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The euro’s share of global foreign exchange fell last year on concerns that plans to use frozen Russian assets to finance Ukraine could further erode the appeal of Europe’s single currency.
Other countries cut the euro assets in their central bank reserves by around €100 billion last year, a drop of almost 5 percent, the European Central Bank said in a report published on Wednesday.
That reduced the common currency’s share of global foreign exchange reserves to a three-year low of 20 percent.
Recent moves by Swiss and Japanese institutions to shore up their own currencies against the risk of depreciation led them to sell some of their holdings in euros, the ECB said. But that hasn’t hurt other crucial reserve currencies such as the US dollar and the Japanese yen, which increased their share last year.
Russia holds about 40 percent of its official foreign exchange assets in euros, an unusually high percentage, amounting to about 8 percent of total global reserves in the European single currency, the ECB said.
About $300 billion of Russia’s foreign exchange reserves were frozen by international sanctions following the massive invasion of Ukraine in 2022, and G7 leaders are discussing plans to mobilize these assets – most of which are denominated in euros – to provide Ukraine with additional financing provided.
The ECB highlighted the risk that tensions with Russia could have an impact on the euro, saying: “Sanctions-related measures could be relevant to the euro’s share of global foreign exchange reserves in the future.”
Foreign affairs representatives from national parliaments and European commissions – including those in Germany, the US and Britain – called on world leaders to seize all of Russia’s frozen assets in a letter to the Financial Times published on Wednesday published.
“The ultimate goal should be to fully seize all Russian assets and transfer them to Ukraine, ensuring that this process complies with international law,” the letter said.
The plans under discussion aim to use future profits from the frozen assets to cover debts to finance Ukraine, rather than seizing them outright.
The ECB has consistently warned that an outright seizure risks damaging the euro’s international role. Italian central bank governor Fabio Panetta said earlier this year that “weaponizing” the single currency could damage its attractiveness.
The euro’s role as the world’s second-largest reserve currency after the US dollar brings important benefits to the eurozone, as it allows members of the single currency bloc to issue debt more cheaply.
However, the euro’s share of global foreign exchange reserves has fallen from 25 percent two decades ago as countries have switched to holding a larger share of other currencies such as the Chinese renminbi, the Australian dollar and the Korean won. In the same time frame, the share of the US dollar has fallen from almost 70 percent to just under 60 percent.
The ECB said an index of the euro’s international use fell by 0.7 percentage points last year at constant exchange rates. But it said the value was “broadly stable” at current exchange rates.
It cited an HSBC survey of central banks that found the eurozone’s weak growth prospects were a factor “hindering investment in euro-denominated assets”, as well as a lack of supply of highly valued assets and centralized debt issuance in the bloc.
Some countries, such as China, Russia and Iran, are trying to use their own currencies more for international trade, by setting up local alternatives to the Swift system for international payments.
Piero Cipollone, ECB board member, wrote in the FT that the eurozone could link its instant payment system to similar networks in other countries “to further develop the infrastructure for cross-border payments in euros with key partners”.
ECB President Christine Lagarde said the euro’s international role “should not be taken for granted”. She added: “While the data so far shows no evidence of substantial changes in the use of international currencies, we must remain vigilant to any cracks that appear.”