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1.3.4.1. How does one measure the international role of the euro ?

The importance of the euro as international currency is measured by its share of :  

• The international trade and in particular of
• quotations in euro ;
• billings in euro ;
• payments in euro. 
  

• The financial markets and more particularly of the  
• bonds
• loans and deposits

• The exchange markets

• The reserves of the central banks and the Special Drawing Rights (SDR)*

• Bank notes in euro circulating in the world.

 

The European Central Bank (ECB) publishes annually by mid-year a report on the evolution of the international role of the euro (in English).

1.3.4.2. What is the general situation in 2006 ?

The rapid growth of the international use of the euro in the years following its creation, has steadied. Its use remains stable or has dropped in several financial areas; in the international trade, it is largely confined to the areas around the European Union (EU)  and it remains stable as reserve currency of the central banks.  As from early 2007, the number of euro bank notes circulating in the world exceeded that of the USD ($). In general, the euro remains a “local” currency mainly used in and around <st1:place w:st="on">Europe</st1:place>.  

For the ECB 2007- report: http://www.ecb.eu/pub/pdf/other/euro-international-role200706en.pdf

1.3.4.3. Are some primary goods quoted in euro on the international markets?

Most primary products and services continue to be quoted in USD or in GBP (£), which was the reference currency on the international markets until 1922 and was officially replaced by the USD at the Bretton Woods* agreements in 1944.  A few countries label their oil exports, for instance, in euro, but these cases remain marginal . A growing number of international professional papers, however, publish systematically the equivalent in euro of their quotations in USD or GBP.

1.3.4.4. What share of the international trade is billed in euro?

Imports into the EU represent 20 % of the international trade (USA : 21% ; Japan :6%), while its exports represent 18.3% (USA 12% et Japan 7%). The EU is the first exporter on the world market, intra community trade excluded.

 

 

When the euro was launched, the share of the world trade billed and paid in euro grew rapidly up to 16.4% in 2001 and 18.7% in 2002. In 2005 and 2006, that share steadied and remained minimal – about 10% - of the trade between European and Asian countries, for instance.

The use of the euro in exports from the euro zone countries (44%) remained stable in 2006. In the imports into these countries, it dropped to 56% in 2006, probably as a result of the steep rise of the prices of energy products billed in USD. These figures should be compared to a use of the USD in 60-70% of the cross-border trade of the EU before the euro was launched.  

 
Japan in 2002 : 54% of exports billed in EUR.

UK in 2001 :      36% of exports toward euro zone billed in EUR (+ 10% from 2000 to 2001).

USA in 2001 :    30% of the trade with Germany and Austria; 10% or less with the other countries.

 
Toursim : € more and more used instead of the USD in all European countries including especially Russia.

 
Conlusion : - rapid growth in the beginning especially after bank notes were made available ;

- USD remains dominant currency

- Euro remains a local currency with neighbouring countries (except Japan)).

1.3.4.5. How did the use of the euro evolve on the bond market after its launching ?

• In 1992, the ecu (see chapter 1.2.2.2.) was becoming the third most used currency of the international issues.

 

• The euro allows Europe to have ITS OWN capital market for the continent

It lead to qualitative changes in the bond market : proportionately less banks, more companies and regional entities.

• Amount of new issues in euro larger than those in USD as from 1999-2000. The volume of the bond market in EUR remains of international importance. The market is made of especially of Anglo-Saxon issuers.

 

• Stong marks of interest from the part of Asian countries.

 

 

• Net new issues involving a partner outside the euro zone larger than issues in USD. Especially those at short term. Those for the longer term remained at the same level as those issued in ecu.

 

 

1.3.4.6. How do the bond issues in euro evolve after then ?

The new long term issues continue to grow both in absolute and relative terms compared to the new issues in USD until 2005. In 2006, they continue to grow in absolute terms (+19 billion EUR), but, for the first time, they drop in relative terms compared to those issued in USD because of the exceptional growth of the latter during 2006 (+100 billion USD or +51% ).

 

In % at Q4		1994	2003	2005	2006
Q= quarter = trimestre	EUR	18	24	33,7	31,4

In 2006, the volume of short term issues in EUR drop both in absolute and relative terms compared to the issues in USD.

The gross issues in euro (including their renewal) remain largely dominated by those in USD. The international bond issues market in EUR remains dominated by issues from the European States outside the euro zone and by States with a developed economy.

Contrary to what happened at the launching of the euro (see chapter 1.3.2.), in 2006 the share of issues by private banks and financial institutions (+67%) rises also faster than issues from corporations and regional organisations.

The share of the euro in american mutual and pension or insurance funds remains negligible (0.7%) while it rises significantly in those held by European entities ( +28%).

1.3.4.7. ….. and on the loan and deposit markets ?

Cross-border loans and deposits evolved as follows :

 

In %	Q1 2003	Q4 2005	Q4 2006
Total loans	8	21.2	19.8
Total  deposits		24.5	21.6
From both bank to borrower located outside the euro zone		20.2	16.7

Loans and deposits in EUR remain European : the main borrowers in euro are from central and oriental Europe (+100% in 2006). Taking the industrial countries together , the main crossborder borrowers are American or British. The share of the euro in overall borrowings dropped in 2006 to 32% (2005 : 36%), probably because of the prevailing uncertainty regarding the future exchange rate of the EUR compared to the USD.

In 2003, when the euro seemed a weak currency, they borrowed in EUR for 30% and in USD for 40%.

For Third World countries , the euro is used mainly in Africa, in Asia and in the Middle East. Latin America uses essentially the USD, even though the share of trade with the EU exceeds that with the USA in all countries except in Brazil (UE : 25%/USA : 26%) and in Mexico (UE : 6%/USA : 87%).

The share of the euro in cross-border deposits (savings) dropped in 2006 by 3% (- 6% for the non-residents of the euro zone). This drop reflects a continued decline that started in 2003, reinforced in the more recent years by the spectacular rise in oil prices. The oil exporting countries have by and large increased their share of deposits held in USD, while Russia has strongly risen its share held in EUR from 9% in 2002 to 40% in 2006.

 

1.3.4.8. What is the share of the euro on the exchange markets ?

In 2006, this share declined from 41% to 39%, the USD share remaining stable, and those of the JPY and the GBP dropping significantly. The declines stem from the introduction of nex currencies in the markets by Continuous Linked Settlements* (CLS). The USD with more than 90% of the market represents still the dominant currency of the world exchange markets.

 

See also www.cls-services.com

1.3.4.9. To what extent are central banks interested in the euro as a reserve currency?

The exact share of the euro in the exchange reserves of the central banks is difficult to estimate because many do not declare the composition of their reserves. For those who do, the share of the euro is estimated to continue to rise as follows :

	1994	1999	2000	2002	2005	2006
En %	22	11-13	16	19/21	24.9	25.8

The 22% of 1994 represent the combined holdings in national European currencies. The drop in 1999 is caused by the portofolio diversification policies of the central banks : holding one European currency offers less diversification and they acquired non-European currencies to achieve and equivalent risk spread.

Taking all known international currency reserves, one estimates that from 1999 to 2006, the share of the USD has declined slightly from 70% to 67% while that of the EUR grew from 20% to 24% (57% in non euro zone countries, 18% in the USD zone countries).

The ris in the share of the euro between 2005 and 2006 is not result of additional purchases of euros but of the rise in the value of the euro on the exchange markets.

Since 1999, the reserves in USD grew regularly by 12% /year, mainly in Asia (share in euro : 6%) . For the euro, after the initial drop compared to the holdings in national European currencies, the euro grew on average by 20%/year until 2005 to remain stable between 2005 and 2006.

In Central and Oriental Europe, central banks hold about half their reserves in euro. The Russian central bank increased spectacularly its share in euro: from 20 to 30% in 2003 and to 45% in 2006.

 

Conclusion : The share of the EUR in the reserves of the central banks is largely determined by their exchange regime : of the 151 countries with a controlled exchange regime, 41 are holding a share of their reserves in EUR (partly through holdings in SDR*).

 

 

1.3.4.10. What is the share of the euro in the Special Drawing Rights (SDR*) ?

In 1975, one « new » European Unit of Account , which later gave rise to the ecu and the euro at the rate of 1 to 1(see 1.2.1.6.) was created to be equal to one  SDR* itself created in 1969 to be equal to about 0.88 gr of gold to have the same value as the USD.

 

In January 2002, 1 EUR = 1.1995  SDR* ; in October 2005, 1 EUR = 1.9660 SDR*.

The  SDR*, a basket currency managed by the International Monetary Fund (IMF)*, comprises four main currencies whose relative weight is calculated according to the economic importance of its region of influence in the world : the USD, the EUR, the JPY and the GBP. Its composition is reviewed every five years. In 2001, the EUR replaced the DEM and the FRF which represented the continental European economies.

The weight of the EUR was then reduced to 29 %, compared to the combined weight of the two national currencies of 32 %. The weight of the GBP stayed at 11 % while that of the USD went from 39 to 45 %, also at the expense of the JPY (15 % in 2001).

The last revision took place in October 2005. Since then, the currency basket of the SDR* contains exactly : :

• 0,5770 USD

• 0,4260 EUR

• 21,000 JPY

• 0,0984 GBP

 

The composition of the  SDR* was then (taking into account the exchange rates of these currencies at the time) USD : 39% ; EUR : 36% ; GBP : 13% ; JPY : 12%.

1.3.4.11. What conclusions can one draw from this analysis ?

The USD remains the world leading currency. The EUR grew rapidly after being launched but is primarily used in and around Europe. Thus, it has mainly a regional usage.

In 2006, the expected evolution towards a bipolar international monetary system was stopped, the euro achieving barely a level that is half that of the USD.

This situation is largely determined by the use of the USD as the reference currency for energetic products whose value rose sharply.

For the usage of the euro to continue to rise, beyond Europe and its neighbours, it will be necessary for the European Union to acquire a credible economic governance and for the European leaders to demonstrate an attitude compatible with the international relations of the post-modern world that excludes hegemonic tendencies. If the European leaders adopt the same attitude as that of their American counterparts who have little consideration for the impact of the fluctuations of their currency on the currencies of the rest of the world ( « The problem of the $ is your problem », « A dollar is a dollar »,…….), then, third countries will see no interest in replacing their holdings in USD by EUR.

 

 

According to Robert Mundell* ,the central banks of the large international currencies and in particular the American Federal Reserve Board (FED) and the European Central Bank (ECB) should better coordinate their policies to stabilise the foreign exchange markets.

1.3.4.12. What is the international potential of the euro

With the USD and the JPY, the euro becomes on the three or four main international  currencies* that better reflect today’s economic and commercial activities in the world by giving Europe a currency whose weight better represent its share of the international trade.

By reinforcing the international role of the euro, the EU improves:

• The negociating position of the European companies to settle their transaction in their home currency*.
• The perspectives of the European bond market, which is potentially the largest in the world. The euro can compete with the USD in the field of financial products. Currently, 60% of the world assets are in USD, greatly exceeding the economic weight of the USA in the world.
• The capacity of the euro to become an obliged exchange reserve in the world.
• The stability of the international monetary system by giving making it more bipolar, hereby reducing the risk resulting from the use of a single national  currency* as reference  currency*. Its creation in close reference to the the existing international  currencies* (USD and SDR*) makes of the euro a forerunner of a future real world currency.
• The chances to see the penchant for competitive devaluation by international  currencies* disappear.
• To achieve this, the political representation of the euro in the international instances must be put at the level of its monetary and economic weight. The countries of the euro zone must have a “Mister euro” at the international plan, and learn to speak with one voice. The Nice Treaty allows the Council to nominate such a representative under a qualified majority voting system.  

 

Alan Greenspan*,the President of the Federal Reserve of the United States (FED), the pendant of the European Central Bank, considers that the credibility of the euro will remain diminished as long as European economic issues remain in the hands of national authorities..