It was claimed that the euro would rival the US dollar as a second global reserve currency.
But the hopes have failed to materialise, and euro’s importance is about the same as it was two decades ago.
What is the recent move?
The European Commission recently published a Communication entitled "Towards a stronger international role of the euro".
The European Commission considers that the eurozone would benefit if the euro played a more global role.
How has the Euro's importance been?
There is widespread use of euro banknotes outside the single-currency area.
[Bank notes are similar to bonds; promissory note issued by a bank in large denominations, which is interest bearing and payable on demand.]
On this measure at least, the euro has been a big success.
Bank note issuance was a profitable business for central banks, because they could invest the proceeds in government bonds with a decent yield.
With interest rates at 5%, and Euro 1.2 trillion of notes in circulation, the European Central Bank (ECB) could have generated revenue of about Euro 60 billion a year.
Currency in circulation has more than doubled over the last 20 years, both in absolute terms and as a percentage of eurozone GDP.
Furthermore, it is commonly estimated that a large fraction of euro cash is used outside the eurozone.
Why is the Euro dream unfeasible?
Bank notes - The economics of banknote issuance have changed now, and at today’s negative interest rates, currency issuance is no longer profitable.
This might be another reason why the ECB decided to stop issuing the Euro 500 note.
Borrowing - Another argument for having a global reserve currency is that foreign borrowing becomes cheaper.
It is a privilege the United States enjoyed owing to the dollar’s status as the world’s main reserve currency.
But while issuing dollar-denominated debt is an important advantage for the US (the world’s largest debtor), the eurozone is a net creditor.
Also, with real interest rates tending to be higher in dollar terms, it would be better for the eurozone’s external assets to be denominated in dollars than in euro.
Power - The extra-territorial application of sanctions by the US makes it extremely difficult for European companies to maintain trade ties with Iran.
This is because most of Iran’s international trade is invoiced and settled in dollars.
In this context, it is in Europe’s interest for the euro to play a larger global role.
However, the ability of the US to apply sanctions so widely is essentially due to its diplomatic and military power.
So even if the euro played a much larger role in global finance, the US would remain dominant in terms of hard power.
What could be done?
The eurozone currently is facing enough economic challenges without the additional burden of issuing a global reserve currency.
So the euro could better increase its global role only by slowing the relative decline of the eurozone economy through rapid growth.
