The myriad benefits of the euro in the global economy arise from the size of the euro area, the integration of its economy, as well as its clear, joint commitment to sound economic policies. This makes the euro an attractive currency for other countries and trading blocs in the global economy. The euro is now the second most important world currency after the US dollar.
Supporting international trade
As the world’s largest trading power, with an open economy and a stable currency, the euro area is an attractive destination for other trading nations. Third-country companies are therefore increasingly willing to do business in euro. This means that when euro-area firms export or import goods they can invoice and pay in euro – reducing their costs and the risk of losses caused by global currency fluctuations. Thus, overall, the euro facilitates and encourages trade with the rest of the world.
The euro is also attractive to foreign governments as a reserve currency because of its strength and the confidence it inspires. In this way, they can spread the risks to their foreign exchange reserves by holding euro as well as US dollars and other currencies.
This is of benefit to the euro-area economy because widespread holdings and a high demand for euro encourages third countries to price their exports in euro – thus reducing costs to euro-area members because there are no exchange rate costs.
In addition, since the euro is in demand internationally, government borrowing by euro-area members on international markets is less expensive because there is more competition to accept euro in debt repayment.
The share of the euro in global foreign exchange reserves has risen from 18% in 1999 to over 25% in 2007. The most significant increase can be found in developing countries, where holdings are now close to 29%, from 18% held in 1999.
One currency with one voice
The international financial institutions, such as the International Monetary Fund (IMF), the World Bank and the Organisation for Economic Co-operation and Development (OECD), increasingly view the euro-area economy as a whole when dealing with macroeconomic matters.
They do this because the strength of the euro, the size of the euro area as a trading bloc, and the coordination of policy-making within the euro area, all mean that what happens in the euro area has growing spillover effects on the world economy.
This growing impact on the world economy is matched by a growing influence of the euro area within these international financial institutions. This gives the European Union a stronger voice in the world.
The euro area: key indicators (2006)
|GDP (in € trillions calculated at purchasing power parity)||8.4||11.9||11.2||3.5|
|Share of world GDP (% at PPP)||14.6||21.0||19.7||6.3|
|Exports(* ) (goods and services as % of GDP)||21.7||14.3||10.8||16.8|
|Imports(* ) (goods and services as % of GDP)||20.9||15.0||16.6||15.3|
(* ) Excluding intra-EU trade
Source: European Commission, ECB and IMF data 2007