. most studies focus either on the store of value function of currencies and their role in foreign exchange reserves [ see chinn and frankel, 2008, for a recent review ] or on the unit of account and means of payment functions, including the invoicing of international trade [ see kannan, 2007 ]. in the first case, users of an international currency are mainly concerned with its ability to maintain a stable purchasing power over time. in the second case, users care about transaction costs and the economies of scale that are obtained from tapping into a large network. in both cases, a number of political, institutional, financial and economic factors contribute to increasing the popularity of an international currency. i will review these factors with particular reference to the euro. economic and financial conditions let me start with the economic and financial conditions supporting the international role of currencies. the size of the economy and its foreign trade flows are crucial to promoting the international status of a currency. this is because there are scale economies and network externalities in using the currency that is also used by other agents in international transactions. the larger the economy and its trade flows, the more likely it is that smaller economies will adopt the currency of the larger trading partner. in this respect, the critical mass of the euro area, in economic terms, is large enough to exert gravitational attraction on the rest of the world. in 2007, the euro area accounted for about 16 % of world gdp, measured at purchasing power parity, and its external trade was equal to more than 18 % of world trade, at current exchange rates. in the invoicing of international trade, however, network externalities tend to generate only one “ winner ”. for several decades, the us dollar has served as a medium of exchange and unit of account for homogeneous goods traded in organised exchanges, such as commodities and oil. in this case, inertia is very important and it is very difficult to dislodge the incumbent currency, whose use is associated with low information and transaction costs. yet even in this case, it would be possible to switch to a parallel invoicing system, including the euro, if agents expected others to start using the new currency and technological progress diminished transaction and information costs [ mileva and sigfried, 2007 ]. transaction costs are important not only in international trade but also in the use of currencies as financing or investment instruments. for this reason, truly international currencies must be backed

concerns surfacing. the non - bank financial sector could also see such risks. while this sector has remained resilient during the recent banking sector stress and market volatility, its exposure to 1 / 3 bis - central bankers'speeches liquidity and credit risks remains high. if investment funds were to experience any sudden liquidity needs, they could amplify adverse market dynamics via procyclical selling behaviour and forced asset sales, thereby introducing risks to wider financial stability. strains in the non - bank sector, which is an important source of bank funding, could also give rise to additional banking sector vulnerabilities via liquidity and credit risk spillovers. past events, such as the pandemic - related turmoil in march 2020 and the uk gilt market stress in the autumn of 2022, also vividly illustrate how non - banks can amplify margin call dynamics in the wider financial system, especially when coupled with excessive leverage. on the side of the non - financial sector, the improvement in macroeconomic developments i noted at the outset have provided key support. at the same time, our assessment underpins how tighter financial conditions are testing household, corporate and sovereign resilience. a strong labour market with unemployment at historical lows has supported household income. but higher interest rates and the squeeze in real income due to high inflation are increasingly compromising household debt servicing capacity. this is reflected in an increase in consumer loans classified by banks as suffering a significant deterioration in credit quality. robust revenues and high profit margins have contributed to strong corporate results. but firms are also being challenged by tighter financing conditions and the repercussions in terms of the availability and cost of funding. euro area firms have benefited from high profits on the back of a sharp post - pandemic recovery and lower energy prices. yet not all firms have benefited equally from the recovery. highly indebted, energy - intensive and pandemic - sensitive sectors have often been unable to increase profit margins. adverse developments in the corporate sector would have knock - on effects on bank balance sheets and household employment prospects. turning to sovereigns, short - term fiscal pressures remain contained. but medium - term challenges are adding to financial stability risks. fiscal fundamentals remain fragile in some euro area countries, given their high debt levels, rising funding costs and high short - term refinancing needs. as government bond yields have increased sharply across the euro area, higher funding costs will ultimately weigh on sovereigns. at the