There is evidence from the case of China that substantially high levels of foreign exchange reserves add political clout. Robert Pringle in reporting on the growth of China’s reserves, notes that its economic dynamism and vast foreign reserves meant that its views needed to be listened to more respectfully than had been the case in the past.
The history of the monetary union teaches us an interesting lesson: when the disciplining role of intra-euro area exchange rates was lost, volatility and tensions have in fact migrated to sovereign debt markets, where they were building up under the surface. Even though markets sometimes misprice assets, they nevertheless provide a useful service in terms of signalling, price discovery and incentives.