The Past, Present, and Future of the Euro as an International Currency：Moving Beyond the COVID-19 Pandemic and Russia’s Military Aggression in Ukraine

Since its introduction in 1999 till the present day, the euro has maintained its position as the second most important international currency after the US dollar. The most significant feature of the euro is the mismatch between fiscal sovereignty and monetary sovereignty, and the integration of Europe, which forms the foundation of the euro, provides some room for changes through deepening and regional expansion. Crises in the past have served as driving forces for integration. During the COVID-19 pandemic, the EU and its member countries, drawing lessons from the euro crisis, established frameworks for fiscal stimuli and realized the creation of the NextGenerationEU (NGEU) fund for economic recovery. The European Central Bank (ECB) played a role in putting the brakes on the chain reaction of debt crises during the euro crisis and supporting fiscal stimuli during the COVID-19 pandemic. The number of countries that have adopted the euro has expanded from the initial 11 to 20 countries. Since 2018, there has been a growing emphasis on strengthening its role as an international currency. The euro currently faces a security crisis in the form of Russia’s military aggression against Ukraine, as well as the accompanying energy crisis. The euro has been utilized as one of the means for imposing sanctions on Russia. However, the shift in the EU’s relationship with Russia, from interdependence to confrontation, does not provide a tailwind for bolstering its role as an international currency. The current crisis could develop to become a source of concern regarding the sustainability of the euro, as well as become an opportunity for promoting deeper integration and expansion. On the policy front, enhancing defense capabilities, energy security, and economic security have become priorities, but there is little momentum towards significantly strengthening common financial resources in the same way that the region responded to the COVID-19 pandemic. There is also a risk that political confrontation may sharpen in response to energy crisis measures. Unlike in its response to past crises, the ECB is now taking swift steps towards the normalization of monetary policy with a view to achieving its main objective of medium-term price stability and is even moving towards further tightening. The current ECB possesses tools to address the fragmentation caused by widening yield spreads, but there are limits to the role it can play in asymmetric shocks such as the energy crisis. Hence, there is a need for coordinated efforts at the political level. As for the outlook, it is difficult to foresee Ukraine’s EU membership and adoption of euro in the near future. However, the EU and the euro are likely to play significant roles in Ukraine’s recovery. As shown by its efforts towards the realization of a digital euro, the EU is maintaining the policy of pursuing strategic autonomy by enhancing the international role of the euro. Going forward, it is likely that repeated efforts will be made to reach the political agreements required to safeguard the euro and that the euro will strengthen its position as the key currency of Europe. On the other hand, with the retreat of globalization, the further expansion of the euro’s international role beyond Europe is expected to be limited. Even as the world becomes increasingly fragmented, the euro is likely to remain as the international currency that ranks second after the US dollar and surpasses the renminbi. However, the gap between the euro and the renminbi is likely to narrow steadily.