Euro’s Path to Global Prominence Leads Through Green Finance

(Bloomberg) -- The euro has carved out a dominant position in the fast-growing market for green-bond financing, accounting for almost half of all new issuances last year, according to the European Central Bank.

The development dovetails with European Union ambitions to make the continent the first climate-neutral region by 2050. ECB President Christine Lagarde has promised to reflect on how her institution could contribute, after repeatedly coming under fire from environmental groups for buying bonds of polluters as part of its monetary stimulus.

Debt earmarked for environmentally friendly investments globally increased 20-fold in the last five years, with European Union residents the biggest issuers, the ECB said Tuesday in its annual report on the international role of the euro. While the size of the market is still small, the euro’s lead is visible: Some 9% of all debt raised in the single currency in 2019 was labeled green, compared to just over 2% of all dollar-denominated bonds.

Positioning the euro as the currency of choice for fighting climate change could ultimately raise its profile as international reserve currency.

“The swift implementation of an EU taxonomy of sustainable economic activities would provide a credible and standardized framework, ensure greater investor confidence and could thereby also contribute to strengthening the international role of the euro”, Executive Board member Fabio Panetta said in a statement.

The report cautions that the push into green finance could face competition from a number of countries, including the U.K., China and Singapore, which have also developed strategies to promote the growth of this market segment.

More broadly, the ECB notes, the euro remained the second most used currency in the world. The share of the single currency in global foreign reserve holdings rose modestly in 2019.

A separate report by HSBC Holdings Plc released Monday showed the euro hasn’t lived up to expectations in its first two decades of existence, a warning for European policy makers not to take the currency’s standing for granted. Central-bank reserve managers surveyed cited Europe’s lack of policy coordination and the ECB’s negative interest rates as reason why the euro’s performance has largely been a disappointment.

Reform efforts aimed at making the monetary and capital-markets union more complete “are paramount to raising the attractiveness of the euro globally,” Lagarde said in the ECB’s report on Tuesday, adding that the “pandemic underlines the urgency of these policies.”

©2020 Bloomberg L.P.