Europe must not weaponize euro, ECB policymaker warns

The eurozone should not weaponize its own currency in a global conflict as that could ultimately undermine it, an influential European Central Bank policymaker said on Friday, just as the EU was contemplating seizing Russian state assets.

European officials have been debating for months whether to confiscate frozen Russian assets, including central bank reserves, to use the cash to fund Ukraine’s reconstruction.

But some are concerned that the broader repercussions of such a move, from retaliation to loss of confidence in European assets, will far outweigh the gain.

“Weaponizing a currency inevitably reduces its attractiveness and encourages the emergence of alternatives,” Bank of Italy Governor Fabio Panetta said in a speech without directly referring to Russia. “This power must be used wisely, however, because international relations are part of a ‘repeated game’.”

The EU, United States, Japan and Canada froze some $300 billion of Russian central bank assets in 2022 when Russia invaded Ukraine. Some $200 billion of that is held in Europe, mainly in the Belgian clearing house Euroclear.

Opponents argue that seizing assets could prompt investors from other countries to flee, fearing for the safety of their own investments, ultimately weakening the currency and pushing up yields.

Panetta, a former ECB board member, argued that the conflict around Ukraine had led to an increase in the role of the Chinese renminbi at the expense of other currencies, since much of Russia’s trade is now done in the Chinese currency.

“The Chinese authorities are explicitly promoting its role on the global stage and encouraging its use in other countries, including those sanctioned by the international community following the invasion of Ukraine,” Panetta said.

As a result, the renminbi overtook the euro as the second most used currency for trade finance and the yen as the fourth most used currency for global payments, Panetta said.

Panetta instead argued that Europe should strengthen the euro by making it more attractive, implementing long-delayed changes that would enhance its role as a reserve currency.

This includes the creation of a safe asset that is issued in sufficient, predictable quantities, and the completion of a banking union that would reduce the difficulty of cross-border banking. Another step would be an efficient payment and market infrastructure system across the bloc, he said.