The EU’s Response to the COVID-19 Crisis: A Game Changer for the International Role of the Euro?

This paper assesses the implications of the large issuance of euro-denominated bonds under the NGEU and SURE instruments, as well as of other measures taken by the EU in response to the pandemic, for the global role of the euro. It focuses on the impact of the new facilities on the supply of safe assets in euros, highlighted by the literature as one of the main constraints so far on the internationalisation of the euro. After discussing this and other reasons why the euro is still punching internationally below the euro area’s economic weight, the paper estimates the expected quantitative impact of the new facilities and other measures, including the euro area’s national fiscal responses to the COVID-19 crisis, on the issuance of euro safe assets. It concludes that, although the NGEU and SURE facilities represent an important step, they are unlikely to sufficiently boost on their own the euro’s global role, reflecting their temporary nature and the partly offsetting acquisition of safe bonds under the ECB’s asset purchase programmes. The paper argues that, if the EU wants to achieve its objective of strengthening the euro’s global status, it should complement these efforts with other measures, as part of a comprehensive strategy. Ongoing structural changes in the world economy, including financial technology, and changes in the geopolitical environment create a more propitious context for this policy to bear its fruits because they make it more plausible that the world will move towards a true multi-polar currency system, overcoming the incumbency advantages that have protected the dollar’s hegemonic position since World War II.