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Italy’s central bank governor has sent a thinly veiled warning about EU plans to seize profits from Russian financial assets in Europe, saying that “weaponising” the euro risked harming its attractiveness and boosting rival currencies such as China’s renminbi.
Fabio Panetta, the new head of the Banca d’Italia, said in a speech on Friday that Russia’s invasion of Ukraine was “a stark reminder” of the strategic benefits for Europe of having a global currency like the euro, adding: “This power must be used wisely.”
“International relations are part of a ‘repeated game’: weaponising a currency inevitably reduces its attractiveness and encourages the emergence of alternatives,” he told an event in Riga to mark the 10th anniversary of Latvia adopting the euro.
He said the increased usage of the renminbi to finance trade between China and Russia was “instructive in this respect” because Beijing has promoted its use in countries hit by international sanctions that makes it harder for them to pay for goods in US dollars or euros. The share of Chinese trade financed in renminbi has doubled in the past three years, helping it to overtake the euro as the world’s second most used currency for trade finance.
Panetta did not specifically mention the EU’s plans to transfer to Ukraine the proceeds of €210bn in Russian sovereign assets that are held in eurozone institutions and have been immobilised by western sanctions since 2022. But officials said his comments were made with these plans in mind.
Rome has frozen relatively tiny amounts of Russian central bank funds, of which the bulk are stuck in Belgium where the central securities depository Euroclear holds about €191bn.
Brussels is working on plans to seize extraordinary profits that Euroclear is making on the immobilised assets and give them to Ukraine. Member states are expected to approve new rules at the beginning of next week that would make it mandatory to set aside these profits, but stop short of actually seizing them for the benefit of Kyiv.
The US, which holds about $5bn in Russian central bank assets, has been pushing other G7 countries to go one step further and seize the assets themselves.
But Italy is one of several EU member states including Germany and France that have been sceptical of such a move and warned about the implications of seizing assets belonging to a sovereign state, which under international law has immunity. Some have expressed scepticism about touching only the profits resulting from the stuck assets.
The European Central Bank, where Panetta was an executive before taking over as head of the Italian central bank late last year, has also warned about the risks of such moves for the stability of the euro, especially if Europe acts alone and not as part of an international effort. Fears have been raised that other central banks or governments might withdraw from euro assets due to concerns their holdings could also be frozen or seized.
Panetta said having an international reserve currency allowed eurozone countries to issue debt more cheaply, estimating the savings could be worth about half a percentage point of interest that amounts to about 0.5 per cent of gross domestic product.
He repeated his earlier call for the EU to create a “steady, predictable supply of ‘safe assets’” by setting up a permanent programme to issue debt centrally. The EU’s €800bn recovery fund launched after the pandemic hit was “a first and welcome step” but because it was a one-off programme that expires in a few years it was “not a game-changer” he said.
While there was “little evidence so far” of increased geopolitical tensions causing a fragmentation of international currency usage, he warned “we should be alert to the possibility that politics will have a greater impact on international currencies in the coming years”.
