Euro’s Global Currency Ambitions Rise as Dollar Dominance Wavers
As U.S. economic policies fuel dollar instability, Europe sees a historic chance to elevate the euro as a true global reserve currency.
The Euro’s Long Road to Reserve Currency Power: Can Europe Seize the Moment?
A Dollar in Decline, a Euro on the Rise?
The global financial order is entering uncharted waters. Long-standing faith in the U.S. dollar—the world’s primary reserve currency for nearly eight decades—is showing cracks under the pressure of volatile American economic policies. While the greenback’s dominance once felt immovable, rising geopolitical tensions and Washington’s unilateral trade actions are prompting global markets to reconsider their allegiances.
In this climate of uncertainty, the euro, often seen as the perpetual understudy, is stepping back into the spotlight. Could Europe’s common currency finally challenge the dollar’s global supremacy?
Policy Shocks and the Dollar’s Shaky Ground
Since former President Donald Trump’s aggressive “America First” agenda shook the foundations of global trade, the dollar has faced headwinds that even its strongest supporters could not ignore. Trump’s confrontational approach to international alliances, trade disputes with key partners like China and the European Union, and clashes with both the Federal Reserve and the judiciary triggered a loss of confidence in U.S. economic stability.
The dollar index (DXY), which measures the greenback against a basket of major currencies, tumbled nearly 10% following Trump’s inauguration—a clear signal that investors were seeking safer harbors.
Stephen Miran, an economic adviser to the Trump administration, stirred further unease when he openly questioned whether the dollar’s role as the global reserve currency was even beneficial for the United States. Such remarks, unprecedented from a senior U.S. official, only amplified global anxiety about the future of the dollar.
The Case for the Euro: A Candidate Long Overlooked
Despite being the world’s second-most traded currency, the euro has struggled to achieve the global reach that the eurozone’s economic weight would suggest. Launched in 1999 with grand ambitions, the euro remains overshadowed by the dollar in international reserves, trade invoicing, and cross-border financial transactions.
But the shifting global landscape presents Europe with a unique window of opportunity. As investor confidence in American economic leadership wanes, Europe has a chance to position the euro as a viable alternative.
Recent research by economic historians Barry Eichengreen and Marc Flandreau reminds us that monetary dominance has rarely been a one-horse race. From the late 19th century through the interwar years, the British pound and the U.S. dollar jostled for the top spot. The idea of a single global reserve currency, they argue, is more the exception than the rule.
Three Crucial Tests for Global Currency Status
For the euro to truly ascend to reserve currency status, it must clear three key hurdles:
Freedom of Capital Movement
Reserve currencies must be easily accessible to global investors. Both the dollar and the euro already meet this standard, offering unrestricted capital flows. In contrast, China’s tightly managed renminbi remains constrained by Beijing’s control over currency exchange and capital movement.
Widespread International Circulation
A dominant reserve currency needs to be widely available outside its home borders. This often correlates with large current account deficits—as seen with the U.S.—since excess imports push dollars abroad. However, this isn’t the only path. The British pound maintained its global dominance in the 19th century despite Britain’s export surpluses.
More crucial than trade balance is the global lending capacity of a country’s banking sector. The United States achieved its dominant position only after the Federal Reserve’s establishment in 1913, which enabled it to support a globally active financial system. Similarly, the eurozone’s banking sector, with total assets of around $34 trillion as of late 2024—40% larger than the U.S. banking system—demonstrates that Europe has the scale to compete.
A Recognized Safe Asset
Perhaps the most significant obstacle for the euro is the absence of a eurozone-wide “safe asset” comparable to U.S. Treasury bonds. Treasuries serve as the ultimate refuge for investors during crises, providing stability and liquidity unmatched by any other instrument.
While German Bunds are considered safe, their limited supply restricts their ability to function as a global benchmark. Without a common eurozone bond backed by collective fiscal responsibility, the euro remains hamstrung in its quest for reserve currency status.
The Political Roadblock to a Eurozone Safe Asset
Efforts to create a eurozone-wide bond have repeatedly run aground on political opposition, particularly from fiscally conservative members like Germany and the Netherlands. Fears of joint liability and the risk of encouraging fiscal irresponsibility among weaker economies have made mutual debt issuance a tough sell.
However, political winds may be shifting. Germany’s recent break from its long-standing debt-averse stance—evident in its debt-funded defense and infrastructure spending plans—signals a potential softening of fiscal orthodoxy. Chancellor Friedrich Merz’s government may be more willing to consider broader financial integration if geopolitical tensions persist.
The European Union’s temporary experiment with joint debt issuance during the pandemic recovery, through its €750 billion NextGenerationEU fund, also demonstrated that shared borrowing is not impossible when political will align with necessity.
Global Power Shifts and the Euro’s Strategic Moment
The euro’s bid for global currency status is not occurring in a vacuum. Washington’s aggressive trade stance and unpredictable policymaking have eroded trust among allies. At the same time, nationalist movements on both sides of the Atlantic complicate the political calculus, often aligning in their skepticism toward globalization.
In Canada, Trump’s policies inadvertently bolstered support for multilateralism, helping the Liberal Party regain momentum. A similar dynamic could emerge in Europe, where nationalist rhetoric faces pushback from centrist parties eager to assert the EU’s financial independence.
If nationalist populists in Germany and France continue to press for isolationist policies, the political center may find new resolve to support deeper fiscal integration as a counterweight—a move that could unlock the euro’s full potential as a global reserve currency.
A Defining Opportunity for Europe
The euro stands at a crossroads. With the dollar’s dominance under threat from within and investor confidence shaken by Washington’s erratic policy turns, Europe has a rare opportunity to reshape the global financial order. But ambition alone is not enough.
For the euro to rival the dollar, the eurozone must overcome its internal political divisions and commit to the structural changes required—most critically, the creation of a eurozone-wide safe asset. Such a move would not only enhance financial stability within Europe but also cement the euro’s place on the global stage.
In an era where economic power is increasingly wielded as a geopolitical weapon, the question remains: Will Europe seize this moment to lead, or will the euro remain the currency of unrealized potential?
Source: (Reuters)
(Disclaimer: The information shared in this article is meant to inform and inspire, not to serve as financial advice. Every investment decision comes with its own risks, so we encourage you to dig deeper, explore multiple sources, and speak with a qualified financial advisor before putting your money on the line. Your financial journey is personal—make sure your choices are too.)