On the international role of the euro
Does it remind you of anything?
It should remind you of this .
And why am I thinking about it now?
Because our friend Marco, of whom I am firmly resolved not to throw anything away, told us that the euro " is in great demand on international markets ".
I was thus reminded of when, in The Sunset of the Euro , I showed you the share of the euro in the foreign exchange reserves held by central banks:
which wasn't booming… This, in my opinion, showed that in the end the central banks didn't really believe in the euro. At the time, COFER (COmposition of Foreign Exchange Reserves) data were distributed by the IMF on Excel sheets. Today it is possible to consult them online and possibly download them from this rather intuitive site . I went looking for the data, and I built an extended series, this one:
where we observe two things:
1) the trend of the updated data is a little different from that of the data available at the time: the decrease in the share begins around 2009 and continues until around 2016.
2) the two dots highlight, respectively, the publication of the Sunset of the Euro and the publication of this one .
Data on official reserves are not trivial to analyse: they are subject to confidentiality constraints, the number of reporting countries has increased over time, particularly with the entry of China, there will certainly be a reason why the data collected in 2012 is not they correspond exactly to the ones I downloaded today, but the most obvious thing to do to check if I'm using the right data is to simply go and check what international scholars are doing. I take for example the article Dollar Dominance and the Rise of Nontraditional Reserve Currencies , by Arslanalp, Eichengreen and Simpson-Bell, which is among the recommended readings on the homepage of the COFER database . The graph on which they are based is this:
and yes, the data they use for the euro are the ones I downloaded, that is, the share of euro reserves out of the total reserves for which central banks specify the reference currency (the so-called allocated reserves ).
I hasten to insert a biographical detail: I then met Ruffini, we liked each other, we have friends in common, he is the future leader or at least charismatic leader of those you call "communists", but he is such a good person, proof of this or that he has forgotten (I think) about this argument of ours. Not me, but don't rush to conclusions: I'm not resentful, I'm just trying to fight Alzheimer's! So be respectful in the comments: don't let them ever win one day, it's better to keep important friends good (then we'll talk about this too)…
Now, one of Ruffini's claims in his attack from the L'Espresso blog (even the network is not bitter, but does not forget) was that I would have been wrong in not taking into account the "unallocated" reserves, i.e. those of which the banks central banks did not report the reference currency. I don't know what to respond to this reproach other than:
1) not even the most established scholars of the phenomenon do so by publishing on the institution's blog that these data are collected, and:
2) even taking it into account nothing changes.
But in the meantime, before you too get sidetracked, note the mocking irony of fate: the yellow dot corresponds to when Ernesto pointed the finger from the authoritative (#DAR) pages of L'Espresso to defend the magnificent and progressive fate of the euro, and immediately afterwards the euro slipped by five percentage points! In short: it's better to leave me alone: as I say, my word has a proven performative value, which, translated into Italian, means that like any true economist I have a fair amount of bad luck…
Let's go back to 2012: the thesis I supported was that the euro would not displace the dollar, simply because it was an unlikely currency. My vision at the time was against the grain (for a change). We came from a period in which the economists who count, the American ones, after having expressed, as you know, a motivated skepticism about the fate of the single currency ( here you can find a review ), upon realizing that it had not exploded immediately, had changed sides, explaining to us why the The euro would have rivaled the dollar! In short: from one (motivated) excess to another (unmotivated). A review of this debate can be found in a recent working paper by Arslanalp et al. (2022) , the in-depth version of the article I quoted above and from which I took the graph with the shares of the various currencies. I'll keep it short for you. In commenting on the graph, the authors note that:
that is: despite the fact that it alone expresses a larger percentage of official reserves than that of all other currencies combined, the dollar has an increasingly smaller weight in the official reserves of central banks, but its role has not been undermined by the euro , nor from other traditional reserve currencies (yen, pound, Swiss franc…), but rather from "other" currencies, from the currencies of emerging countries (renminbi and other "non-traditional" currencies, including, listen, listen!, the crown Swede! That other guy is absolutely right to say that we should do like Sweden…).
So in 2022 it turns out that I was right in 2012 (strange…)!
In fact, in explaining why other currencies (the "non-traditional" ones, not the euro!) are enjoying similar favor, the authors of the working paper clarify that this could depend on various factors: the increased liquidity of some emerging economies, the increased focus of central bankers on currencies that provide attractive returns in a period in which US and EU interest rates were close to zero (we are talking about the period before 2021, of course). But despite these advantages, nontraditional currencies have a disadvantage: they tend to fluctuate, and therefore expose them to exchange rate risk. The authors therefore conclude that there is a more plausible explanation for the success of these alternative currencies:
The stability of underlying economies and the rationality of political decisions are important in determining the international acceptance of a currency. Put positively in 2022 to explain the success of the renminbi and company, it is the argument that I used negatively in 2012 to explain the failure of the euro: the currency of an economy condemned to curl up on itself like the European one would never have could have been considered attractive by those who were immune (perhaps because they were protected by a strong language barrier!) from the propaganda of our information operators!
And indeed that was the case.
The renminbi is the currency of an economy that will have many reasons for us to be perplexed, but at least it is growing (at our expense, due to the wrong decisions taken in Brussels, but it is growing)! Why shouldn't a Russian or a Brazilian rely on it? And in fact they do it:
But I don't want to shy away: let's get technical, as Ernesto carelessly did (or did?) way back in 2014. Ernesto pointed out to me that without taking into account the "unallocated" reserves it was difficult to argue that the euro was unattractive: we would have maybe we could discover, once the disclosure took place, that China was stuffed with euros like a coconut, and this would have increased the share of euros in total reserves!
Now, this point is dealt with in a technical way by Arslanalp et al. in the sixth paragraph of their working paper, dedicated precisely to the robustness checks of their hypothesis (i.e. mine). In particular, on page 29 analyze the COFER reporting effect , i.e. the potential distortions deriving from the fact that until 2018 there was uncertainty about the currencies in which a rather large share of official reserves was invested. Their assessments are quite refined (though necessarily based on arbitrary assumptions, given that essential information is missing). I propose a much less refined one: simply, I represent the shares of all official reserves (including "unallocated") on the total (allocated and unallocated) reserves:
The operation doesn't make much sense (this is confirmed by the fact that whoever wanted to do it was a very good tax expert, not an international monetary economist with an h- index equal to 64), but at least it provides us with a kind of acid test . What do we see? We see that the euro was around 20% in 2003, and is still around 20% at the end of the sample, and therefore with the progressive disclosure of the allocations of important central banks such as the Chinese one we are not witnessing an explosion in the use of the 'euro, which was and remains Ernesto's wishful thinking (sorry, you can't have everything). The non-traditional ones, on the other hand (green broken), starting from lower, have overtaken the euro around 2022. No, the euro has definitely not rivaled the dollar, the euro is not the cause of the secular decline of the dollar, and in general the euro is not doing very well. Its global reach is not at all comparable to that of the dollar, the BIS explains to us , with the aggravating circumstance that its role could be overestimated, given that many formally international transactions in euro are essentially "national" because they take place within the euro area, the Atlantic Council explains to us .
I'll add a detail: the weaponization of the dollar obviously hasn't done the euro any good. When investors from emerging countries (here I am not referring to central banks, but to everyone else) saw that the EU was slavishly following the US on sanctions, seizures of assets, etc., between the dollar and the euro they obviously preferred the dollar , because they understood that the euro, not offering the same guarantees of stability as the dollar, did not even allow them to diversify country risk (your current accounts would have been confiscated in Milan as in Washington…).
The result was this:
(taken from here ).
Do you see policy rationality as a component of currency attractiveness? Do you see that lateral thinking helps?
Yes, I know: Proietti had said it .
At this point, to close, I drive another nail here: for exactly the same reasons why the euro cannot replace the dollar, in Italy as elsewhere the "centre" does not exist, it remains a hole with the parties around it. I therefore close this post by wishing best wishes to a new, or rather old, friend who is leaving in search of fortune towards that mythological place, that garden of the Hesperides where the tree of the golden voters is located, the moderate voters, those who, poor people, they are abstaining because they cannot vote for those who, like us, are incompetent and pick their noses.
I have given you a widespread illustration of incompetence in this post, the summary of which is: I'm waiting for you here anyway!
The world universe is giving you an illustration of the desire for moderation every single day that the good Lord puts on Earth!
But perhaps going to the center when the world is going to the right (for the very good reason that it has been ruined by the left) is an exercise in lateral thinking that could prove fruitful. I don't think so, but I don't want to seem like a jinx!
Good luck everyone, and remember: I'm not bitter! I'm just exercising my memory… and of you, yes, of you who are reading this right now, I remember well…
Good night!
This is a machine translation of a post (in Italian) written by Alberto Bagnai and published on Goofynomics at the URL https://goofynomics.blogspot.com/2025/01/sul-ruolo-internazionale-delleuro.html on Wed, 08 Jan 2025 22:36:00 +0000. Some rights reserved under CC BY-NC-ND 3.0 license.