Euro Shrinks as Global Reserve Currency Amid Concerns of using Frozen Russian Assets

A report published yesterday by the ECB shows that euro global reserves shrank by nearly 5% or €100 billion last year, to a 3-year low of 20%.

Global central banks have cut their reserves in euro in 2023 on concerns related to the EU’s stance on accessing frozen Russian assets held in the currency. Russia holds nearly 40% of its reserves in euros, which accounts for 8% of global euro reserves.

The possible move to freeze another country’s assets held in euros makes the currency less appealing. Adding to this sentiment is the fact that central banks such as those of Japan and Switzerland have sold euros to defend their domestic currencies.

Both central banks have recently intervened in the forex market buying their local currencies. The action has particularly affected the euro compared to reserves held in US dollars.

ECB Concerns of Possession of Frozen Assets

ECB officials have stated that using Russia’s frozen assets might be relevant in the share of euro in global foreign exchange reserves. The central bank has often mentioned that the use of frozen assets could undermine the international role of the euro.

Bank of Italy’s governor has also said that the weaponization of the euro could seriously affect its attractiveness. While ECB president Lagarde has stated that the euro’s international role should not be taken for granted.

The statements from EU officials on the possibility of using frozen Russian assets to fund Ukraine focus on profits from these assets. Even though they always mention the path would respect international law, other countries may feel threatened by this type of action.

Adding to the euro’s woes as a global reserve currency are plans by BRICS countries to create a common trade currency backed by gold. It’s still early for implementation of such a currency, but works are in the pipeline and its seems political will is strong, especially in Russia.