EU uses ECB safety net to win allies

THE European Central Bank’s (ECB) plan to make it easier for foreign central banks to secure funding in euros is the latest part of Europe’s emerging strategy to win trade and political friends and hold its own against the United States and China.

The ECB’s safety net will give banks outside the eurozone access to emergency funding in euros at times of stress and reinforce incentives for them to use the single currency.

The initiative fits into ECB president Christine Lagarde’s broader effort to capitalise on what she has called the euro’s “global moment”, as erratic US economic policy under President Donald Trump has raised fresh questions about the dollar’s long-standing dominance.

Economists say easier access to euro liquidity could support the EU’s wider international strategy by complementing trade agreements, such as the deal recently concluded with India, and by reassuring investors that assets in the single currency will remain liquid even in periods of market turmoil.

“The fact that alongside these free trade agreements, we could offer a repo facility would be smart,” Ludovic Subran, chief investment officer at German insurer Allianz, said.

“If we want to practise economic diplomacy, I think it goes with the full gamut, including what we can do on the euro.”

French bank Societe Generale’s chief executive Slawomir Krupa also welcomed the move last Friday as a tool that “supports growth...and the influence of our region”.

Euro’s challenge to US dollar

Reuters exclusively reported recently that the ECB is working on more generous terms for its euro repurchase agreements, which let foreign central banks borrow euros against collateral denominated in the single currency.

This facility – known as Eurep and created during the 2020 Covid crisis – is currently only available to eight countries that neighbour the eurozone, including EU nations such as Romania and Hungary, and others like Albania and Montenegro, and with strict limits.

Under the proposed changes, the interest rate on these operations would be lowered, rules would be standardised and stringent caps on how much each country’s central bank could borrow from the ECB would be eased, sources said.

The aim of the move, which should be announced next week, is to boost the use of the euro as a currency for investing, lending and trading abroad, where it is a distant second to the US dollar.

It comes as finance ministers prepare to discuss issuing euro-denominated stablecoins and joint EU debt, and as middle powers in all corners of the world seek new allies to hedge against the risk of Trump’s increasingly unreliable United States.

Central bankers from all around the world have been pondering for months if they can still rely on the US Federal Reserve to provide dollar liquidity in a crisis via its so-called swap lines.

Kelly Eckhold, chief economist at Westpac NZ, says an expanded Eurep facility could be “an opportunity for New Zealand”.

“The current US administration is more inward looking and may be less likely to lend funds via swap lines in a global liquidity crisis,” he wrote on X.

Not a grown-up currency

The ECB’s plan is not without risk. Loans would only be extended against high-quality, euro-denominated collateral, limiting credit and foreign exchange risk.

But the ECB and eurozone governments may still end up facing the same kind of uncomfortable questions that the United States has faced for decades: what happens if foreign borrowers run into problems with their euro-denominated debt?

“You can really imagine that this would create additional questions on providing this liquidity facility in a country where a commercial bank would be distressed,” Allianz’s Subran said.

In 1971, then Treasury Secretary John Connally famously said the US dollar was “our currency, but your problem” – a reference to the fact the greenback is run with American interests in mind.

European governments and central bankers may find it hard to be quite so flippant.

The euro is a young currency launched just 27 years ago, it is not backed by a single treasury or deposit insurance and still carries the scars of a debt crisis that almost brought it down in the early 2010s.

This makes it more sensitive to any crisis abroad, particularly in countries that have unilaterally adopted the euro, in the way some American nations are “dollarised”.

“The ECB is correct to be wary of euroisation because the euro is not a grown-up currency,” Bruegel senior fellow Rebecca Christie says.

“The ECB has not had all of the tools that the Fed has and because of that they have to be much more careful about their reputation.” — Reuters