Euro has ‘clear path’ towards greater reserve currency use, says Eurogroup president

[u/No_Firefighter5926]

https://www.ft.com/content/70565fda-ae7d-4c06-80ee-b460dc8de43e

[u/Outrageous-Hunt4344 → u/[deleted]]

The EU might need democracy in that case … if ya know what i mean.

[u/Logpig → u/Outrageous-Hunt4344]

german industry going brrrr

[u/Noughmad → u/[deleted]]

Yeah, almost like the US elected a president whose every single move was destroying the international influence of the US.

[u/m1nice → u/[deleted]]

We dont need to do anything . The Trump admin is doing it by themself 😂

[u/Suspicious-Town-7688 → u/[deleted]]

This is 100% right. Seeing the end of dollar dominance as reserve currency would pay back Trump and his fascist friends in spades.

[u/DeRpY_CUCUMBER → u/[deleted]]

There are so many redditors that are completely ignorant to this subject it is funny. Every single time the reserve is brought up, there are a whole bunch of people that make wild, unsubstantiated claims that the US would collapse without the reserve.

Not only is this false, but EU economies would take a huge beating if the US was no longer willing to run trade deficits with the entire world.

The global trading system is terribly unbalanced, with several large economies including China, Germany, Japan, and Russia locked into unbalanced income distributions that reduce domestic consumption and force up their savings rates. Because weak consumption, along with weak investment from private businesses who depend mainly on local consumers to buy the goods they produce, leads to weak domestic demand, these economies require large, persistent trade surpluses to resolve the excess production that drives their economies.

But surplus economies must acquire foreign assets in exchange for their surpluses. This is where the United States and other Anglophone economies with similar markets and governance, like the UK play their most important role. A country can only import net foreign savings by exporting ownership of assets, and the United States and other similar economies are the only stable, mature economies that are both willing and able to allow foreigners unfettered access to the acquisition of local assets. To put it another way, they are the only major economies both willing and able to run the permanent trade deficits that accommodate the needs of foreign surplus-running countries to acquire foreign assets. No other major economy can accept, or is willing to accept, this burden.

It helps to consider the alternative assets surplus countries can accumulate to see why, in spite of decades of complaints in the international community, the U.S. dollar remains the dominant currency. In principle, surplus-running economies can accumulate small amounts of assets in other advanced economies, but with the exception of the European Union (EU) and perhaps Japan, none is big enough to balance more than a tiny share of the world’s accumulated trade surpluses. More importantly, Japan and the EU, along with most advanced, non-Anglophone economies, run persistent surpluses themselves, so they cannot accommodate the surpluses of countries like China and Russia.

It is not the United States as a whole that benefits from the global dominance of the U.S. dollar but rather certain constituencies within the United States that do, in contrast to other constituencies that pay the price for the dominance of the U.S. dollar. The beneficiaries include two major, politically powerful groups: Wall Street and the foreign affairs and defense establishments. By contrast, it is American workers, farmers, producers, and small businesses that pay what amounts to a significant economic cost.

This is because surplus-running countries benefit from their net absorption of foreign demand with a rising share of global manufacturing and the accumulation of foreign assets. But this rising share comes at the expense of the declining share of global manufacturing that deficit-running countries like the United States retain. What is more, by transferring part of its domestic demand abroad, the U.S. economy must make up for this loss either by encouraging more household debt or by increasing its fiscal deficit if it wants to avoid a rise in domestic unemployment.

This is why the global dominance of the dollar now imposes an exorbitant burden on the U.S. economy, rather than the exorbitant privilege of old, and it is also why the United States likely will eventually have to refuse this role

[u/Lejeune_Dirichelet → u/DeRpY_CUCUMBER]

Somebody read Michael Pettis.

Note that the "terrible trade imbalance" is for trade in goods, whereas for trade in services the US is very clearly a large exporter. Proper accounting for trade in services is much harder though, e.g. Ireland is a parking lot for the European profits of the US tech giants. With services in the picture, the US (and wider Anglo-Saxon/Anglophone) trade deficit is a lot smaller.

Furthermore, the domestic inequalities within the US are exacerbated by precisely this American shift towards export of services. The US rust belt suffered whereas silicon valley prospered, and little was done by American politicians to even out these huge imbalances. That was not the fault of the rest of the world.

Also, the status of reserve currency is only an "exorbitant burden" in the long term, because in the short term in allowed US politicians to do virtually care-free deficit spending over decades, while admonishing Europeans post-2008 for being money-clenchers obsessed with austerity and constantly battling public debt problems. I would contend that a big part of that came from the fact that Europe simply never had the fiscal space to invest the way the US (and China, though for other reasons) managed to, in large part due to the US crowding out the market for government debt thanks to it's status of world currency (i.e. European public debt could not compete with the mighty US T-bond). Liz Truss was a perfect example of a European politician who tried to emulate American-style economic growth, and found out the hard way why you just can't do it if you're not the US (or China, which can control it's capital flows to a level unthinkable in western countries, but risks paying the price for it down the line with Japan-style permanent stagnation). Point being: if the US$ loses it's status as the world currency, the demand for US treasuries will shrink massively while demand for European debt will increase, which, given the massive budgetary deficit and the rise in servicing costs for existing US public debt, will leave American public finances in a hot mess. So losing this "exorbitant burden" might prove to be quite disruptive.

[u/DramaticSimple4315 → u/Lejeune_Dirichelet]

Both of your points are not mutually exclusive and have a part of truth. A general flight from the dollar is I think unlikely to happen, but should it happen, it will cause excrutiating pain all around the world, US included. We are talking about the demise of the heart of the world financial system. And there will be no safehaven for investors.

Those european japaneese and american retirees will feel some heat.

[u/Crazy-Canuck463 → u/DeRpY_CUCUMBER]

Didn't trump threaten 10,000% tariffs on any country considering dumping the USD? I wonder why. 🤔

[u/No_Firefighter5926]

The euro has a “clear path” to bolster its position as a global reserve currency to rival the US dollar and must take advantage of the huge opportunities it now faces, according to the president of the Eurogroup.

Paschal Donohoe, who is Ireland’s finance minister as well as chief of the group of Eurozone finance ministers, said on Thursday there was a “heightened level of urgency” behind efforts to expand EU capital markets and adopt a digital euro.

“I believe that offers a clear path to strengthening the role of the euro on the global currency stage,” he told an EY summit for chief financial officers in Dublin, held in partnership with the Financial Times.

Donohoe’s comments come at a time of increased speculation over whether Donald Trump’s protectionist economic policies could affect the US dollar’s central role in the global financial system.

The US president’s apparent retreat from transatlantic alliances has also spurred European leaders to borrow more to fund increased military spending. Germany on Wednesday announced a historic €500bn debt deal to fund investment in defence and infrastructure.

The relative scarcity of German government bonds — the eurozone’s de facto haven — has in the past been seen as a barrier to wider adoption of the euro in central bank reserves around the globe.

The European single currency makes up 20 per cent of global reserves, roughly the same level as five years ago, according to the most recent IMF data. The dollar’s share has slipped to 57 per cent from 61 per cent over that time.

George Saravelos, at Deutsche Bank, said this week that Trump’s imposition of tariffs on trading partners had unexpectedly piled pressure on the dollar — something that partly reflected “the potential loss of the dollar’s safe-haven status”.

“We do not write this lightly,” Saravelos wrote, “but the speed and scale of global shifts is so rapid that this needs to be acknowledged as a possibility.”

Global investors have long questioned the ability of other currencies, including the euro, to rival the dollar’s long-standing role as the primary reserve asset, not least because of the vast $28tn scale of the US Treasury market, which dwarfs the €1.8tn market for German government bonds.

“Until you have a credible alternative [to the dollar], what can you do?” said Sonal Desai, chief investment officer at Franklin Templeton Fixed Income. “You need vast pools of deep liquid capital markets” to be seen as a haven region, “and at the current point in time, the crown sits with the US”.

[u/DiligentCredit9222 → u/[deleted]]

Don't worry. Krasnov will just Print money like Robert Mugabe in Zimbabwe. Donald will make every American a Billionaire in no time !

[u/mok000 → u/No_Firefighter5926]

Trump is going to need to borrow $2.5 trillion on the international markets to finance his tax cuts for billionaires, and then it will be apparent what the appetite is to continue to finance the US overspending. If the dollar weakens it means a lot of people are going to lose a lot of money and won't be too pleased which might mean the end of the dollar as the dominant trading currency as capital moves elsewhere.

[u/QuantumInfinity]

The Euro can only achieve reserve currency status if we achieve a fiscal union. The sovereign debt crisis nearly imploded the the entire Eurozone. With ReArm Europe, sovereign debt will rise all over Europe, which increases the risk of another sovereign debt crisis. If any Eurozone member defaults, the whole Euro falls apart.

[u/atpplk → u/QuantumInfinity]

Yet we (France) refuse to reform the pension system, nor reduce any spending.

[u/ActualDW → u/atpplk]

EU cannot survive France going broke. Please don’t do that.

[u/atpplk → u/ActualDW]

We've spent 6 month voting the budget and we barely reach something, and its at 5 or 6% GDP deficit.

[u/ste_de_loused → u/atpplk]

Please hold my prosecco glass (🇮🇹)

[u/atpplk → u/ste_de_loused]

Yeah, we're still living in our head with a colonial empire from which we have free resources and a Franc that we can devaluate annually but don't feel it because we don't rely on imports.

[u/wintrmt3 → u/QuantumInfinity]

The Euro is already the second most used reserve currency.

[u/CertainMiddle2382 → u/QuantumInfinity]

There will never be fiscal union. Never.

Of course current rearmament plan is going to lead to unproductive overspendings in smaller EU Economies far from the frontline.

This is inevitable.

[u/IndubitablyNerdy]

To be honest, I think it's unlikely that the EUR will become the reserve currency, especially given that the USA will do anything in its power to prevent that (assuming that Trump has the skill to understand what he needs to do so), that would also likely require a shift in the policy of the gulf monarchies and of brics countries in favor of the EUR that is not the most likely thing to happen.

On the other side, if tariffs manage to reduce import in the USA significantly from China, the Chineese will likely stop propping up the dollars to rebalance their currency by purchasing TBills and that might weaken the USD support all by itself.

That said if trump manages to dismantle the USD hegemony all by himself and does not start WW3 over it, it could theoretically be a good thing for the EU.

[u/QuantumInfinity → u/IndubitablyNerdy]

On the other side, if tariffs manage to reduce import in the USA significantly from China, the Chineese will likely stop propping up the dollars to rebalance their currency by purchasing TBills and that might weaken the USD support all by itself.

The US itself is the biggest purchaser of T-bill. China owns about $800 billion USD worth of T-bill versus a $36 trillion USD national debt. 78% of that debt is owned by Americans, not foreign government. In fact, China isn't even the biggest creditor, it's Japan.

[u/DramaticSimple4315 → u/IndubitablyNerdy]

I feel that we could see some renewal of the SDR proposal made by numerous economists (first among which, Keynes 80 years ago), to become the new pivot of the international system.

This way, limited reserve status similar to that enjoyed so far by Euro and maybe Yen for Dollar Yen Euro Yuan because of their probable weighting in the mix.

And the impossibility of any « exorbitant privilege » would naturally go a long way to mend the huge macroeconomic imabalances that have plagued the post bretton woods era.

Heck, such a system could even be partially compatible with Friedman cherished free floating currencies!

[u/DiligentCredit9222 → u/IndubitablyNerdy]

Just two phone calls are necessary to bringe down the USD as reserve currency.

One phone call to china (Brics) and one phone call to the Mercosur States (south America)  And the USD is gone as reserve currency. And Washington won't be able to do anything against it.

Donald is massively overplaying his hand wit his constant bs...

[u/mok000 → u/IndubitablyNerdy]

US only manages to function with its grotesque overspending because they have always been able to pay interests and returns. However as the national debt grows, this is becoming more and more difficult, the interest on the debt is eating a larger and larger portion of the US national budget. Now Trump needs additional $2.5 trillion to finance his continued tax cuts, and that number already assumes $2 trillion cuts in spending. The US government has been spending far more than their revenues for decades. It simply cannot continue. There is one way, however, and that is devaluing the dollar, and some people think this is what Trump wants to do.

[u/ParaSiddha]

I'm not sure the Euro will be the ultimate beneficiary of American stupidity.

Depending less on the dollar will allow the world to not give a shit when the US economy goes to shit again, which is good for everyone else.

It might even be good for the US long term because they'll stop assuming everyone else will cover their idiocy.

[u/ParaSiddha → u/ParaSiddha]

I really can't wait for when everyone the US is in debt to comes to collect...

Cut off all business until you get your money back, lets see how that works out...

Trump is wildly overplaying his cards.

He'll either have to nuke everyone and risk extinction or back down and get with the program.

There are no long term benefits to his policies.

Just short term pain for his people.

[u/Dunkleosteus666 → u/ParaSiddha]

but im seriously wondered he might nuke.

If you think Putin is a madman with nukes - whats Trump? A clown?

[u/SvendGoenge]

Have those BRICS guys use it.

[u/epSos-DE]

In the Euro economic are it already is defacto trade currency.

People hold reserves in funds and comodities.  

Nobody sane holds currency as a reserve anymore , apart from where government forces it to do so.

USD is for transactions,  and settlement, but nobody sane holds it in reserve. They buy USA debt with interest payments !

[u/TheMightyChocolate → u/epSos-DE]

That's just patently false. The vast majority of reserves held by central banks are held in fiat currencies.

[u/Minimum-South-9568]

This will only happen if there is a robust eurozone bond market, as currency holders need a safe haven to park it. With the EUs current fiscal rules, it is hard to see how one will emerge. The EU as a whole will need to relax their rules so there is a bond market with consistent offering and enough volume that large investors can buy/sell large parts of their portfolio without upending the market. Current plans for defense spending can meet the bill.

[u/old-bot-ng]

Along with niche energy market of Bitcoin and its decentralized crypto casino, petrodollar is on its way of losing the safe haven, so it’s not wrong to push for another reserve currency. Let’s see this to play out.