European Central Bank Vice President Vitor Constancio said common euro bonds would be a useful asset in the global currency system even if they remain an “unrealistic prospect.”
As “deficit and debt ratios need to be decreased, the U.S. could not offer its bonds and T-bills as the almost exclusive reserve asset of the world,” Constancio said in a speech in London today. “In this context, euro assets are necessary. Even if they are clearly seen as an unrealistic prospect, euro bonds, from the pure perspective of the international monetary system, would be useful as a reserve asset for the world economy.”
Europe’s debt crisis has buoyed the status of the dollar as the world’s reserve currency, even as its share of global foreign-exchange holdings has fallen to about 61 percent from a peak of 72 percent a decade ago. As euro-area states struggle with high debt yields, officials including European Commission president Jose Manuel Barroso have argued for common euro bonds, meeting resistance from Germany and the ECB.
European Union Monetary Affairs Commissioner Olli Rehn is due to issue a consultation paper today that will propose options for the creation of euro bonds as a way to stabilize the single currency’s debt markets. German Chancellor Angela Merkel earlier told the country’s parliament that introducing common debt securities would weaken pressure on the euro’s members to cut debt, in a rejection of the plans.
Constancio said that the potential of the Chinese yuan to “upgrade” as an international currency is “huge, but the timing is difficult to predict.”
“In the future, the system will also need assets in the Chinese currency, when China will have a convertible currency, a flexible exchange rate and a developed bond market,” he said.
Constancio signalled that the pegging of China’s currency to the U.S. dollar is a risk to global stability.
“When one of the emerging economies is very large, the pegging of its currency to another risks limiting the flexibility of adjustment in both, which in turn threatens to distort the exchange rate of other major currency pairs, with implications for global economic performance.”