The euro celebrates 25 years of virtual existence this month, with its digital creation in 1999 followed by the introduction of physical notes and coins in 2002. It's embedded successfully as the domestic means of exchange within the 20-nation euro zone. While its survival is no longer threatened, the common currency has made little progress in its broader aim of challenging the dollar's role as the world’s reserve currency — and has instead gone backward.
De-dollarization is a perennial theme, but the greenback remains king. The use of the euro in SWIFT transactions — the main global system for cross-border payments — fell to 22% by the end of last year from 38% in January. The dollar took a corresponding leap, with usage climbing to 48% from 40%. Most of this was due to a change in market practice when SWIFT changed its calculation method to more accurately measure commercial bank data sent to the European Central Bank; but the common currency has failed to fulfill the aspirations of its founders.
It's worth noting that usage of "other" currencies also rose, to 15% from 10% during 2023. The Chinese yuan edged up to a 4% share, just pushing into the fourth spot ahead of the Japanese yen, with sterling staying in third place. Change is afoot, though — global payment flows may no longer be comprehensively captured in SWIFT data.
Bilateral trade between China and Russia and the rest of the BRICS+ confederation is hard to assess, but the potential for an increase is clearly there. Kit Juckes, chief currency strategist at Societe Generale SA, told me the real story is about fragmentation. He reckons it's becoming much harder to get an accurate reading of the data, but expects over time the disruption from the pandemic and heightened geopolitical woes will lead to less trade occurring in both dollars and euros.
The fallout from Russia's invasion of Ukraine is also diminishing the euro’s market share, according to Mark Tinker, chief executive officer of ToscaFund Hong Kong Ltd. In his Market Thinking substack blog, Tinker argues that the March 2022 ban on Russia using SWIFT combined with other sanctions prompted Europe to buy liquid natural gas from the US and Qatar in dollars. As the BRICS+ start to use fewer dollars, Europe in turn is being forced to use the US currency more frequently.
The US Treasury's Office of Foreign Assets Control may have initiated the move to freeze Russia’s foreign reserves, but the EU is tarred with the same brush — even if it’s only planning to tax the profits, rather than seize the assets. Around $200 billion is believed to be held up in European institutions, mostly trapped in the settlement conduit Euroclear.
The double whammy of ending European reliance on cheap Russian hydrocarbons — which were paid for solely in euros — and being forced into the dollar energy market illustrates a radical alteration in global trading. Some of this commodity effect will dissipate over time as the move to renewable energy sources continues, but more permanent is the shift in what the EU sells to Russia and China. Many of the luxury and manufacturing products Russia bought from Europe are now being now sourced via China and Hong Kong. It's the worst of all worlds for the euro export machine, though at least the value of the common currency is both stable and roughly in line with its long-term average to the dollar.
The China-EU trading relationship is worth $900 billion annually, but it's increasingly skewed against Europe's long-term interests. China is buying less high-value products from the bloc. The German auto sector is ramping up electric-vehicle production to combat a deluge of Chinese cheap EVs, but it has an almighty battle on its hands. Germany at least has the monetary firepower to protect its industries: A €902 million ($983 million) package convinced Swedish EV battery maker Northvolt AB to build a new cell plant in Germany rather than the US.
The rest of European manufacturing may need wider help, such as from more joint EU debt, as French President Emmanuel Macron has called for. Hopes for the euro area to introduce a comprehensive fiscal union have dissipated but there is a lot more remedial action needed, such as addressing perennial budget deficits and subpar growth, before any wholesale political reform such as creating a capital markets union is possible.
While the fall in euro usage and corresponding jump in dollar dominance may have been overdone last year, any correction is likely to be modest until the geopolitical air clears. Some of the loss of status and relevance for the euro will be permanent. The dollar's position as global reserve currency is unassailable. Twelve years after Mario Draghi’s pledge to do whatever it takes to safeguard the euro, its existence may be guaranteed but its global role is anything but assured.
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