The Euro: Global Currency?
Initially launched in 1999 as accounting currency to replace the European Currency Unit (ECU) and distributed widely by 2002 as physical banknotes and coins, the euro has rapidly joined the ranks of truly international currencies. Now yielding pride of place only to the U.S. dollar amongst all international currencies, the euro is decidedly influential in some end-uses but not in others.
The standing of the euro among international currencies, defined as usage by residents outside the issuing nation (or nations, the euro-zone, in this case), bestows both political and economic benefits. The former is all about gaining pride, influence and prestige. Multiple economic advantages ensue. Countries that adopted the euro no longer need accumulate foreign reserves since they can plug gaps in their current accounts with this internationally-accepted legal tender. Wide acceptance extends to more active and more efficient capital markets within the issuing nations; hence, financial institutions within the euro zone enjoy lower transaction costs and interest rates. In turn, more profitable banks and other types of financial institutions can offer more interest on deposits and reduce the cost of loans.
On the whole, the euro has gained the widest usage in international financial transactions, especially with respect to denominating international debt securities. In fact, the euro already has the leading position, according to the Bank for International Settlements, when it comes to international bonds and notes. These are debt instruments denominated in either local or foreign currency but marketed to nonresidents of the issuing country. To account for almost half of the worldwide stock of international bonds and notes - all those issued and outstanding, in other words - strongly suggests very wide acceptance indeed.
The euro also takes a backseat only to the U.S. dollar as the second most actively traded currency in foreign exchange markets. Corollarily, the euro-dollar currency pair earns the most attention and is the most heavily transacted.
On the other hand, the euro has made the least inroads in international trade. This stands to reason, given the dominant trading volumes of the U.S.A., China and Japan and the fact that international trade has traditionally been dollar-based. Data provided by the European Central Bank suggest, though, that the euro is the dominant currency for invoicing exports and imports among the euro countries and their neighbors on the continent.
By geographical area, for the moment, the role of the euro remains largely confined to the European Union (EU), including those countries that have exempted themselves from converting to the euro as their official currency: the UK, Denmark and Sweden. The euro is also the primary international currency in the CFA franc countries of Central and Western Africa.
These same geographical and political alliances explain why the euro is the official valuation peg for one-third of nations/states that link the value of their currency to one or another of the leading international currencies. In the aforesaid African nations, the euro countries, potential accession nations and even the euro-exempt members, the currency already accounts for fully half of international reserves. But on a global scale, the dollar still comprises around two-thirds of reserves owing to the preference for a dollar peg in the rest of Africa, in Asia and throughout Latin America.
Though standardization on the euro has not been without its hiccups and political turmoil even in the original Maastricht Treaty nations, the currency is dominant on the continent in point of trade, as a component of official foreign reserves and as a valuation peg for those nations retaining their own currency. In addition, the euro is now the leading currency for quoting international debt instruments.