area transactions, in line with Gopinath (2015). If intra-euro area transactions are excluded, the estimated share of the euro is lower, at around 30%, against around 50% for the US dollar.^[111] The new data also reveal several new stylised facts.

First, the data indicate that use of the US dollar and euro as vehicle currencies has increased over time, despite the decline in the share of global trade accounted for by the United States and the euro area. This is apparent from Chart 23, which shows the increasing concentration of invoicing in US dollars and euro over time. In 2018 the share of global trade invoiced in US dollars was around four times larger than the share of global trade destined to the United States – significantly more than in 1999, when it was three times larger. The corresponding ratio also rose for the euro. The implication is that vehicle currency use has been on the rise.^[112]

The disproportionate role of the US dollar in global trade invoicing can also be discerned at the country level. The left panel of Chart 24 compares the share of countries’ exports to the United States in total exports with the share of their exports invoiced in US dollars; in almost all cases, the latter is much greater than the former. From a global perspective, the euro’s share in trade invoicing is more in line with the share of trade in which at least one euro area country is involved.

Still, it is interesting that the euro is used as a vehicle currency in certain regions. In particular, non-euro area European countries and several African countries use the euro for invoicing of more than just their exports to the euro area (these countries tend to cluster towards the top left-hand corner of the right panel of Chart 24). So even though the US dollar is the globally dominant currency in trade invoicing, the euro may be regarded as a regionally dominant currency in Europe and some parts of Africa, including countries of the CFA franc zone.

Third, institutional and geographical proximity to the euro area and the EU seem to have triggered notable changes in invoicing currency patterns for several countries. Countries that are in the run-up to euro adoption or that joined the EU, EU candidate countries, and other European countries have experienced marked increases in the use of the euro as an invoicing currency – increases that typically occurred at the expense of the US dollar. Chart 25 illustrates this point by showing the full time-series data for selected European countries.^[113] The increase in these countries’ export shares invoiced in euro is noticeable, especially when one considers that the shares of exports destined to the euro area have either been fairly stable or exhibited only modest increases. The rise in the share of exports invoiced in euro is typically paralleled by a decline in the share invoiced in US dollars. These findings are consistent with the theoretical literature’s emphasis on the role of history, path dependence and nonlinearities in the choice of a trade invoicing currency, including discrete events, such as the establishment of currency unions and episodes of comprehensive institutional integration.^[114]

Box 9
New estimates of the determinants of global invoicing currency choice

Prepared by Georgios Georgiadis, Helena Le Mezo and Arnaud Mehl

Recent literature in the field of international macroeconomics departs from the standard open economy framework under which export prices are set in the producer’s currency. Rather than using the conventional assumption applied since the seminal work of Mundell (1963)^[115], it is instead assumed that export prices are set in a so-called vehicle currency, i.e. the currency of neither the exporter nor the importer, but of a third country.^[116] An important observation underlying this assumption – known in the literature as the dominant currency paradigm – is that most global trade transactions are invoiced in just a few currencies, most frequently the US dollar, but also the euro, regardless of the countries involved in the transaction.^[117] It is therefore important to establish whether this assumption is supported by recent and comprehensive data, since the predictions of the dominant currency paradigm differ from those of the conventional assumption along several dimensions, such as the impact of exchange rate movements, the conduct of monetary policy and international spillovers of monetary policy from countries that issue a dominant currency.

The new dataset can help shed light on a range of international macroeconomic questions. First, it enables the role of vehicle currency invoicing for exchange rate pass-through to import prices and trade volumes to be revisited. Boz et al. (2020) combine the new dataset on invoicing currency patterns with expanded and updated datasets for bilateral trade price and volume indices to obtain estimates of exchange rate pass-through in the spirit of earlier literature, such as Gopinath et al. (2020). They find that the pass-through to import prices and trade volumes from fluctuations in US dollar exchange rates is higher than from fluctuations in the bilateral exchange rate between the importer’s and the exporter’s currencies. The propensity to invoice international trade transactions in US dollars drives the importance of the dollar exchange rate. These findings confirm the results of Gopinath et al. (2020), who conduct similar analyses on a smaller sample.

Moreover, the dataset can shed light on the determinants of invoicing currency choice. Recent theory suggests that complementarities in price-setting and cross-border input-output linkages are key determinants of an exporter’s invoicing currency choice (see, for example, Mukhin, 2018). This leads to four predictions. First, the large size of the United States and euro area as destination markets creates strategic complementarities in price-setting for exports. This is expected to encourage local currency pricing, whereby exporters to the United States (euro area) minimise deviations of their prices from the prices of their competitors by invoicing in dollars (euro). Second, the stability of marginal costs in their currencies in turn encourages US and euro area exporters to invoice in US dollars and euro respectively, and to choose producer currency pricing. Third, outside the United States and the euro area, strong complementarities in price-setting in markets for homogenous goods, such as oil and other commodities, encourage vehicle currency pricing in major currencies like the US dollar and the euro. Finally, countries other than the United States and the euro area that are integrated in global value chains are expected to use vehicle currencies for invoicing as hedges against shocks to marginal costs relative to their revenues. In a recent paper, Georgiadis et al. (forthcoming) compare these predictions with the data.^[118] Table A gives a snapshot of their panel regression estimates. The dependent variable is the share of countries’ exports invoiced in US dollars (in columns 1 to 3) and in euro (in columns 4 to 6). The table gives results for the full country sample (in columns 1 and 4), a sample excluding euro area countries (columns 2 and 5), and a sample excluding European countries, i.e. the euro area, other EU countries and a few countries in their neighbourhood (columns 3 and 6).

Empirical results largely confirm theoretical predictions. The share of exports invoiced in US dollars and euro increase with the share of a country’s exports to the United States and the euro area respectively. This is consistent with the prediction that strategic complementarities in price-setting encourage local currency pricing for large destination markets. The estimates for imports – not shown in the table – are similar, consistent with the prediction that the stability of marginal costs in their currencies encourage US and euro area exporters to choose producer currency pricing in US dollars and euro respectively. Moreover, the share of trade invoiced in US dollars tends to increase for countries which export more homogenous goods; by contrast, the share of the euro declines.^[119] This suggests that complementarities in price-setting in homogenous goods like oil and other commodities encourage vehicle currency pricing in the US dollar at the expense of the euro. Finally, there seems to be no systematic relationship between invoicing in US dollars and euro and integration in cross-border input-output linkages and invoicing in dollars, while there is evidence for such a relation for the euro in the full sample.^[120]

Table A

Regression estimates of the determinants of US dollar and euro invoicing

The impact of global value chain integration on currency invoicing depends significantly on the extent of countries’ trade with the United States and the euro area. This is visible from Chart A, which shows estimates of the marginal effect of global value chain integration on export invoicing conditional on imports from the euro area.^[121] The blue solid line shows the marginal effects evaluated at different values of the share of countries’ imports from the euro area. The grey shaded area shows the 90% confidence bands, while the yellow dotted line shows the distribution of the shares of imports from the euro area across the sample. As the chart makes clear, stronger integration in global value chains is associated with a higher share of the euro as an invoicing unit, but more distinctively when countries tend to trade to a more significant extent with the euro area and are therefore part of the European value chain.

Chart A

Global value chain integration associated with higher euro invoicing for countries in the European value chain

Marginal effect estimates of global value chain integration on euro invoicing conditional on imports from the euro area

(percentages)

Conclusion

The data presented in this special feature are relevant for future research. For instance, the data can help enhance analyses of the relationship between invoicing currencies and the effects of exchange rate movements, the role of international currencies and the global spillovers of monetary policy. Moreover, the findings that emerge from the analysis of these data have implications for policy. In particular, they suggest that preserving the euro area’s openness to trade and the European value chain are important for the prospective role of the euro as a global invoicing currency.

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