Euro-zone fiscal conservatism prevents the euro from becoming a dominant reserve currency

The euro’s share of global foreign exchange reserves is levelling off. We believe that the euro ’s weak role as an international reserve currency can be explained by fiscal conservatism in the euro zone, which takes two forms that are detrimental to the development of the euro’s international role: The small size of the euro zone's federal debt, and therefore the segmentation of the sovereign debt market; The failure to take advantage of the euro's reserve currency status, leading to a fiscal policy involving persistent external surpluses for the zone. However, it is much more difficult for a country with no external debt to issue a global reserve currency than for a country with external debt.