Growing challenges to the euro’s status as a reserve currency in a fast-changing global economy are, for now, staying the hand of European capitals as they weigh up the repercussions of a potential seizure of frozen Russian assets.
Nevertheless, Europe faces an increasingly urgent need to help bankroll Ukraine’s survival as US President Donald Trump looks to pull the plug on US support and instead bargain with Russian President Vladimir Putin.
That throws a spotlight on the roughly US$300 billion of Russian central bank assets frozen by the West after Putin ordered his troops into Ukraine three years ago, the bulk of which is held in Europe — mainly as government bonds, the profits from which are used to guarantee loans to Ukraine.
While seizing those assets outright might be very tempting, such actions have a long and legally fraught history, and could scare off other central banks looking to park assets in Europe.
An early example of such action cited by European economists in research last year was the Soviet confiscation of gold shipped to Moscow by the National Bank of Romania back in 1918. The wars of the 20th century yielded dozens more examples.
However, European officials who pride themselves on the region’s respect for the rule of law are fighting shy of any breach of the legally enshrined immunity of sovereign assets.
“This is not for the European Central Bank [ECB] to debate, but I would certainly submit that the international law basis on which any decision is made will matter as far as other investors are concerned,” ECB President Christine Lagarde said last week.
The final decision rests not with the ECB, but its political masters in Berlin, Paris and the other 18 capitals of the euro countries. They would not take Lagarde’s argument lightly.
“No one has any interest in doing things that would weaken our system now, which is also being widely attacked elsewhere via trade, tariff, customs policies,” French Minister of the Armed Forces Sebastien Lecornu said last week of threats by Trump to impose hefty new levies on European exports.
Europe has long had to accept that the euro is unlikely to challenge the dominance of the US dollar as a reserve currency — briefly an aspiration in the heady days after its 1999 birth.
In fact since 2010, the share of global currency reserves held in the euro has dropped from 25.8 percent at current exchange rates to 20 percent as other currencies gain traction. Even the US dollar has slipped slightly, while still accounting for 58.4 percent.
In a report last year on the euro’s international standing, Lagarde cited challenges ranging from the emergence of other units as trade-invoicing currencies through to renewed interest in gold as a reserve asset in troubled times.
However, some question the rationale of even seeking to position the euro as a major reserve currency given the weak points in its construction, already exposed in debt crises 15 years ago.
“If we assume that this is a political ambition, then indeed the euro is handicapped by the absence of capital markets union, the lack of a euro safe asset and the lack of fully fledged banking union,” said Hans Geeroms, a professor at the College of Europe and a visiting fellow at the EU think tank Bruegel.
Those were among the failings identified by former ECB president Mario Draghi in a report last year on how Europe could avoid the “slow agony” of an economy falling further behind US and Asian rivals. Yet scant progress has been made on them even now.
If such fragilities help explain why Europe is wary of anything which could weaken the credibility of its currency, wider geopolitical considerations are closing in.
Participants at a summit on boosting European defense spending on Thursday last week said no decisions on Russian asset seizures were taken in the talks, with one EU diplomat confirming that Germany, France and Belgium — home to the Euroclear securities depository where many of the assets are parked — had restated their opposition.
However Mitu Gulati, an expert on sovereign debt law at the University of Virginia, said Trump’s reversal of US policy on Ukraine had shocked Europeans into “looking to do the things they weren’t willing to do six months ago.”
“The same people that said we are not going to do [full seizure] are calling now to say we are interested,” said Gulati, who declined to elaborate on which countries he had spoken to.
One eurozone central banker who requested anonymity agreed the political pressure to consider confiscation was mounting.
“The ECB’s advice won’t change, but this may not sway politicians,” the banker said. “The bill for Ukraine has just gone up a lot, and this makes this money so much more attractive.”
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