The Euro’s Reserve Currency Potential

Discussion and Analysis by Charles Porter: 

The European Sovereign Debt crisis has beset the Euro’s potential to reach the forefront of reserve currency holdings. However, alongside upset, crises enhance the propensity for prosperous change; if it’s ‘broke’, fix it. 


This article serves as a follow-up to the conclusion of yesterday’s article.


Markets appear to have forgiven the original fear of contagion following the UK referendum in June 2016. Upon this more stable footing, the Eurozone has the potential for reform. Following the crisis, it is imperative that the Eurozone demonstrates consistent macroeconomic and political stability, if its recovery is to be successful. Whereas the US has numerous channels to explicitly achieve internal economic stability, the Eurozone has no such mechanisms. It does, however, have the blueprint for many.


The report from the presidents of European Union institutions is supported by currency union research at the London School of Economics. Both of these leading voices ask for a Eurozone stabilisation function to provide smoothing between Eurozone members. Further to these deals, an almost unthinkable mutualisation of Eurozone debt has been presented as a necessary condition for Eurozone stability. Achieving an explicit smoothing mechanism will alleviate the pressure from the solitary monetary policy instrument that the European Central Bank currently has at its disposal.


Dwindling political-will limits the ability to achieve this development, and ones similar to it. Therefore, should a dramatic fix for the incompleteness of the Euro truly be required in the long run, then its propensity to be a reserve currency may be limited. Indeed, the Euro’s ultra-long-term longevity may be questioned.