The international role of the Euro with Klaus Regling

The International Role of the Euro

The Third Max Watson Memorial Lecture

Klaus Regling
Managing Director of the European Stability Mechanism

As the founding Managing Director of the European Stability Mechanism (ESM), Klaus Regling is uniquely conscious of the role of the euro in steering the fortunes of the euro area. His work on the currency union predates the ESM and the European Financial Stability Facility (EFSF), to earlier collaboration with his friend Max Watson at the International Monetary Fund and the European Commission. Hence it was fitting that he dedicated the third Max Watson memorial lecture to his vision for the future of the euro, which he and Max cared so much about.

Regling made a persuasive case that unalloyed global dependence on the dollar left the world unduly vulnerable to US monetary policy and domestic developments, as seen in the Latin American crisis, Asian crisis, and global financial crisis. A wider international role for the euro would strengthen global financial stability, as well as supporting growth and integration within Europe.

Regling explained that he envisages not a dual dollar/euro system, but a multi-polar system—since China also has begun to prioritize greater global influence of the renminbi. Multi-polarity in itself would have benefits for global financial stability, by offering possibilities for diversification and hedging. But in such a world, Europe would offer additional advantages of trust and credibility, which should help its currency stay a strong second global currency. Besides Europe’s economic size, it offers a credible legal system, with stable rule of law and investor protection. It has an independent central bank, and operates advanced, open financial markets.

Europe’s comprehensive response to its crisis restored and further strengthened the influence of the euro. The response included large EFSF/ESM financial support to safeguard stability in euro area countries which could not use the exchange rate instrument, as well as banking, fiscal, and structural reforms, and closer policy coordination. Happily, it is clear that Europe’s stability is now more assured. For instance, banks have slowly worked their way through the Non-Performing-Loans legacy of the 2010-11 crisis, and have been a stabilizing factor rather than a vulnerability during covid.