ECB, plan to expand the global role of the euro - Liquidity lines will be used to support financial stability
The European Central Bank (ECB) is drawing up a plan to increase the use of the euro worldwide, capitalizing on the loss of confidence in US political and financial leadership.
Liquidity lines, agreements to borrow at short notice from other central banks, have long been a standard part of the ECB’s crisis management tools. But now the ECB is considering using them for policy purposes as well. One objective is to cushion any shocks if the US, which has propped up the global financial system with dollars for decades, suddenly decides to withdraw support or impose unacceptable conditions. Another is to support the euro’s foreign trade more actively and reap some of the benefits that the US has historically enjoyed from controlling the global reserve currency. Analysts say the efforts are sensible and reflect a growing willingness by European authorities to expand the use of the euro around the world.
Central banks typically use two types of tools to lend to each other: either by exchanging one currency for another (swap lines), or by providing funds against collateral issued in the lender's currency (repo lines).
Currently, the ECB has unlimited swap lines with the US Federal Reserve, the Bank of Canada, the Bank of England, the Swiss National Bank and the Bank of Japan, as well as limited lines with the central banks of Denmark and Sweden. The institution also operates a mechanism with the People's Bank of China, limited in both volume and duration.
Other central banks seeking liquidity in euros must rely on “repo lines”, known as EUREPs, through which they can borrow a limited amount of euros for a certain period against high-quality euro collateral. Currently, only Hungary, Romania, Albania, Andorra, San Marino, North Macedonia, Montenegro and Kosovo have such lines. However, they have not been used since 2 January 2024, and even at the height of the Covid crisis, their use amounted to only 3.6 billion euros.
For the euro's international partners, the fact that they can access the euro in times of crisis is of great value, helping to avert fears of financial instability. “The fact that foreign commercial banks can lend in euro, being assured of access to this currency as a backstop, encourages its use. Liquidity lines, especially EUREP, need to be flexible and easy to activate,” said one of the ECB's decision-makers.
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