There’s been a lot of newsflow out of Europe this past week. I want to take a step back and highlight a few things that I believe are significant in the greater scheme of things, and in a sense try to join the dots. These all have, in various ways, a geopolitical or geo-economics flavor. The bottom line is: Europe is on the move and responding to the pressures it is being subjected to. (For my quick take on the news regarding Christine Lagarde potentially stepping down early, see here. Needless to say, there is a geopolitical element there, as well.)
source: Photo by Christian Lue on Unsplash
ECB liquidity lines
Last weekend, the ECB announced that it is extending its euro liquidity-providing repo facility (EUREP) – in which it lends euros to foreign central banks, secured by high-quality euro-denominated collateral – to (in principle) all central banks in the world. (Currently, this is available to European microstates as well as Hungary and Romania.) They are also available by default – that is, instantly, as standing facilities.
While by no means market moving, I think this is significant. First, because it makes a contribution to strengthening the international role of the euro – which, in turn, is important for Europe’s monetary sovereignty and strategic autonomy (although I agree with Vincient Arnold that this isn’t a game changer). Second, the decision to extend these liquidity lines demonstrates that geopolitical considerations increasingly shape the ECB’s thinking and manifest themselves in its policy tools. It’s no coincidence that the announcement was made last Saturday, with the Munich Security Conference in full swing – where Christine Lagarde spoke.
Now, I believe the ECB can do even more with its international liquidity provision tools to strengthen the international role of the euro, and I expect it to eventually do so.
For example, the central banks of EU countries are still on EUREP, rather than on proper swap lines. (The technical difference is that for a repo line the receiving central bank posts high quality euro collateral to receive euro liquidity from the ECB; in a proper swap line, the receiving central bank just pledges its own currency.) But if you want to internationalise the euro, the place to start is with the EU member states that are not in the euro. So I’d expect at some point Hungary and Romania to be offered proper swap lines.
Second, the trade agreements with MERCOSUR and India are also an opportunity to internationalize the euro. Here, too, I don’t see why there shouldn’t be proper swap lines with the central banks of MERCOSUR and the Reserve Bank of India. The point being that on the back of these intensified commercial relationships, more stable euro funding could help with increasing the invoicing in euro of the trade flows.
Euro stablecoins
Another piece of news that didn’t get much airtime this week was that Joachim Nagel, the head of Germany’s central bank, in a speech expressed a favourable opinion of euro stablecoins: “I also see merit in euro-denominated stablecoins, as they can be used for cross-border payments by individuals and firms at low cost” (Bloomberg story).
Now, I happen to think that stablecoins should be part of the euro ecosystem and be part of the strategy to maintain and expand the international role of the euro. In digital space, Europe seems to be betting the house on retail CBDC (the “digital euro”), which I find a very risky strategy, particularly the way the D€ is designed – why not have both? I’ll write about this at some point. In the meantime, having a top policy maker coming out in favor of euro-denominated stablecoins is good news.
Sweden and the euro
The Bloomberg story that Sweden is reconsidering joining the euro didn’t get a lot of airtime, but I think is interesting nonetheless. If I were to forecast, I think Denmark is more likely to join eventually, although Sweden might, too. (Sweden rejected euro adoption in a referendum 2003, and Denmark did in 2000 – although the Danish krona is pegged to the euro). If and when this were to happen, it would also be good news because it would increase the weight of the pro-market, fiscally conservative constituents of the bloc.
The bigger picture is that the pressures from geopolitics is triggering broader realignments in currencies. In Europe, this means that the pull to the center is becoming stronger, and Europe’s economic centre of gravity is the euro. What’s more, the euro is a federal element in what is a loose confederation: the EU. The broadening of the eurozone that’s underway (recall that Bulgaria joined this year; while the next ECB Vice President is from Croatia, which joined in 2023) will be accompanied by more federal elements in EU politics – eventually likely in my view to include joint financing for defense spending, a kind of partial “Eurobond”. In the meantime, one question is how much euro strength the euro area economy can live with - but I’ll leave that for another time.
The wide angle
For a while, the dominant forces in Europe were centrifugal. Brexit had the UK shoot itself in the foot leave the EU, while Eurosceptic and sometimes openly anti-EU parties have been in the ascendancy. That was the broad direction of travel as globalization (trade and immigration in the economics sphere) was seen as threatening by large segments of the electorate in many countries. All of that went in the opposite direction to integration (EU, euro). To be sure, this isn’t over – in France, RN may win the presidency next year; in Germany, the AfD looks poised for a strong showing in this year’s regional elections.
Yet in Europe the broad political winds should start blowing in the other direction – due to geopolitics. Threatened by the Trump administration’s US and squeezed by China, Europeans are (re-)discovering that there is strength in numbers – and integration, economic and political, becomes essential. I believe that, over time, electorates will increasingly understand this. Centripetal forces – towards the center and federalization, will start gaining in strength again. It doesn’t mean “populism” is going away, after all it’s a symptom of real pressures. But it does mean, for example, that it will be harder for parties to align themselves quite so openly with the Trump administration.
As someone said if we don’t hang together, we’ll be hung separately.
What’s striking here is that these aren’t “currency” decisions so much as execution decisions.
Liquidity lines, swap access, and euro-stablecoins are ways of moving monetary authority upstream before stress, not after it.
Europe isn’t federalizing because it wants to. It’s being forced to, as execution speed elsewhere collapses the old perimeter between politics, finance, and security.
The euro is becoming the coordination layer.