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, promoting a 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.
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.
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.
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