With the US dollar showing signs of strain, a pivotal question is emerging in global financial circles: could this be the euro's moment to shine on the world stage? European leaders are actively exploring ways to boost the international stature of their common currency, sensing a historic window of opportunity amid shifting geopolitical and economic plates.
A History of Ambition, Tempered by Crisis
Since its inception in 1999, the euro has harboured ambitions of becoming a true global currency. In the years leading up to the 2007-09 financial crisis, there was genuine hope among European officials that it could eventually rival the dollar. However, the subsequent eurozone debt crisis of the 2010s dealt a severe blow to these aspirations.
The European Central Bank (ECB) was not originally designed as a lender of last resort, making government bonds susceptible to speculative attacks. The banking system was fragmented nationally, creating dangerous "doom loops" between shaky sovereign debt and weak banks. Furthermore, a lack of common, high-quality safe assets—with Germany issuing too few bonds and countries like Italy and Spain lacking credibility—combined with dismal growth and near-zero yields, made the euro an unattractive asset for international investors.
Four Pillars of a New Euro Optimism
Today, the euro remains a solid but distant second to the dollar, accounting for about a fifth of global central bank reserves compared to the dollar's three-fifths. Yet, European officials believe the landscape is changing, citing four compelling reasons for renewed optimism.
First, a more secure financial architecture. The ECB has effectively become a lender of last resort, a transformation that began under former President Mario Draghi during the euro crisis. Its massive bond-buying programmes, including the €1.8 trillion pandemic emergency purchase programme and the unlimited Transmission Protection Instrument (TPI) created in 2022, have bolstered confidence. The EU's willingness to support members was demonstrated by the €807 billion pandemic recovery fund, funded by common debt. Additionally, the ECB now directly supervises Europe's 114 largest banks.
Second, more investible and safer assets. The recovery fund created a substantial pool of common EU debt, providing truly European safe assets. Furthermore, a continent-wide surge in defence spending, potentially rising from 2% to 3.5% of GDP, means even fiscally conservative nations like Germany are poised to increase debt issuance, creating more investment options.
Institutional Stability and Trade Leadership
Third, the appeal of European institutions. Compared to political polarisation in the US, the euro's governance offers stability. It is the currency of 20 sovereign states overseen by a fiercely independent ECB. Changing its governance is extremely difficult, making it hard to weaponise. Sanctions require unanimous EU consent, and the bloc's commitment to the rule of law and open trade is unwavering. The ECB's framework for providing euro liquidity to non-euro countries could become a more attractive alternative to the Fed's swap lines, especially if US policies become unpredictable.
Fourth, a changing global trade order. As America steps back, Europe is positioned to lead a new liberal trading order. Increased trade invoiced in euros will spur demand for euro-denominated trade financing, insurance, and derivatives. Notably, euro-denominated interest-rate derivatives have recently surpassed those in dollars. New trade links will foster euro-based banking accounts worldwide, ultimately driving demand for euro reserves. Ursula von der Leyen, President of the European Commission, has noted the growing desire of many countries to deepen ties with the EU.
The Path Forward: Reforms and Realities
Seizing this opportunity won't be automatic. It demands difficult reforms. High-debt nations like France and Italy must pursue sustainable growth rather than merely issuing more bonds to balance budgets. Conversely, countries like Germany and the Netherlands need to use their fiscal space to invest and create safe assets. Deeper, unified EU capital markets are essential, requiring progress on harmonising bankruptcy laws and business regulations—not just easier fixes like securitisation rules.
A more international euro would lower borrowing costs for European governments, a crucial advantage during a period of rising defence expenditure. While European politicians may currently avoid bold proclamations to avoid provoking a reaction from the Trump administration, the forces of international finance operate with their own logic. As history shows—from ancient Athens' owl-inscribed tetradrachm to today's currency markets—trust and stability are the ultimate foundations of a reserve currency's power.
