ECB Flags Euro Risks Amid Declines in Global Forex Reserves

The European Central Bank (ECB) warned on Wednesday about potential risks to the euro’s share in global foreign exchange reserves due to the use of frozen Russian assets for financing Ukraine. Other countries have reduced their euro assets by approximately €100 billion, or nearly 5%, over the past year. The euro’s share of global reserves has consequently dropped to 20%, its lowest in three years.

The decline in euro holdings partly stems from moves by Swiss and Japanese institutions aiming to support their own currencies, although the US dollar and Japanese yen saw increased shares. Russia holds about 40% of its foreign exchange assets in euros, contributing to around 8% of the global reserves in the currency.

International sanctions have frozen about $300 billion of Russia’s reserves, mostly in euros, following Russia’s invasion of Ukraine in 2022. G7 leaders are deliberating on using these frozen assets to fund Ukraine, with proposals focusing on employing future profits from these assets rather than outright seizure.

ECB officials, including President Christine Lagarde and Italy’s central bank governor Fabio Panetta, have cautioned that seizing these assets could diminish the euro’s international appeal. The euro currently serves as the second-largest reserve currency globally, following the US dollar, which has experienced a drop from nearly 70% to below 60% over two decades.

In recent discussions, ECB board member Piero Cipollone suggested that integrating the Eurozone’s instant payment system with similar international networks could bolster cross-border euro payments. Lagarde emphasized the importance of maintaining vigilance to any potential disruptions in the euro’s usage.

G7 Summit in Italy Focuses on Ukraine, Sanctions, and Economic Aid

Leaders of the G7 countries convened in Puglia, Italy, on Thursday to address critical issues, including the war in Ukraine, financial support for Ukraine, and sanctions against entities aiding the Russian economy. The summit will also cover topics such as migration, the Middle East, climate change, and artificial intelligence.

Among the notable discussions is the EU-led $50 billion loan designed to ease Ukraine’s financial burdens, potentially funded by profits from approximately $300 billion in frozen Russian assets. The US proposes expanding sanctions to include more entities assisting the Russian economy, which could increase sanctioned entities from 1,000 to 4,000.

Prominent guests at the summit include Pope Francis, Argentina’s President Javier Milei, India’s Prime Minister Narendra Modi, and Brazil’s President Luiz Inácio Lula da Silva. Ukrainian President Volodymyr Zelenskiy and US President Joe Biden will hold a joint press conference to underscore their unified stance against Russia.

Further, the summit will explore China’s role in supplying dual-use items to Russia, which EU foreign affairs chief Josep Borrell noted has significantly increased. The G7 aims to balance its economic relations with China while addressing support for Russia.

US President Joe Biden’s participation follows a busy schedule, including meetings in France and personal challenges related to his son Hunter Biden’s legal issues. Biden’s engagement at the G7 aims to reassure global allies of continued US support amid domestic and geopolitical uncertainties.