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EUROPEAN

COMMISSION

Brussels, 5.12.2018
COM(2018) 796 final

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN


PARLIAMENT, THE EUROPEAN COUNCIL (EURO SUMMIT), THE COUNCIL,
THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL
COMMITTEE AND THE COMMITTEE OF THE REGIONS

Towards a stronger international role of the euro

EN EN
1. INTRODUCTION: THE EURO AS A SYMBOL OF UNITY, SOVEREIGNTY AND STABILITY

The 2017 Rome Declaration1, agreed on the occasion of the 60th anniversary of the
Treaty of Rome, stated that a stronger European Union was a necessity. The EU
Leaders emphasised in particular that the EU should become a stronger global actor. It
must be better able to withstand global shocks, shape global events and be better
equipped to shoulder international responsibilities.

In his State of the Union Address of September 2018, President Juncker highlighted
the strategic importance of the euro in this context and called on action to make it
play its full role on the global scene: “[By] next year, we should also address the
international role of the euro. The euro is 20 years young and has already come a long
way – despite its critics. It is now the second most used currency in the world with 60
countries linking their currencies to the euro in one way or another. But we must do
more to allow our single currency to play its full role on the international scene.”

In its twenty years of existence, the euro has become a mark of Europe’s economic
strength and a symbol of Europe in the world. 340 million European citizens use euro
banknotes and coins every day across the euro area’s 19 Member States. Europeans
identify the euro as one of the main symbols of the European Union 2. Ten years after the
financial crisis shook the world, the architecture of Europe's Economic and Monetary
Union has been significantly reinforced and public support for the euro stands at new
highs.3 With time, the practical benefits of the euro are also becoming more visible:
stable prices, lower transaction costs for citizens and businesses, more transparent and
competitive markets and increased intra-EU and international trade. With its single
currency, the Union remains the most integrated economic area in the world offering an
investment friendly environment.

Historically global developments have always played a role in further economic and
monetary integration within Europe, including the move towards a single currency.
Due to the currency market turbulences in the late 1960s, the Heads of State or
Government of the European Communities at the time requested the Council to draw up
a plan for closer monetary integration. The resulting Werner Report4, published in 1970,
delivered an ambitious plan to achieve Economic and Monetary Union. The Werner
Report was based on the assumption that exchange rates to the US dollar would remain
stable. However, on 13 August 1971, President Nixon of the United States of America
decided to suspend the US dollar’s convertibility into gold, thereby ending unilaterally
the fixed exchange rate system that had existed since the Second World War.

1
Rome Declaration of the Leaders of 27 Member States and of the European Council, the European
Parliament and the European Commission.
2
Standard Eurobarometer 89:
http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/instruments/ST
ANDARD/surveyKy/2180
3
Flash Eurobarometer 473: Overall support for our single currency has returned to its highest level. 74
% of citizens across the euro area say that the euro is good for the EU, according to the latest
Eurobarometer survey. https://ec.europa.eu/info/news/eurobarometer-2018-nov-20_en
4
http://ec.europa.eu/economy_finance/publications/pages/publication6142_en.pdf

1
At that point, Europe had to decide to take its destiny in its own hands and advance
on the path towards a single currency, which started with exchange rate
mechanisms5 and was finally achieved on 1 January 1999. This has gone hand-in-
hand with the definition of a common economic governance framework through which
Member States coordinate their policies and assume joint responsibilities.

Since its launch 20 years ago, the euro has been the second most important
international currency:

As a safe store of value, the euro represents around 20 % of international reserves of


foreign central banks.

Businesses and foreign Governments use the euro for issuing debt. By the end of
2017, more than 20 % of debt issuance on international markets was denominated in
euros.

The euro has become a widely accepted currency for international payments. About
36 % of the value of international transactions were invoiced or settled in euros in
2017, compared to about 40 % for the US dollar.

Around 60 countries6 in the world are either using, will use or link their currency
to the euro. The euro is the main currency of reference for most European Economic
Area countries, as well as smaller neighbourhood countries, and the African CFA7
zone (14 countries). The adoption of the euro by further European Union Member
States, a Treaty obligation (except for Denmark and the United Kingdom), will
contribute to increase the weight of the single currency.

However, the international use of the euro has not yet returned to the situation
where it was before the financial crisis8. For instance, the volume of euro-denominated
foreign debt issuance reached a peak at 40 % before the crisis (in 2007) and now stands
just above 20 %, similar to its share in 1999.

5
For the history of the euro (including the 'snake-in-the-tunnel' and the Exchange Rate Mechanism
ERM) see: https://ec.europa.eu/info/about-european-commission/euro/history-euro/history-euro_en
6
Including dependent territories.
7
CFA franc is the name of two currencies used in parts of West and Central African countries which are
guaranteed by the French treasury and pegged to the euro.
8
European Central Bank – The international role of the euro, June 2018.
https://www.ecb.europa.eu/pub/pdf/ire/ecb.ire201806.en.pdf

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Graph 1: Currency composition of global foreign exchange reserves

Source: Commission calculations based on IMF

Graph 2: Currency composition of global payments

Source: SWIFT

Graph 3: Countries using or linking their currency to the euro

European Union
EUR-pegged
USD-pegged
Peg or managed float with currency basket incl. EUR
Peg with other currency basket

Source: Data based on IMF and ECB

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In the wake of the crisis, Europe has taken determined action to increasingly make
the euro a source of economic protection and empowerment. Building on the vision
set out in the Five Presidents’ Report9 of June 2015 and further developed in the
Reflection Papers on the Deepening of the Economic and Monetary Union10 and the
Future of EU Finances11, published in spring 2017, the Commission set out a roadmap
for deepening the Economic and Monetary Union12. Strenghtening the international role
of the euro is both the logical continuation of and a new frontier in this overall agenda,
developed over the past four years. This is not a new issue: the international role of the
euro has been subject to discussions since its inception, but there has never been a more
suitable moment to take this forward.

Supported by the further strengthening of Europe’s Economic and Monetary


Union, there is scope for the euro to develop further its global role and achieve its
full potential, reflecting the euro area's political, economic and financial weight. The
currency of choice of citizens, business and markets accross the world is not static and
depends on historic reasons, liquidity considerations and policy choices. The
international role of individual currencies has shifted over the past centuries, with the US
dollar emerging as the main global currency only after the Second World War, due to the
United States’ economic strength, its developed financial system and stability.

Recent global trends, the emergence of new economic powers along with the
development of new technologies, are supporting a potential shift towards a more
diversified and multipolar system of several global currencies. For instance, while the
Chinese renminbi is not yet an international currency that could challenge the position of
the dollar or indeed the euro, its international use is an important element of China’s
reform agenda. This is reinforced by the increasing capacity of Chinese importers and
exporters to make and accept payments in their own currency. At the same time, recent
extraterritorial unilateral actions by third country jurisdictions like in the case of re-
imposed sanctions on Iran13, together with recent challenges to the international rules-
based governance and trade, are a wake-up call regarding Europe's economic and
monetary sovereignty.

9
https://ec.europa.eu/commission/publications/five-presidents-report-completing-europes-economic-
and-monetary-union_en
10
https://ec.europa.eu/commission/publications/reflection-paper-deepening-economic-and-monetary-
union_en
11
https://ec.europa.eu/commission/publications/reflection-paper-future-eu-finances_en
12
https://ec.europa.eu/commission/publications/completing-europes-economic-and-monetary-union-
factsheets_en
13
On 8 May 2018, the United States decided to withdraw from the Joint Comprehensive Plan of Action
and unilaterally reinstate all previously lifted sanctions against Iran, which entered into force in two
stages, on 7 August and 5 November. The European Union has reaffirmed its commitment to the
nuclear deal and taken forward a number of measures to maintain economic links with Iran, including
the activation of the Blocking Statute, which seeks to mitigate the extraterritorial effects of U.S.
sanctions on EU businesses.

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2. THE CASE FOR AN INCREASED INTERNATIONAL ROLE OF THE EURO

The strengthening of the euro's international role should be conceived as part of


Europe’s broader commitment to an open, multilateral and rules-based global
economy. It would help improve the resilience of the international financial system,
providing market operators across the globe with additional choice and making the
international economy less vulnerable to shocks linked to the strong reliance of many
sectors on a single currency.

At the same time, it can bring tangible benefits "at home": it would allow the
European Union to enhance the protection of its citizens and businesses, to uphold its
values and to promote its interests in shaping global affairs according to rule-based
multilateralism. In particular, the euro should continue to facilitate and expand Europe's
responsible trade agenda, allowing European companies to trade without disruptions all
over the world to the benefit of Europe's economy, while at the same time safeguarding
the European social and regulatory model at home.

The decision to use a currency is ultimately made by market participants and there
are good reasons why economic actors might wish to invest and hedge in different
currencies. The objective is not to interfere in commercial freedom or limit choice, but
rather to expand the choice for market participants by ensuring that the euro represents a
strong and reliable alternative in all relevant ways.

BOX 1: Benefits of an increased international use of the euro


A wider global use of the euro can be beneficial in several ways:
Lower cost and lower risk of trading internationally for European businesses.
Trading in euro rather than in a foreign currency will remove the exchange risk and
other currency related costs especially for small and medium-sized European
businesses.
Additional choice for market operators across the globe.
Lower interest rates paid by European households, businesses and Member
States. A more attractive euro as a safe store of value reduces the interest rate (or
return) demanded by investors.
More reliable access to finance for European businesses and governments, even
in periods of external financial instability, as European financial markets would
become deeper, more liquid and integrated.
Stronger autonomy of European consumers and businesses, allowing them to pay
or receive payments for their international trade, and finance themselves with reduced
exposure to legal actions taken by third country jurisdictions, like extraterritorial
sanctions.
Improved resilience of the international financial system and economy, making
them less vulnerable to exchange rate shocks.
The benefits attached to a wider use of an international currency come with
increased global responsibilities, in line with central banks' respective mandates.
Although the benefits of a stronger international role of the euro outweigh the possible
challenges, its consequences would have to be carefully calibrated, for example in
relation to the balance of payments for the euro area vis-à-vis the rest of the world.

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There are still several factors holding back a stronger international use of the euro
and Europe's financial sovereignty:

The Bretton Woods system established the US dollar as the global international
reserve currency after the Second World War, effectively replacing the pound
sterling as the main global currency. In parallel, the US dollar has also become the
standard currency of commodities trades and the predominant currency for derivative
operations14. Once a currency emerges as the incumbent standard, its network effects
make it even more attractive, as its wider use allows to conduct further complex
financial market operations with higher liquidity15. This hampers the emergence of
alternative reserve currencies.

The cost of using the US dollar in certain transactions remains lower than the
cost of using the euro, partly as a consequence of the role of the US dollar as the
incumbent standard. Thanks to the higher liquidity of the US dollar, many money
market16 operations become less costly by using the dollar as a currency vehicle
compared to the direct use of the euro.

The euro is a much younger currency and its structures need to be further
developed and completed. Further steps are necessary to complete the Economic and
Monetary Union architecture, which underpins the single currency.

Some of the most relevant global financial market infrastructures focus


primarily on non-euro currencies and/or are located outside the euro area and
the Union. The international financial system and markets largely and increasingly
rely on connected platforms for trading, clearing and payment settlement. A number
of these platforms are located outside the euro area or are operated by non-European
companies for historical reasons and liquidity considerations, and hence are
potentially more exposed to third-country influence.

Several policy avenues could boost the attractiveness of the euro, increase the share of
payments made in euro in strategic sectors and further strengthen European economic
and financial sovereignty domestically as well as abroad. The main avenues are outlined
below.

3. COMPLETING EUROPE'S ECONOMIC AND MONETARY UNION AS A FOUNDATION


FOR A STRONG INTERNATIONAL ROLE OF THE EURO

International currencies must be backed by large, stable and efficiently functioning


economies and financial systems that are attractive to international users and
investors. While the international role of the euro is mainly driven by market forces,
sound national fiscal and growth-enhancing policies, a healthy financial sector and the
respect of the EU's economic and fiscal framework, provide the foundation for and are
essential to the credibility of Europe's single currency.

14
Financial instruments whose value depends on the value of other underlying variables.
15
Increased means to conduct transactions due to a larger market.
16
Markets where financial instruments with high liquidity and very short maturities are traded.

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Delivering an even more stable and resilient economic and financial framework can
help raise the euro's attractiveness globally. Europe could reinforce the international
role of the euro by making it even more compelling as a means of trade payment and
trustworthy investment currency. This means first and foremost completing the
Economic and Monetary Union, Banking Union and Capital Markets Union to
deliver sustained growth and provide for enhanced resilience to adverse shocks. In
particular, a complete Banking Union17 would provide for stronger and better supervised
banks providing an even more resilient banking sector in Europe and increasing
confidence in the EU financial sector and the single currency. A deepened Capital
Markets Union18 would provide more diversified and liquid financial markets and would
deliver increased private-sector risk sharing. This in turn would mobilise capital and
channel it to more companies, including small and medium-sized enterprises, and
infrastructure projects. Deeper and more integrated capital markets will provide
businesses with a greater choice of funding at lower costs, offer new opportunities for
savers and investors and make the financial system more resilient, thus increasing the
attractiveness of the euro. The use of the euro for money laundering or terrorist financing
purposes is also prevented and prosecuted in an effective manner.

The Commission has made several key proposals to the co-legislators to complete
the Banking Union and deliver Capital Markets Union, which are still pending final
adoption. In particular, finalising the backstop to the Single Resolution Fund (to be able
to manage even a large banking crisis) and the European Deposit Insurance Scheme (to
provide an even stronger and more uniform degree of deposit insurance) would reinforce
financial stability by further reducing exposure of banks to their national sovereigns,
while the Commission's proposed banking package and non performing loans package
would further reduce risks in the banking sector.

Increasing the available pool of euro-denominated assets with a higher credit


ratingcontributes to the development of the European financial sector and enhances
the global relevance of EU financial regulation as well as EU-based payment
systems. The Commission's proposal19 on Sovereign Bond Backed Securities, to be
issued by the private sector, would be one possibility of increasing the available amount
of euro-denominated assets with a high credit rating and a high level of attractiveness for
international investors. Such assets would therefore increase the liquidity in euro, which
is one important feature where the euro is at a disadvantage in global markets compared
to the US dollar.

In the context of preparing the Union’s next Multiannual Financial Framework 20,
the Commission has made proposals to further strengthen the performance and
resilience of the euro area economies with dedicated budgetary instruments, as well
as proposals supporting non-euro countries wishing to join the euro. The proposed
European Investment Stabilisation Function21 would allow for a better absorption of
large asymmetric shocks in the euro area, which would in turn increase investor

17
Third Progress Report on the reduction of non-performing loans and further risk reduction in the
Banking Union – COM (2018) 766 final of 28 November 2018.
18
COM(2018) 767 final of 28 November 2018.
19
COM(2018) 339 final of 24 May 2018.
20
COM(2018) 322 final of 2 May 2018.
21
COM(2018) 387 final of 31 May 2018.

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confidence in the euro. In parallel, the Reform Support Programme22 should improve
the implementation of structural reforms, which are crucial to enhance cohesion and
competitiveness, raise productivity, and foster the resilience of economic and social
structures in all Member States. The Reform Support Programme includes a
Convergence Facility, with the aim of helping non-euro area Member States on their
way to joining the euro.

A greater international role also presupposes adequate institutional capacity and a


more unified representation to coordinate positions and speak with one voice.
Building on the role already played by the European Central Bank, the Eurogroup and
the Commission, which are defined in the EU Treaties, several Commission proposals
represent further steps in this direction. In December 2017, the Commission presented a
proposal to establish a European Monetary Fund, anchored within the European Union’s
legal framework and built on the well-established structure and governance of the
European Stability Mechanism. Moreover, the Commission proposal23 to improve the
external representation of the euro area in international financial organisations is meant
to help strengthening the euro area stance in the international arena and make sure that its
voice is clearly communicated globally. By combining existing functions at EU level and
bringing together closely linked policy instruments, the position of a European Minister
of Economy and Finance would help to create new synergies and thus improve the
overall coherence and effectiveness of EU economic policy-making over time, including
the capacity to speak with one voice on euro matters.

4. FURTHER INITIATIVES TO DEVELOP THE INTERNATIONAL ROLE OF THE EURO


This Communication also sets out initiatives developing the international role of the euro
in three different dimensions: in the European financial sector (to ensure deep and
complete financial markets denominated in euros), in the international financial sector
(where an increased role of the euro would be beneficial to global financial stability) and
in key strategic sectors where the euro could further develop its role (for example in the
areas of energy, commodities and aircraft manufacturing).

4.1. Additional measures to foster a deep European financial sector


Increasing the attractiveness of the euro will increase its use, which will in turn
make it even more attractive. This can create a virtuous spiral.

Additional and more targeted measures within the Banking Union and the Capital
Markets Union support the financial sovereignty of the euro area. Financial markets
and infrastructures in the euro area play an integral role in offering opportunities to
enhance the international role of the euro. They do so by providing dependable and stable
financial services and transaction opportunities. The scale and autonomy of euro-
denominated services depends on whether market participants find them cost-effective,
easy and safe for the conduct of their international business and to store their value
reserves in euros. Consequently, measures that enhance stability and liquidity, and widen
the range of financial services denominated in euro, strengthen the international role of
the euro. Moreover, in the context of a reinforced role of the euro, the EU should
continue to advance its regulatory agenda in areas like the fight against money

22
COM(2018) 391 final of 31 May 2018.
23
COM(2015) 602 final of 21 October 2015.

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laundering24 and terrorist financing25. Stringent supervision of financial transactions
contributes to global security, integrity of the financial system and sustainable growth.

The following targeted measures would not only make the euro more attractive to
use, they would also make the euro area more resilient with regard to outside
influence:

First, the Commission seeks to widen the use of the euro by strengthening the
liquidity and resilience of European market infrastructures. With the overarching
objective of reducing systemic risk, the European Market Infrastructure Regulation26
introduced the obligation for market participants to clear27 certain financial contracts
(e.g. over-the-counter derivatives contracts, such as derivatives providing insurance
against interest rate changes) via dedicated market infrastructures28. Importantly, this has
created liquid clearing markets for euro denominated products which are accessible to all
counterparties. Well-developed market infrastructures for clearing provide market
participants with readily available and efficient insurance against future changes of
interest or exchange rates in their commercial transactions. The broad availability of such
euro-denominated markets will therefore support the attractiveness of the euro for such
transactions. Subject to the determination procedure envisaged in the above-
mentioned Regulation and the conditions set out therein, in order to promote liquid
and efficient central clearing solutions, the Commission could extend the scope of
derivative contracts covered by the clearing obligation. Moreover, the Commission
could consider extending the use of clearing services to a wider range of counterparties.

Secondly, the Commission aims to further improve the efficiency of euro area
financial markets, by ensuring a reliable framework for the production of a full
range of trustworthy interest rate benchmarks29. Market participants use interest rate
benchmarks as reference in many contracts and financial products. The EU Benchmark
Regulation30 requires financial benchmarks in the EU and euro area to be more
transparent and reliable. The full implementation of this Regulation should therefore
help increase the attractiveness of trading and pricing euro-denominated
instruments31. The Commission will facilitate further coordination and cooperation
across market segments, benchmark administrators, contributing banks, national
competent authorities and the European Central Bank.

24
COM(2018) 645 final of 12 September 2018.
25
COM(2018) 640 final of 12 September 2018.
26
Regulation (EU) 2012/648, OJ L 201, 27.7.2012, p.1.
27
Matching buy and sell orders.
28
Central clearing counterparties.
29
Reference rates are provided in many financial contracts, for instance those indexed to variable interest
rates, to value balance sheet items and to price derivatives such as forward contracts, options and
swaps.
30
Regulation (EU) 2016/1011, OJL 171, 29.6.2016 p.1.
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In particular this would apply to money markets (markets where financial instruments with high
liquidity and very short maturities are traded). Market participants use the money market for
borrowing and lending in the short term, i.e. up to one year.

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Thirdly, the Commission supports a fully integrated instant payment system in the
EU, to reduce the risks and the vulnerabilities in retail payment systems and to
increase the autonomy of existing payment solutions. EU citizens rely on a small
number of global providers when making cross-border card and online payments. As
clearing even of intra-European payments often takes place outside the EU, disruption for
technical, economic and legal reasons that may originate from outside the EU exposes
the retail payment system to unnecessary vulnerabilities. Moreover, the market
dominance of few international card schemes raises questions from a governance
perspective, as it significantly reduces the influence of European payment service
providers on developments in major part of the retail payments market. An EU-wide
cross-border instant payment solution would complement current card schemes, reducing
the risk of external disruption and making the EU more efficient but also more
autonomous. The introduction of euro instant payments also offers opportunities for the
development of efficient new retail payment solutions also for cross-border payments,
which can bring benefits to European citizens, businesses and banks.EU-wide standards
for euro instant payments have already been laid down in the SEPA (single euro
payments area) Instant Credit Transfer scheme launched in November 2017. In
November 2018, the European Central Bank launched its Target Instant Payment
Settlement (TIPS) system, facilitating cross-border instant payments in the EU. The
Commission will explore measures in order to facilitate the cross-border use of
payment solutions developed in individual Member States. It will further support
work in the Euro Retail Payments Board (under the auspices of the European
Central Bank) to ensure the interoperability of existing instant payment solutions.
The Commission will also work with relevant stakeholders on a joint commitment
to ensure the wide availability of instant payment services for customers, including
for cross-border payments. The Commission will take stock of the progress
achieved in its review of the Payment Account Directive, which is due in 2019.
Fourthly, the Commission will explore the possibility to develop further the role of
the euro in foreign exchange markets. Trading in foreign exchange market takes place
via so-called currency pairs, for example the euro and the dollar or the euro and the
Japanese yen. Today, all of the most liquid currency pairs involve the US dollar
(including the euro/US dollar, which is the most liquid pair). Trades involving the euro
and currencies other than the US dollar generally go through the US dollar
("triangulation"). One of the reasons is that the US dollar is being widely used as the
global reserve currency, underpinned by a highly developed and liquid government bond
market. It would be worthwhile to explore the reasons for the current situation and
whether market liquidity for particular currency pairs of the euro and currencies other
than the US dollar could be further developed. Furthermore, large market makers 32 play a
key role in the foreign exchange markets and euro area banks could further develop their
role in such market-making activities. The Commission will launch a targeted
consultation with financial market actors to identify potential obstacles and
incentives with a view to enhancing the role of the euro in the foreign exchange
market.

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A company always ready to buy or sell a financial asset at an openly quoted price on a long-term basis.

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4.2. Initiatives linked to the international financial sector
The international role played by the euro to safeguard global financial stability
could be expanded progressively. The cooperation between Central Banks to safeguard
financial stability helps to ensure that European companies can trade allover the world. In
the aftermath of the financial crisis, the European Central Bank engaged with its
counterparts to preserve financial stability and avoid disruptions in the world economy,
for instance, with the establishment of a number of currency swap lines33 as a foreign
liquidity backstop in case of market impairments, in line with its mandate. This practice
has been beneficial for the global trading of European companies.

In order to lead by example, European bodies and mechanisms should be


encouraged to increase their share of debt denominated in euro. European-level
entities have been issuing debt for many years, largely in euro but also in foreign
currencies, notably to provide project financing (the European Investment Bank Group)
or financial assistance to Member States (the European Financial Stability Facility, the
European Stability Mechanism). The issuances by these EU-level bodies have attracted
global investors, including during the crisis, and have increased the level of euro
denominated high-quality assets.

Europe could further develop its economic diplomacy by engaging with global
partners to promote the use of the euro in payments and as a reserve currency.
Europe is an important geo-political actor, exercising economic influence in the world34.
Engaging diplomatically with international partners to encourage the use of the euro and
advance Europe's position on how the global financial architecture should develop,
would help reinforcing the international role of the euro.

The Commission together with Member States and relevant EU bodies will engage
with global partners for an increased use of the euro. High-level commercial
missions, where the importance of the euro is stressed to business delegations, could be
considered. Given that the latest developments in emerging market economies may have
raised the appetite for diversification in terms of foreign currency-denominated debt
exposure, some of these actions could focus on an increase of foreign debt issuances
denominated in euro.

Finally, the External Investment Plan35 was adopted in September 2017 to help
boost investment in partner countries in Africa and the European Neighbourhood,
including via the provision of technical assistance to authorities and businesses.
Technical support could be used to improve the access of developing countries to the

33
A currency swap line is an agreement between two central banks to exchange their respective
currencies. By preserving access to foreign liquidity in adverse circumstances, swap lines make it safer
to do business with other parts of the world. In 2011, the ECB, along with the Bank of England, the
Bank of Canada, the Bank of Japan, the Federal Reserve and the Swiss National Bank, set up a
network of swap lines enabling the participating central banks to obtain currency from each other. In
2013 the ECB established a currency swap agreement with China.
34
As an example, the European Union and its Member States continue to be the world’s leading provider
of Official Development Assistance with an overall amount of EUR 75.7 billion in 2017..In the context
of the External Investment Plan, an initial EU input of EUR 4.1 billion is expected to leverage EUR 44
billion of investment. In the next programming period the EU could provide financial support to third
countries for a total of EUR 123 billion in third countries, if the Commission proposals are adopted.
35
https://ec.europa.eu/commission/eu-external-investment-plan/what-eus-external-investment-plan_en

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euro payment system, for instance in order to comply with the EU anti-money laundering
legislation, and to facilitate trade linkages.

4.3. Further steps to increase the use of the euro in key strategic sectors: energy,
commodities and transport sector

Despite the significant share of the euro in international payments, there is still
scope to expand its use in key strategic sectors. In spite of their position as large
buyers as well as major producers, European businesses still trade in US dollar in key
strategic markets, often even between themselves. This exposes businesses to currency
risks and political risks, such as international sanctions that directly affect dollar
denominated transactions.

In the energy sector, over 80 % of Europe's energy imports are priced and paid for
in US dollar, despite supplies coming mainly from Russia, the Middle East and Africa
and the EU being the world's largest energy importer. The EU's annual energy import bill
averaged EUR 300 billion over the last 5 years. More than 93 % of the traded volumes in
the domain of energy are accounted for by oil, where currently all contracts are dollar-
denominated. For natural gas, about 70 % of EU imports are referenced in US dollar. Gas
contracts traded on the EU gas hubs are denominated in euro.

In the case of raw materials (metals and minerals) and food commodity markets,
the situation is similar. Europe consumes about 10 % of global raw materials and is a
major importer. Nevertheless, the majority of raw materials are traded on global
exchanges in US dollar. This also applies to highly standardised food commodity
markets, such as grains, oilseeds and sugar. Europe is an important exporter of soft
wheat, sugar and olive oil but the use of the euro is mainly limited to intra-EU trade.

In the transport sector, for example a recent study36 concludes that nearly all
invoicing in the aircraft manufacturing sector is done in US dollar, even within the
euro area. More than half of Airbus’ revenues are denominated in US dollar with
approximately 60 % of such currency exposure "naturally hedged"37 by US dollar-
denominated costs. The remainder of costs is incurred primarily in euro.

There are several factors explaining the marginal use of the euro in key sectors,
including historical inertia, network effects and liquidity reasons. For instance, there
is a lack of euro-denominated benchmarks for international trading in both oil and
commodities38. The commodities markets have been dominated by the US dollar because
of the earlier development of the Chicago and New York exchanges. As regards aircraft
manufacturing, fuel prices quoted in dollar influence the currency used in the entier value
chain. Moreover, the aircraft market, including insurance and maintenance, is a global
market that does not allow regional price differentiation.

36
JRC study: http://publications.jrc.ec.europa.eu/repository/bitstream/JRC96913/lbna27754enn.pdf
37
A natural hedge is the reduction in risk by institutions that are exposed to large swings in exchange
rates by exploiting their normal operating procedures. This can include receiving income in another
country and currency while incurring expenses in that same currency.
38
In the oil sector, the first price benchmarks for the physical market were developed in the late 1980s by
major oil companies and price reporting agencies using US dollar to facilitate global transactions and
comparisons across different crude grades.

12
The Commission intends to present in the coming months several targeted
initiatives in strategic sectors:

A Commission Recommendation is adopted today in order to promote a wider


use of the euro in international energy agreements and transactions. The
Commission recommends that the euro should be used for contracts concluded within
the framework of intergovernmental energy agreements between Member States and
third countries. A wider use of the euro in energy-related transactions by European
market participants and companies providing financial services is also recommended.
In addition, the Commission will launch a consultation and invite stakeholders to
express their views on the market potential for a broader use of euro-
denominated transactions in the areas of oil, refined products and gas. In
particular, the consultation will gather feedback on the need to set-up euro-
denominated crude oil reference contracts and reinforce contracts on refined products.
The consultation will also gather stakeholders’ views on the expansion of the use of
euro-denominated gas contracts.

In the sector of raw materials (metals and minerals) and food commodities, the
Commission will engage in a broad consultation with stakeholders in order to
identify ways of increasing trading in euro, especially in the context of
transactions at exchanges located in Europe and direct transactions between
European companies. A general European Commodities Summit is planned for 2020
to continue the discussions with all main actors. In addition, the Commission will
continue with a market-oriented Common Agricultural Policy, allowing the
development of international trade in agricultural commodities to develop further. The
Commission will also favour the recourse to futures markets and contracts in euro
(e.g. through awareness raising and training) and increased market transparency for
agricultural and food commodities in euro39.

A consultation will be launched to investigate possible actions to promote the use


of the euro by transport sector manufacturers (aircraft, maritime and railways).
The consultation will explore in a more detail the reasons why the euro is not used for
many of the most relevant international transactions and will help identifying
conditions that would enable the promotion of the euro in transactions with European
businesses.

The Commission will carry out these different work streams in parallel and report
on progress by summer 2019.

39
An increasing number of price references expressed in euro are now published through the EU market
observatories since they were established in 2014 (while in the past, most information available to
traders was expressed in US dollars). This will be further consolidated with the proposal ensuring
more market transparency, planned for adoption in 2019.

13
5. CONCLUSION

Building on the Roadmap for the completion of Europe's Economic and Monetary
Union, there is scope for the euro to develop further its global role, so that it is more
commensurate to the euro area’s political, economic and financial weight. This will
allow the EU to better protect its citizens and businesses, uphold its values and promote
its interests. It will also make the international economy less vulnerable to shocks linked
to a single dominant currency and support a balanced, rules-based international political
and economic order.

The Commission invites EU Leaders to discuss the international role of the euro at
the December European Council and the Euro Summit, as part of their discussion
on the completion of Europe's Economic and Monetary Union. Strengthening the
international role of the euro will require the further strengthening of the structures of the
Economic and Monetary Union, including through the adoption of all pending proposals
for completion of the Banking Union and decisive progress on the Capital Markets
Union.

In addition, the Commission will pursue the targeted initiatives set out above and
encourages all relevant actors and stakeholders to take an active role in this process.

14
European Commission - Fact Sheet

Frequently asked questions: Towards a Stronger International Role of the


Euro

Brussels, 5 December 2018


What is the purpose of this Communication? Why is it needed?

In the wake of the economic and financial crisis, Europe has taken determined action to increasingly
make the euro a source of economic protection and empowerment. Strengthening the international role
of the euro is both the logical continuation of and a new step in this overall agenda developed over the
past four years. Supported by the further strengthening of Europe's Economic and Monetary Union and
notably the development of the Capital Markets Union, there is scope for the euro to develop further its
global role and achieve its full potential, reflecting the euro area's political, economic and financial
weight.
A globally stronger euro would help improve the resilience of the international financial system, provide
market operators across the globe with additional choice and make the international economy less
vulnerable to shocks linked to the strong reliance of many sectors on a single currency.
At the same time, it would bring tangible benefits "at home": it would allow the European Union to
enhance the protection of its citizens and businesses, to uphold its values and to promote its interests
in shaping global affairs according to rules-based multilateralism. In particular, the euro should
continue to facilitate and expand Europe's responsible trade agenda, allowing European companies to
trade without disruptions all over the world, while at the same time safeguarding the European social
and regulatory model at home.
What can the Commission really do to increase the international role of the euro?
The decision to use a currency is ultimately made by market participants and there are good reasons
why economic actors might wish to invest and hedge in different currencies. The objective is not to
interfere in commercial freedom or limit choice, but to expand market participants' choices by ensuring
that the euro represents a strong and reliable alternative in all relevant ways.
Recent global trends, the emergence of new economic powers as well as the development of new
technologies are supporting a potential shift towards a more diversified and multipolar system of
several global currencies. The time to encourage this is now.
However, changes in the system of global currencies take time and there is no single measure that will
enforce such changes. To create the conditions for the wider use and stronger role of the euro, action
is needed on several fronts simultaneously: continued work on the completion of Europe's Economic
and Monetary Union, the Banking Union and the Capital Markets Union; improvement of the financial
market infrastructure; economic diplomacy and making a strong case in key strategic sectors for
increased use of the euro.
What are the main initiatives outlined in today's package?
Several policy initiatives can boost the credibility and attractiveness of the euro:
- completing Europe's Economic and Monetary Union, Banking Union and Capital Markets Union
- additional measures to foster a deep European financial sector
- initiatives linked to the international financial sector
- boosting the use of the euro in key strategic sectors. To this end, the Commission has adopted a
Recommendation on the international role of the euro in the field of energy, promotinga wider use
of the euro in this strategic sector.
By when can we expect any further steps and actions taken by the Commission on this
front?
Targeted consultations of stakeholders will follow this Communication to determine where more fine-
tuned initiatives can be taken. In the summer of 2019, the Commission will publish an analysis of the
results of the various consultations and examine possible follow up actions.
Energy recommendation
Why is the Commission presenting a recommendation on the international role of the euro in
the field of energy? How will this Recommendation promote the larger use of the euro
contracts in international energy markets?
The EU is the world's largest energy importer. Its annual energy import bill averaged €300 billion in the
last five years, around 85% paid in US dollars. This exposure to the dollar regime – common in many
globally traded commodities – poses uncertainties, risks and costs that may be mitigated through a
larger use of euro contracts.
The euro is a stable, reliable and globally recognised currency widely accepted for international
payments. Strengthening its role in the field of energy trade and investment, while preserving general
economic efficiency, will reinforce the international position of the euro and support the EU's objective
to build an Energy Union that ensures that Europe's energy supply remains safe, viable and accessible
to all.
Why should private energy companies switch to the euro from the US dollar? Would they not
have done it by now if it were cheaper or better?
The historical dominance of energy trade based on the US dollar means that recent unilateral actions
by third country jurisdictions, together with declining support for international rules-based governance
and trade can impede or at least make energy trade more difficult.
Hence a growing role of the euro will support EU energy policy objectives through lowering transaction
costs and risks, increase access to reliable finance and strengthen autonomy thus reducing risk of
disruption of energy supplies due to third-party actions. The benefits of this switch may have been
evident, but the dollar's dominant role and entrenched position makes it difficult for individual private
companies to develop alternative regimes. Wider coordination and systemic market opening may need
to be facilitated.
How will European citizens benefit from this? Will their energy bills be lower?
In spite of their position as large buyers as well as major producers, European businesses still trade in
US dollar in key strategic markets, often even between themselves. This exposes businesses to
currency risks and political risks, such as unilateral decisions that directly affect dollar denominated
transactions.
As most energy imports are currently based on the US dollar, its fluctuation vis-à-vis the euro might
result in a significant change in the import bill from one year to another. Significant exchange rate
changes instantly appear in the energy import price level, eventually influencing the purchasing power
of European citizens and the costs of businesses. Broader use of the euro in the energy sector could
mitigate these currency risks and lower costs in the energy sector in Europe.
Will this proposal create jobs and growth in the European energy sector?
It would eliminate a factor of uncertainty, which should result in lower costs, which could make a
contribution to potential job creation and economic growth in the EU.
Deepening the Economic and Monetary Union
Why does the Economic and Monetary Union need to be deepened to increase the role of the
euro?
International currencies must be backed by large, stable and efficiently functioning economies and
financial systems that are attractive to international users and investors.While theinternational role of
the euro is mainly driven by market forces, sound national fiscal and growth-enhancing policies, a
healthy financial sector and the respect of the EU's economic and fiscal framework provide the
foundation and are essential to the credibility of Europe's single currency.
Following the economic and financial crisis, the architecture of the Economic and Monetary Union has
been reinforced considerably. The euro area has been equipped with crisis resolution mechanisms,
several key elements of Banking and Capital Markets Unions have been put in place and the
macroeconomic and fiscal surveillance of Member States has been significantly strengthened. However,
completing the Economic and Monetary Union is necessary to overcome remaining vulnerabilities and
reinforce Europe's economic and financial sovereignty.
Which proposals on deepening Economic and Monetary Union does the Commission consider
to be relevant?
Deep and liquid EU capital markets are the best way of reinforcing the euro. The Commission has
presented 16 proposals relevant for the Capital Markets Union and only three have been adopted so
far. In addition, finalising the backstop to the Single Resolution Fund (to be able to manage even a
large banking crisis) and the European Deposit Insurance Scheme (to provide an even stronger and
more uniform degree of deposit insurance) would reinforce financial stability by further reducing
exposure of banks to their national sovereigns. The Commission's banking package of 23 November
2016, provisionally agreed on 5 December, and non-performing loans package of 14 March 2018will
further reduce risks in the banking sector.
In the context of preparing the next EU Multiannual Financial Framework, the Commission has made
proposals to strengthen further the performance and resilience of euro area economies with dedicated
budgetary instruments. The proposed European Investment Stabilisation Function would allow for a
better absorption of large asymmetric shocks in the euro area, which would in turn increase investor
confidence in the euro. In parallel, the Structural Reform Support Programme should improve the
implementation of structural reforms, which are crucial to enhance cohesion and competitiveness, raise
productivity, and foster the resilience of economic and social structures in the Member States. The
Reform Support Programme includes a Convergence Facility, with the aim of helping non-euro area
Member States on their way to joining the euro.
A greater international role also presupposes adequate institutional capacity and a more unified
representation to coordinate positions and speak with one voice. In December 2017, the Commission
proposed the establishment of a European Monetary Fund, anchored within the European Union's legal
framework and built on the well-established structure and governance of the European Stability
Mechanism. The Commission proposal, of October 2015, to improve the external representation of the
euro area in international financial organisations is meant to help strengthening the euro area stance in
the international arena and make sure that its voice is clearly communicated globally.
How can the available pool of euro-denominated assets be increased?
A stronger euro in the international sphere requires an ample supply of higher credit-rated euro-
denominated assets, in particular in the context of significant global demand for such assets. In fact, a
scarcity or asymmetric supply of such safe assets can influence adversely the availability and the cost
of finance for the economy, and the transmission of the common monetary policy. Increasing the
available pool of euro denominated higher credit-rated assets will contribute to the further
development of the European financial sector and increase the global relevance of EU financial sector
regulation as well as EU-based payment systems. The Commission presented a proposal on an
enabling framework on Sovereign bond-backed securities (SBBS), issued by the private sector, which
could be one way to increase the amount of safe assets and facilitate diversification.
Financial services
How does financial services policy contribute to enhancing the international role of the
euro?
Financial markets and infrastructures in the euro area offer opportunities for enhancing the
international role of the euro by providing dependable and stable financial services and transaction
opportunities. It is up to market participants to choose which currencies to use. However, the
Commission's policy aims to remove obstacles to use the euro by market participants and to increase
the attractiveness of the euro area economy for investors.
Several EU key policies are designed to foster financial market developments conducive towards a
greater role of the euro, either directly or indirectly. In particular, the Banking Union and the Capital
Markets Union (CMU) are the main vehicles for achieving this. Building on the financial stability
provided by an effectively functioning Banking Union, the key objective of the CMU is to build and
develop deeper and more liquid markets. The two initiatives mutually reinforce each other to take the
Single Market further, and once completed, both could lead to a greater international use of the euro.
What is the importance of the clearing obligation for derivative contracts and how can it
influence the use of the euro?
Derivatives are financial contracts linked to the future value or status of the 'underlying' to which they
refer to, for example the development of interest rates or of a currency value, or the possible
bankruptcy of a debtor. Over-the-Counter (OTC) derivative contracts are not traded on an exchange
but instead privately negotiated between two counterparties, for instance a bank and a manufacturer.
The European Market Infrastructure Regulation (EMIR) is a centrepiece of legislation introduced in the
wake of the financial crisis to make financial markets safer and more stable. It implements the 2009
G20 commitment to increase the stability of the OTC derivatives market in the EU.
EMIR reduces risks to the financial system arising from derivatives transactions in two ways. First, it
increases the transparency of the over-the-counter (OTC) derivatives market by increasing the share of
derivatives trades that are reported to trade repositories. Second, it strives to mitigate counterparty
credit risk and reduce the operational risk associated with OTC derivatives, by introducing the
obligation for market participants to clear OTC derivatives.
Financial markets and infrastructures in the euro area play an integral role in offering opportunities for
enhancing the international role of the euro. They do so by providing dependable and stable financial
services and transaction opportunities. Extending the scope of derivative contracts covered by the
clearing obligation would do just that, i.e. further strengthen the liquidity and resilience of European
derivatives markets. In a world where ultimately market participants choose which currencies to use,
well-developed market infrastructures for clearing derivatives provide market participants with readily
available and cost-efficient ways to insure against financial risks. The broad availability of such euro-
denominated markets and infrastructures will therefore support the use of the euro.
How does the Benchmark Regulation increase the robustness of the benchmark
provisioning? Why does it matter for the international use of the euro?
Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial
contracts (the Benchmark Regulation) introduces a regime for benchmark administrators that ensure
the accuracy and integrity of benchmarks, which limits the risk of benchmark manipulation and
increases the efficiency of euro-area financial markets. Market participants use interest rate
benchmarks as references in many contracts and financial products.
The Benchmark Regulation introduces a framework, a code of conduct, requiring robust methodologies
and sufficient and reliable data. Through reliable benchmarks, this framework will ensure more efficient
euro area financial markets, which in turn makes them more attractive for doing business and
referencing in contracts. Greater efficiency and reliability would make trading and pricing in euro-
denominated instruments more attractive for both domestic as well as foreign investors.
What are instant payments and how could they result in stronger and more resilient
European retail payment systems?
Instant payments are electronic payments that are immediately cleared and settled between banks
without intermediaries and with immediate confirmation to payers and payees. With instant payments,
electronic payments become as immediate as cash.
The Single Euro Payments Area (SEPA) harmonised the way we make and process retail payments in
euros, aiming to make payments in euro and across Europe as fast, safe and efficient as national
payments are today. Currently, consumers and merchants in the EU have to rely on a few global
providers (card schemes and online payment services) to make payments across borders, even within
the euro area. Alternative methods for retail payments with a pan-European reach can be developed on
the basis of European payment infrastructures, as opposed to infrastructure run notably by a small
number of global card providers.
Euro instant payments offer a fresh opportunity for creating efficient pan-European payment solutions,
as they are based on a common scheme (SEPA instant credit transfers, SCTinst), and European
infrastructures for clearing and settlement, notably with the ECB's Target Instant Payment Settlement
system (TIPS) that was launched in November 2018.
Why does the Commission intend to consult on the role of the euro in foreign exchange
markets?
In January 2019 the Commission will launch a targeted consultation open to financial market actors
and other relevant stakeholders with detailed knowledge of in currencies trading, including banks,
exchanges, pension funds and insurance companies, as well as official institutions, such as central
banks. Other relevant stakeholders, such as businesses, will also be consulted in order to assess how
the trading of the euro in foreign exchange markets can affect them.
The objective of this targeted consultation is to better understand market liquidity in foreign exchange
markets. In particular, the Commission will seek to deepen its understanding of the degree of
“triangulation” in trading between particular currency pairs involving the euro, and whether this is
linked to inadequate market liquidity for those particular pairs. Triangulation is the process whereby
trading between particular pairs of currencies that don't involve the US dollar, is done indirectly via the
dollar (i.e. to trade between currency A and currency B, currency A is first exchanged for the dollar,
and then with currency B).
The Commission will also seek to assess the extent to which euro area banks are active in market
making in foreign exchange markets. A market maker is a financial institution that is willing to buy and
sell securities at a given price. Market making helps to support market liquidity and market efficiency.
Agricultural and food commodities
Who will be consulted concerning the role of the Euro in agricultural and food commodities
international trade? When?
The Commission will consult from mid-January to mid-April 2019 the stakeholders involved and
concerned by the international trade of agricultural and food commodities. A targeted online
questionnaire will be sent to traders (importers and exporters), producers (farmers and processing
industries) and other stakeholders of the of the food supply chain (price reporting agencies, financial
institutions, civil society, academia etc.).
These stakeholders of the food supply chain will also be consulted in a series of expert groups (e.g. the
expert group on agricultural commodities), civil dialogue groups or market observatories boards. The
meetings of all these committees that will be organised in the first half of 2019 will address the issue of
the role of the euro in international trade.
More information
Press release: Commission presents ways to further strengthen the euro's global role
Factsheet: Commission presents ways to further strengthen the euro's global role
Communication: Towards a stronger international role of the euro
Recommendation on the international role of the euro in the field of energy
Euro area
Banking Union
Capital Markets Union
Follow Vice-President Dombrovskis on Twitter: @VDombrovskis
Follow Commissioner Moscovici on Twitter: @pierremoscovici
Follow Commissioner Miguel Arias Cañete: @MAC_europa

MEMO/18/6650

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