The Euro’s international role is growing. Its share in global use challenges the US dollar’s position.
More than two decades after its introduction, the European common currency became increasingly popular during the pandemic. It even threatened to overtake the US dollar as the number one fiat currency.
The trend is likely to persist moving forward. The US Treasuries are considered the safest assets in the world, literally the risk-free benchmark for markets. But they have a rival now, in the form of the newly issued European bonds’ part of the next generation EU scheme designed to boost European economies. EUR24 billion worth of these bonds were issued this June – and the offer was oversubscribed multiple times at a record rate.
Euro’s International Influence Boosts Euro Area Economies
Nineteen countries have chosen to use the common currency since the euro’s introduction, but according to a study by the European Central Bank, more than half of the euro currency banknotes in circulation are held outside the Euro area countries. It shows that the international role of the euro is growing, and that is a positive for the Euro area economies.
A currency wanted by foreign nations reduces the cost of borrowing, thus having a positive impact on the bottom line for firms and banks. Despite the increasing adoption of the euro in global payments, the US dollar still remains the world’s preferred currency to stash foreign reserves. It is holding close to 60% of the foreign reserves, while the euro accounts only for about 20% or so.
The euro benefited from the pandemic. Unlike the previous economic recession, when the euro’s survival was tested, the common currency gained credibility during the COVID-19 pandemic. For the first time ever, the European Union has issued common debt, denominated in euros, a move welcomed by international financial markets.
Because the new bonds rival the US Treasury by being backed by the balance sheet of all EU member states, they in turn boosted the euro’s credibility. The US dollar finally has a rival.