The Daily Populous Wednesday April 9th, 2025 evening edition
Authored by euobserver.com and submitted by Westervangaal

Could the euro finally be pushed to rival the dollar as a global reserve currency? Until recently, that seemed a distant prospect.

But US president Donald Trump’s trade aggression has already wiped out trillions from stock markets in recent weeks, sending the dollar lower against nearly all major currencies as investors fled to gold, the yen, and European stocks.

Most experts still expect de-dollarisation to be a slow process, not sudden death (you don’t drain an ocean overnight). But Trump’s next tariff offensive, planned for Wednesday (2 April), which he has called “Liberation Day” could provoke further market turmoil and has already prompted a strong response.

European Central Bank (ECB) chief Christine Lagarde on Monday said it was the beginning of Europe’s “march to independence.”

“This is a moment when we must together decide to take better control of our destiny,” she said.

Lagarde did not spell it out, but one path to greater independence is to strengthen the euro’s role as a reserve currency. As the world’s second-largest currency, the euro is well-positioned to step in. But a lot has to go right politically for that to happen. And EU decision-makers do not have a great track record in this regard.

A key driver behind the euro’s creation was to act as a counterweight to the dollar, but later EU and ECB officials largely left the euro's international expansion to market forces, neglecting, and at times even discouraging, a serious push to strengthen its global role.

“The infrastructure is there — what’s missing is political will”

The US by contrast, spent decades cementing dollar supremacy, sometimes aggressively so. As a result, the euro today is underdeveloped relative to the size of its economy. It lacks sufficient safe assets, has too little offshore liquidity, and no coherent financial diplomacy.

“The ECB has been sleeping,” Jens van ’t Klooster, professor of political economy at the University of Amsterdam, told EUobserver. “For decades, we just assumed we could rely on the US dollar. That now proves to have been a costly mistake. We have to very quickly prepare replacement systems that took the US a century to build.”

Together with the Berlin-based economist Steffen Murau, van 't Klooster has tracked the euro’s “failed” internationalisation project and laid out a three-pronged strategy to revive it:

- The ECB needs to expand the supply of tradable euro-denominated debt — the lifeblood of any international currency — by loosening the strict rules that currently limit which bonds can qualify as safe assets.

- Second, it needs to broaden its network of swap lines — the credit lines that allow foreign banks and governments to access euros during crises — a role still dominated by the US federal reserve.

- Finally, EU authorities must foster more trade in euros, especially along supply chains linked to the energy transition. That means making it easier for companies to borrow, trade, and invest in euros - which, in turn, will help deepen euro-based financial markets.

The euro won’t be able to fully replace the dollar outright. But it could become the anchor of a more multipolar financial system, alongside the Yen, Sterling, and Renminbi.

This could stabilise the financial sector if Trump’s trade policies destabilise dollar markets, and could help embed European (green) norms into the global financial system.

Before we get there, it’s worth asking why de-dollarisation is on the table in the first place. The short answer is: Trump.

Tariffs and trade wars are bad enough. But there are signs he’s willing to go even further and weaponise the dollar to get what he wants.

In an off-the-cuff remark during a White House press point last month, he told reporters that the €34 trillion in outstanding US debt would be “looked at” because some of it might be “fraudulent.”

“Toying with the idea of not paying back holders of US debt is a more fundamental threat to the dollar than the end of Bretton Woods.”

This was widely interpreted to imply that the Trump administration was considering a “selective default” as part of a cost-cutting drive led by the unelected tech tycoon and White House aide Elon Musk.

Treasury secretary Scott Bessent, regarded by some as one of the ‘saner’ voices in Trump’s camp, later softened the statement. But Bessent himself backs the so-called “century bond” plan.

This scheme would allow the treasury to convert foreign-held US debt (much of it in five- or 10-year treasury bonds) into low-interest 100-year bonds, and potentially subject it to an additional tax.

In effect, this also amounts to a partial default. Creditors would be “encouraged” to accept bonds they neither want nor trust, with little hope of recouping their claims in full.

To enforce it, Trump’s advisors lean on a familiar playbook: more tariffs and the threat of withdrawing military support through Nato.

The same logic could easily escalate. Trump could threaten to withhold dollar access or selectively default on debt to punish adversaries or coerce “ungrateful” allies.

“Threatening to default on debt could trigger a fire sale of dollar assets,” van 't Klooster said. “Not paying back US debt would tear through the international monetary system far more violently than the end of Bretton Woods.”

Whether the Trump administration will take it this far is unclear. But the danger is taken seriously at the highest levels.

European central bankers have raised doubts about the reliability of US institutions to provide dollar funding during market strain, and former US treasury officials have warned that the “spectre of default” could destroy US credibility.

“The mood could shift,” van 't Klooster said. “People could simply decide that exposure to dollar assets is no longer desirable.”

Even those eager to see the dollar dethroned — Chinese president Xi Jinping not least among them — have no interest in a disorderly collapse of the global financial system. As van 't Klooster puts it bluntly: “The dollar = the financial system.”

The euro is best placed to cushion the blow, but it is still far too small. The sheer scale of dollar markets is hard to match.

Tens of trillions in dollar debt can’t simply be poured into gold, equities, or scattered across the shallow bond markets of a handful of mid-sized countries. What global finance needs is another deep pool of safe assets — stable in value, easily turned into cash, and widely accepted.

That’s where ‘king dollar’ is hard to beat. It still accounts for 88 percent of cross-border trade and 58 percent of global reserves. The US government has €34 trillion in debt, with €21 trillion available as safe assets for global markets.

“We left internationalisation to the market. We never seriously thought about how to promote a euro-denominated global payment and credit system”

China’s bond market is the second biggest (approximately €22 trillion), but most of it consists of local government and state-owned enterprise debt, with limited foreign access. The eurozone comes next, with almost €13 trillion in total debt, but only €4 trillion counts as safe.

This is nowhere near enough to replace the dollar. As a share of total debt, eurozone safe assets are about half of what the US offers — one-third compared to two-thirds.

The eurozone could expand its supply of safe assets by broadening guarantees for individual member states or by issuing more common debt, but both require a political agreement.

Instead, it relies on a patchy and opaque system, leaving investors uncertain about the status of individual countries' debt. Italian debt may be deemed safe today, but what happens if a crisis hits?

This uncertainty stems in part from a 2005 ECB decision: European debt is still graded using US rating agencies like Moody’s and Fitch, whose verdicts can prevent major EU countries such as Poland, Spain, and Italy from qualifying as safe assets in ECB operations.

The ECB has long avoided setting its own standards to dodge politically fraught debt disputes. Yet, as van 't Klooster and Murau note with some understatement, it is “questionable” whether US agencies should remain the ultimate judges of European solvency.

Whatever approach EU and ECB officials choose to fix the safe asset problem, it is only one step.

The real missing link is the euro's limited use as trade currency, and a lack of infrastructure to support offshore euro creation: banks and firms outside Europe need to be able to issue euro-denominated financial instruments easily, just as they have done for decades with dollars.

The dollar’s strength comes from a century of proactive — sometimes aggressive — offshore monetary policy.

“The US has flat-out threatened the Saudis in the past: keep selling oil in dollars, or we’ll invade,” said van 't Klooster, referring to 1970s declassified documents showing US offers of 'military protection' helped ensure oil would continue to be priced in dollars.

“Oil is the root of why the whole system is dollar-based. Everyone needs dollars to access energy,” he added. This was supported by the eurodollar market, which allowed dollars to circulate globally beyond US borders and was forcefully backed by the Fed, the Treasury, and the State Department.

But the euro never had such a deliberate strategy. “We left internationalisation to the market,” van 't Klooster said. “We never seriously thought about how to promote a euro-denominated global payment and credit system.”

“Oil is the root of why the whole system is dollar-based. Everyone needs dollars to access energy”

The ECB’s first president, Wim Duisenberg, argued in 1999 that stable prices would “automatically foster” international use of the euro.

It didn’t — and although the ECB has since distanced itself from this view, it still treats euro internationalisation as a domestic issue, one that will somehow emerge from “deeper [EU] capital markets.”

Yet the energy transition offers Europe a second chance.

Just as coal anchored the pound and oil anchored the dollar, the euro could be tied to critical minerals and green technologies.

“If the prices of batteries, solar panels, and renewable energy investments are increasingly set and financed in euros, the currency’s global role would grow,” said van ‘t Klooster.

Trump’s hostility to the green transition only sharpens this possibility. Europe, at least in principle, could forge a cleaner alternative to the petrodollar. But the starting position is weak. China dominates much of the supply chain for minerals and rare earths and is already building its own financial channels.

"Internationalising the euro could embed European norms into the system”

But the more value chains Europe manages to price and finance in euros, the stronger the network effects will become, this time anchored not in oil, but in metals, critical minerals, and renewable infrastructure.

This wouldn't necessarily make the system fairer. “The global financial system is deeply unequal,” said van 't Klooster. “But internationalising the euro could embed European norms into the system."

Unlike in the US, where even looking at climate risk is restricted, "Europe could make sustainable finance the norm," he also said.

In some ways, this is already happening. The largest share of green bonds globally is denominated in euros.

“The infrastructure is there — what’s missing is political will,” said van ‘t Klooster. “National ministries, the central bank, the EU — there needs to be a coherent strategy to roll out the euro. But the pushback is still that the central bank could become too political, but I think doing nothing is also a political choice.”

This article has been updated with minor edits.

AnomalyNexus on April 9th, 2025 at 12:37 UTC »

Dethrone seems unlikely.

A "multi-polar" currency system seems more likely

fpPolar on April 9th, 2025 at 11:54 UTC »

The truth is the Euro has some drawbacks simply because it is the currency for multiple sovereign nations. It can much be harder for the EU to enact monetary policy, especially if countries have competing interests.

Many European countries also don’t have the same appetite for borrowing and spending.

Westervangaal on April 9th, 2025 at 11:03 UTC »

Hey, I’m the author.

US treasuries selling off again—sharing this piece I wrote last week. Leans a lot on the work of political economists Jens van ‘t Klooster and Steffen Murau.

The euro’s too small to replace or rival the dollar as global reserve currency, but there’s a lot the EU/ECB can do to grow its international role and help steady the global financial system. (Open access)

Hope it’s interesting!