JCMS 2004 Volume 42. Number 3. pp. 453–71 © Blackwell Publishing Ltd 2004, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA Abstract Economic studies suggest that the Eurosystem’s international reserves ($370 billion) could be reduced by up to half of its existing level. The article discusses the likely size and distribution of excess reserves and proposals for their uses. Small economic gains can be expected from a reserve reduction, as well as an elimination of incompatibilities and conflicts of interest between the conduct of monetary and in- vestment policy. A careful and co-ordinated reserve reduction would pose no threat to financial stability, making it also admissible from a legal perspective against the background of Art. 31 of the ESCB (European System of Central Banks) Statute. Finally, transferring reserves as an extraordinary gain to the government does not constitute monetary financing as prohibited by Art. 101 EC Treaty. Introduction Since the introduction of the euro on 1 January 1999, much of the Eurosys- tem’s international reserves can be regarded as excessive. The economic ra- tionale for a decrease in the adequate level of reserves is the shrinkage of the foreign trade sector (intra-euro area trade is – from a monetary perspective – no longer foreign trade), the elimination of the need to stabilize exchange Economic and Legal Issues in Reducing the Eurosystem’s Excess of International Reserves* HARALD BADINGER Europainstitut, Wirtschaftsuniversität Wien BARBARA DUTZLER Austrian Federal Ministry of Finance * We are grateful to Fritz Breuss and Stefan Griller for numerous helpful comments on an earlier draft. This article has also benefited much from the suggestions of two anonymous referees. The usual disclaimer applies. Financial support by the Austrian Science Fund (FWF) – project number P15256 – is gratefully acknowledged. The views expressed in this article are those of the authors and do not necessarily reflect the position of the Austrian Federal Ministry of Finance.