Why is the Euro Punching Below its Weight

62 Pages Posted: 29 Jan 2020

See all articles by Ethan Ilzetzki

Ethan Ilzetzki

London School of Economics & Political Science (LSE) - Department of Economics

Carmen Reinhart

Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2020

Abstract

On the twentieth anniversary of its inception, the euro has yet to expand its role as an international currency. We document this fact with a wide range of indicators including its role as an anchor or reference in exchange rate arrangements-which we argue is a portmanteau measure-and as a currency for the denomination of trade and assets. On all these dimensions, the euro comprises a far smaller share than that of the US dollar. Furthermore, that share has been roughly constant since 1999. By some measures, the euro plays no larger a role than the Deutschemark and French franc that it replaced. We explore the reasons for this underperformance. While the leading anchor currency may have a natural monopoly, a number of additional factors have limited the euro's reach, including lack of financial center, limited geopolitical reach, and US and Chinese dominance in technology research. Most important, in our view, is the comparatively scarce supply of (safe) euro-denominated assets, which we document. The European Central Bank' lack of policy clarity may have also played a role. We show that the euro era can be divided into a "Bundesbank-plus" period and a "Whatever it Takes" period. The first shows a smooth transition from the European Exchange Rate Mechanism and continued to stabilize German inflation. The second period is characterised by an expanding ECB arsenal of credit facilities to European banks and sovereigns.

JEL Classification: E5, F3, F4, N2

Suggested Citation

Ilzetzki, Ethan and Reinhart, Carmen and Rogoff, Kenneth S., Why is the Euro Punching Below its Weight (January 2020). CEPR Discussion Paper No. DP14315, Available at SSRN: https://ssrn.com/abstract=3526040

Ethan Ilzetzki (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Carmen Reinhart

Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ( email )

79 JFK Street
Cambridge, MA 02138
United States
617-496-8643 (Phone)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Kenneth S. Rogoff

Harvard University - Department of Economics ( email )

Littauer Center
Room 232
Cambridge, MA 02138
United States
617-495-4022 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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