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Sylvia Ma

Daniel Gros is the director of the Institute for European Policymaking at Bocconi University. Previously, he served as an adviser to the European Parliament, collaborated with the European Commission as economic adviser to the Delors Committee, which developed plans for the euro, and worked at the International Monetary Fund.
In this interview, Gros examines the structural tensions shaping EU-China economic ties, draws lessons from the euro’s experience to analyse the yuan’s internationalisation, and explains why stablecoins and central bank digital currencies are limited in fundamentally shifting the global monetary order.
This interview first appeared in SCMP Plus. For other interviews in the Open Questions series, click here.
After more than two decades since the creation of the euro, what’s the biggest lesson that can be learned from its internationalisation? What do you think can apply to the yuan?
When the euro was created many had the illusion that it would rival the US dollar. But one should keep in mind that the key advantage of the [US] dollar is twofold. First, it has a very deep and broad financial market. It is very open. Second, once a currency is used everywhere in the world, then why should people change?
If you are in Latin America, Africa or somewhere in Asia, and you want to deal with somebody else – even especially those who are not in the US – instead of having to deal with national currencies, you just take the dollar as the common denominator.
Once everybody has chosen the dollar, why should they change? I think this is the lock-in effect the dollar has, and it is very difficult to get into.
The second, which is related to my first point, is that to become an international currency, a currency needs very deep and liquid financial markets. The euro does not have that because Europe has a more bank-centric system. China also has a bank-centric system.
Moreover, if you want your currency to become international, you have to have an open capital account. That means you lose control over the value of your currency. That is the trade-off: having a global currency requires letting its value be determined globally.
That is why the Germans in the past did not want the Deutschmark to become a global currency, because then they would lose control over their exchange rates.
In that sense, it would be very nice if the yuan became an international currency and became much stronger. That would be useful for the rest of the world. But unfortunately, I do not think the leadership in China will allow the currency to fluctuate freely.


The euro was expected to challenge the US dollar’s dominance, but progress has been slow. How much potential does the euro have today in the context of de-dollarisation? Could it become a reliable currency, especially for emerging economies like China?
Only to a very limited extent.
At the moment, the ratio between the dollar and the euro is roughly 3 to 1. If it goes to 2.5 to 1, it does not change the world.
What we do not know is how the US will evolve over the next 20 years. We thought we knew that it was a stable democratic state. Now there are some question marks. A lot will depend on how future elections go.
So yes, I think there is some potential for the euro, but I see it as limited.
As the world’s largest trader, how much can China’s trade clout accelerate the yuan’s internationalisation? What domestic changes would be needed for it to become a major reserve currency, and is meaningful progress realistic over the next five years?
The key question is whether China can allow the yuan to fluctuate freely and offer foreigners access to its financial markets. If it is mainly a banking market, foreigners cannot access it. But if it were more like a US-style securities market, with shares and bonds, the yuan could become much stronger and part of the current control concept would disappear.
Theoretically, China is ideally placed to have a currency that could rival the dollar, but it would require fundamental domestic economic changes.
The key levers to become a global currency are domestic, not international.
Beijing could ease restrictions on capital flows and open up markets over the next five years if it wanted to. The question is whether they want to give up control over the currency.
Another critical point is investor confidence. Any foreign investor, in Latin America, Africa or elsewhere, who buys Chinese bonds needs to be assured their investment is protected, even if a minister says something crazy about, for example, Taiwan.




That is the key question. In the US, until recently, investors could be pretty sure. But can China ever assure foreign holders of Chinese assets that, whatever the politics, their money is safe?
Promoting trade settlement in yuan would make the currency more international, but it would not make it a global reserve currency.
So this would all happen in a sort of hub-and-spoke way, in relationships with China, but it’s all a bit artificial. It all depends on the Chinese government saying, “You should use yuan – you do it.”
But then the question is: should I use yuan when I trade between Indonesia and Zimbabwe? No.
What is your take on stablecoins, which some argue reinforce the US dollar’s dominance? And how do you rate the potential of central bank digital currencies like the digital yuan and digital euro?
Central bank digital currencies are different from stablecoins. It is very important to keep that in mind.
In China, for example, you already have the digital yuan, but it has completely flopped, because the payment system is already very efficient – Alipay, WeChat Pay and so on. So who needs a new one? The banks are mostly state-owned. What’s the difference between a currency issued by the People’s Bank of China and a government-owned big bank? I don’t see any difference.
That’s why I think the digital yuan was really not needed domestically. In Europe, we also have very efficient domestic payment systems, so a digital euro is also not necessary.
For foreign traders, for example, in Japan, wanting to export or import with China, they don’t need a special digital yuan – the normal bank accounts already work fine. So there is no point. And now stablecoins are forbidden in China.
For stablecoins, as I said in an article last year, they are not suited for broad retail use. Their underlying blockchain technology creates structural inefficiencies – transaction delays, data redundancy and commercial privacy risks – that make them unable to compete with existing payment systems.
You need stablecoins when the normal payment system doesn’t work. Inside China, there is no problem. Inside the euro area and the US, domestic transfers work. But cross-border transfers are not so easy.


For example, if someone in the US wants to transfer money to their mother in Guatemala, that is difficult. You have a currency exchange, and they usually charge 3 or 4 per cent. With a stablecoin, you can get the money more quickly. If your mother has a stablecoin and knows how to use it, and has internet access, then it works.
That is where I think stablecoins could have a use and plus in what we might call the grey economy, including criminals, because they are not easily traceable.
That is why I see demand for stablecoins internationally and in the shadow economy. And these guys want to have one unit of account – the [US] dollar. Who needs a euro stablecoin when you can have a dollar one? And drugs are priced in dollars, not euros.
But for domestic transactions in areas with good domestic payment systems and stable banks, I don’t see much usefulness and demand for stablecoins.
Hong Kong issued its first stablecoin licences this month. What is your view on the city’s role in cryptocurrency development? And how do you see its role as an offshore yuan market?
China can use Hong Kong as a sandbox. You can see how things work and test them. If it doesn’t work, it’s just in Hong Kong. So I think it is useful for China.
But I don’t see why a Hong Kong-based stablecoin should be much better than a US one. There is a question of fine details and how the software is configured. As I said, the major demand for stablecoins is for small-scale transactions, for people in Europe or the US who want to send money home, and then the demand in the shadow economy.
For the shadow economy, you prefer somebody who is located in Honduras. It seems pretty sure that the Honduran authorities would not be as careful in checking as in Hong Kong. So, I don’t foresee any big legal use of stablecoins in normal industrial or financial markets.
On the offshore yuan market, it cannot really grow unless there is a stronger link between the offshore and onshore markets. If that link remains controlled – whether a little more or a little less – why would anyone hold very large amounts in the offshore market?
A small amount for trade purposes, yes, but that is very limited.
For large financial transactions or investments – for example, where can you place the equivalent of US$20 billion in the offshore market and be sure you can get the money back the next day? That is why I think the offshore market will remain very limited.




You once argued that economic policy is expected to have limited impact on the prospects of major economies this year because of deep structural issues. What does that mean in China’s context, particularly for the prospects of a meaningful consumption recovery?
I think policymakers – and perhaps journalists, as well – often overestimate what governments can actually achieve. I have seen many cases where governments say, “There is a problem, and we have to do something”, even if the likely impact of that action will be very limited.
In the case of China, I think it is generally agreed that the key issue is that the households, firms and the government save too much.
That then leads to a very large current account surplus. I have been looking at China for at least 12 years, and this pattern has remained essentially the same. I have also followed the Japanese economy for 25 years, and there are parallels.
Boosting consumption, in principle, should be easy, right? But in fact it is not. Unless you do something truly out of the ordinary, simply changing some taxes here or giving some benefits there – I do not think that will change the savings behaviour of the population.
So that is my view: in that sense, just talking about giving some subsidies here or lowering some taxes there does not change the fundamentals.
I agree with the conventional wisdom that marginal increases in public spending will not make a major difference. Having a different, more generous social security system might have an impact – not immediately, but over time.
What is your assessment of the EU’s economic outlook? With China’s growth still heavily export-driven, how do you see EU-China trade evolving? Does this call for the EU to rethink its strategy towards China?
I think the EU’s economic outlook is rather boring – not a big upswing, not a big downturn. Growth of around 1 point something per cent, with very little variation.
European industry is solid, but it is not high growth. It is not like in the US, where you can have a huge expansion of data centres and then maybe also a crash. I do not think that is likely to happen in Europe. I just see a continuation of moderate, low growth.
In China, maybe the leadership in Beijing is motivated to reduce imbalances, but they simply cannot do it. There is a difference there.


The problem in Brussels is that many people focus on trade terms of the bilateral trade relationship. Trade is always multilateral. If the EU continues to have a moderate current account or trade surplus overall, there is no reason to look only at the bilateral deficit with China while ignoring surpluses with others. That is the problem I see – policymakers focus on the bilateral aspect instead of the overall picture, and some tensions come from this mistaken bilateral focus.
At the same time, something else is going on which, in my view, is unavoidable. China is becoming more competitive in a number of medium-tech industries that Europe used to dominate. That takes time to get used to.
European policymakers say this is because of subsidies. I would argue that in certain sectors there are subsidies, but overall, given China’s very high savings rate and very large investment in human capital – education and millions of engineers – it is unavoidable that China becomes more competitive in these areas. There is very little politicians can do about that.
Where I think China makes a mistake is when it says: We have selected these sectors and we will dominate them. The rest of the world says: We also like these sectors, but you are giving them an unfair advantage.
I think this is something that would come about naturally, but if China presents this as a state-led strategy, others will react.
I think the rest of the world very often reacts in the wrong way, but that is the way politics is. As I said at the beginning, there is a problem, and politicians feel they need to do something about it. That is also the case in Brussels.
On the economic front, there is an unavoidable problem coming towards the EU economy. I do not think protectionism against China is of any use, because the true market is the global market.


We can protect our internal market, which is not small, but it is still only a fraction of the global market. Our industry can survive only if it remains competitive globally. That is why I am sceptical that protecting our own industries will achieve much.
Politicians here say: China has targeted this sector. We cannot leave this sector being killed by China; therefore, we must also give it subsidies. That is the political dynamic. Economically, in my view, it does not make much sense. But that is the way the world works.
Under Donald Trump’s second term as US president, do you think rising protectionism has reshaped the global trade order? If so, does this open opportunities for closer EU-China economic and financial cooperation, and where might breakthroughs emerge?
I do not think the global trade order has been reshaped by Trump – I think the US has exited the world trade order, while the rest stick to it.
All academic research agrees that 90 per cent of the cost of Trump’s tariffs falls on the US itself, then let them stay in the corner and the rest of the world continues.
Of course, China is particularly targeted, and the Chinese are particularly upset. For the Chinese, I would say: that market is gone, but let us make sure we keep good relations with everybody else and keep the other markets open. But if politicians give the impression that they are targeting certain markets, that creates more friction.
You may have heard the head of the World Trade Organization say that 90 per cent of world trade continues as before. Do you know any country that says, “Oh, tariffs are a very good instrument that we want to use?” Nobody.
As for closer EU-China cooperation, in principle, we have a common interest in keeping the world trade order open. But I do not think a more friendly relationship is realistic. As I said earlier, China is perceived as a major competitor, especially where the impression is that the government is behind its success. That is something many in Europe do not like.
Then there is the fundamental disagreement over Ukraine. So while it is nice to talk about cooperation, I do not see major improvement.
In some areas, cooperation could make economic sense. For example, in green technology, China has subsidised battery production and other clean technologies. Europe can benefit from cheaper batteries and cheaper inputs for the green transition. From that perspective, one could even say: thank you for subsidising them.
But you can see how difficult that would be politically. If I told the Chinese to double their subsidies for batteries so that we can get even cheaper products, that would not be acceptable politically.
The political atmosphere will not improve much. The priority should be to keep tensions under control and keep trade as little disturbed as possible.


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Open QuestionsDaniel Gros on what China can learn from the euro as it works towards a global yuan

Former European economic adviser says Beijing’s bid to build an international currency will hinge on leaders allowing it to fluctuate freely

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Former European economic adviser says Beijing’s bid to build an international currency will hinge on leaders allowing it to fluctuate freely

Former European economic adviser says Beijing’s bid to build an international currency will hinge on leaders allowing it to fluctuate freely