ECB weighs expanding euro liquidity lines to challenge dollar dominance

The European Central Bank is quietly examining whether to repurpose its network of foreign-currency liquidity lines as an instrument of geopolitical influence, hoping to exploit a perceived retreat in US financial leadership. Four officials on the Governing Council and its preparatory committees have told POLITICO that the discussion centres on the EUREP repo facility, the ECB's mechanism for lending euros to non-euro-area central banks against high-quality euro-denominated collateral, and whether it should be expanded, made permanent and priced more aggressively.

The current architecture: swap lines versus repo lines

Central banks typically operate two kinds of backstop. Swap lines exchange one currency for another at a pre-agreed rate, with the borrower obliged to repurchase its own currency later. Repo lines, by contrast, provide cash against collateral denominated in the lender's currency. The ECB maintains unlimited standing swap lines with the Federal Reserve, the Bank of England, the Bank of Japan, the Swiss National Bank and the Bank of Canada. Capped swap lines exist with the Danish and Swedish central banks, and a volume- and duration-capped facility operates with the People's Bank of China.

EUREP is different. It is a repo facility, not a swap line, and it is currently available to only eight central banks: Hungary, Romania, Albania, Andorra, San Marino, North Macedonia, Montenegro and Kosovo. Since 2 January 2024, not a single euro has been drawn. Even at the height of the pandemic, peak usage reached just €3.6 billion, a rounding error in the Eurosystem's balance sheet. The knowledge that the facility exists is supposed to deter self-fulfilling runs, but its practical impact on euro internationalisation has so far been negligible.

Why the debate has surfaced now

The trigger is not a crisis in Europe but a shift in perceptions of the United States. Officials describe a growing concern that Washington may either refuse to act as global lender of last resort or attach political conditions to its dollar swap lines. If that happens, the argument runs, the euro must be ready to absorb at least a fraction of the resulting demand. A second motive is commercial: the US derives seigniorage, lower borrowing costs and sanction leverage from the dollar's reserve status. Some in Frankfurt believe Europe should pursue a share of those benefits more deliberately.

François Villeroy de Galhau, governor of the Banque de France, made the case explicitly in a recent speech. He pointed to China, which has established roughly 40 swap lines with trading partners worldwide, many of them in emerging markets where dollar access is volatile. The Eurosystem, he argued, "can make euro invoicing more attractive" by expanding the provision of euro liquidity lines. The implication is clear: liquidity provision follows trade, and trade follows liquidity.

A divided Governing Council

Consensus on the Governing Council remains elusive. Martin Kocher, governor of the Austrian National Bank, said in a recent interview that there has been "no deeper discussion" on the Council and that he sees no reason to promote euro liquidity lines actively. "I'm not arguing that you should incentivize or create a demand. Rather, if there is demand, we should be prepared for it," he said, while acknowledging that "preparation is very important." His stance reflects a broader northern European caution: liquidity lines expose the Eurosystem to credit risk, and the political return is uncertain.

Other rate-setters take a different view. One told POLITICO that EUREP "should be flexible, simple and easy to activate" and suggested two concrete steps: extending eligibility to more countries and converting the facility from a temporary arrangement into a standing one, removing any ambiguity about whether and under what conditions euros would be made available. Francesco Papadia, a Bruegel fellow who previously ran the ECB's market operations, added that the ECB could also cut the cost of EUREP drawings, raise the volume caps or extend the maximum maturity.

The collateral constraint

Even if the political will materialises, a structural obstacle looms. EUREP requires high-quality euro-denominated collateral, typically sovereign bonds rated AA or above. The pool of such assets is limited to a handful of euro-area governments, and there is no joint European safe asset analogous to US Treasuries. Papadia noted that the Federal Reserve's swap network works because "the Fed has the US Treasury as a kind of partner in granting these swaps." Until Europe creates a common debt instrument, the collateral ceiling will cap the scale of any repo-based expansion.

This is not a new problem. The European Commission has debated a European safe asset for years, most recently in the context of the Capital Markets Union. Progress has been glacial. Without it, the ECB cannot easily replicate the Fed's ability to lend at scale against a deep, liquid, risk-free asset. Swap lines bypass the collateral requirement but introduce a different risk: the counterparty may fail to repurchase its own currency, leaving the ECB holding an illiquid foreign currency it neither wants nor can easily use.

The Argentina precedent

That risk is not theoretical. Brad Setser of the Council on Foreign Relations has highlighted the Federal Reserve's $20 billion swap line with Argentina. "The United States doesn't really want Argentina's currency," he wrote. "It expects to be repaid in dollars, so it would be a massive failure if the swap was never unwound and the US Treasury was left holding a slug of pesos." Papadia echoed the warning: "The main risk is that the country would use a swap and then would not be able to return the drawn euros. And then you will be left with foreign currency you don't really know what to do with." That fear inclines the ECB toward reforming EUREP rather than expanding swap lines.

Liquidity lines follow power; they do not create it

Gianluca Benigno, professor at the University of Lausanne and former head of international research at the Federal Reserve Bank of New York, goes further. He argues that the entire premise, that expanding liquidity lines will internationalise the euro, confuses cause and effect. "Liquidity lines can be used to advance your goals if you already have power, but they can't create it," he said. Europe's diminishing geopolitical weight means demand for euro funding outside the continent will remain thin without much broader changes: a clear political vision for Europe's global economic role, a functioning Capital Markets Union, and the creation of a common European safe asset. Those are decisions for elected leaders, not central bankers.

What happens next

The Governing Council has not scheduled a formal decision. Officials say the next step is technical work on the parameters of a reformed EUREP, eligibility criteria, pricing, maturity and collateral rules, which will be presented to the Council's International Relations Committee in the coming months. A political steer from the European Council or the European Parliament could accelerate the process, but neither has yet treated euro internationalisation as a priority. Until then, the ECB's most powerful tool for projecting monetary influence abroad remains largely theoretical.