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The euro’s share of global foreign exchange holdings fell last year amid concerns that plans to use frozen Russian assets to finance Ukraine could further erode the single European currency’s appeal.
Other countries cut euro-denominated assets in their central bank reserves by about 100 billion euros last year, a drop of nearly 5 percent, the European Central Bank said in a report published on Wednesday.
This reduced the single currency’s share of world foreign exchange reserves to a three-year low of 20 percent.
Recent moves by Swiss and Japanese institutions to support their own currencies against the risk of devaluation meant they sold some of their euro holdings, the ECB said. But that didn’t hurt other key reserve currencies like 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 share that equates to about 8 percent of total global reserves held in the single European currency, the ECB said.
Around $300 billion of Russia’s foreign exchange reserves have been frozen by international sanctions following its full-scale invasion of Ukraine in 2022, and G7 leaders are discussing plans to mobilize those assets – most of which are in euros – to provide additional funding to Ukraine.
Highlighting the risk that tensions with Russia could impact the euro, the ECB said: “Measures related to sanctions may be relevant to the euro’s share of global foreign exchange reserves going forward.
Foreign affairs representatives of national parliaments and European committees – including those in Germany, the US and the UK – called on world leaders to seize all of Russia’s frozen assets in a letter to the Financial Times published on Wednesday.
“The ultimate goal must be the complete confiscation of all Russian assets and their transfer to Ukraine, while ensuring that the process complies with international law,” the letter said.
The plans being discussed focus on using future profits from the frozen assets to shore up debt to finance Ukraine, rather than seizing them outright.
The ECB has consistently warned that an outright seizure could damage the euro’s international role. Italy’s 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 gives the eurozone important advantages, allowing members of the single currency bloc to issue debt more cheaply.
However, the euro’s share of the world’s foreign exchange reserves has fallen from 25 percent two decades ago as countries have shifted to holding a larger share of other currencies such as the Chinese renminbi, Australian dollar and Korean won. In the same time frame, the share of the US dollar fell from almost 70 percent to just under 60 percent.
The ECB said the index of international use of the euro fell by 0.7 percentage points last year at constant exchange rates. However, he said the value was “broadly stable” at current exchange rates.
It cited an HSBC survey of central banks that found weak eurozone growth prospects were a factor “holding back investment in euro-denominated assets”, as well as a lack of supply of highly rated assets and centralized bond issuance in the bloc.
Some countries, such as China, Russia and Iran, are trying to make more use of their own currencies for international trade and are creating local alternatives to the Swift system for international payments.
ECB board member Piero Cipollone wrote in the FT that the eurozone could link its instant payment system with similar networks in other countries “to further develop the infrastructure for making cross-border euro payments with key partners”.
ECB President Christine Lagarde said the euro’s international role “should not be taken for granted”. She added: “Although the data so far shows no evidence of material changes in the use of international currencies, we must remain vigilant to any cracks that begin to appear.”