The United States is in turmoil, and so is its currency. Since Donald Trump slapped tariffs on all imports, global markets have retreated. His unrelenting attacks on Federal Reserve Chairman Jerome Powell then further shattered confidence in American monetary stability.
“Mr. Too Late, a major loser, should lower interest rates, NOW,” Trump demanded on social media last week. Previously, he declared Powell’s “termination cannot come fast enough” and even praised the European Central Bank as a model because of its looser monetary policy.
Most tellingly, Trump explicitly linked monetary easing to his trade agenda: “Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!!”
The consequences have been swift. Investors are fleeing dollar assets. The Euro has hit a three-year high against the greenback, up about 5 per cent in just weeks.
Across Europe, and especially in Paris, the excitement is palpable. Is this the moment the Euro has been waiting for?
Emmanuel Macron certainly thinks so. The French President has called for Europe to assert its “monetary sovereignty” and reduce reliance on the “unpredictable” US dollar. He has reportedly quizzed the European Central Bank about opportunities to elevate the Euro’s global status.
European leaders have long fantasised about the Euro rivalling and potentially replacing the US dollar as the world’s leading currency. Yet despite the US dollar’s troubles, one should remain sceptical about the Euro’s readiness to take over.
French politicians had long resented what Charles de Gaulle called the dollar’s “exorbitant privilege” – the advantage the US enjoys from issuing the world’s reserve currency. When Jacques Delors spearheaded monetary union, he saw it as Europe’s path to financial independence. He famously predicted that “le petit Euro deviendra grand” – the little Euro would grow up to be big.
That prediction has, at best, been only partially fulfilled.
Today, the Euro accounts for roughly 20 per cent of global foreign exchange reserves. The dollar? Almost 60 per cent. This ratio has remained stable since the Euro’s birth in 1999. In commodity markets, from oil to metals, prices are still quoted in dollars. Global trade, especially beyond Europe’s borders, continues to be predominantly dollar-denominated.
So, what explains the dollar’s persistent advantage over the Euro? In large part, inertia and network effects. Once a currency becomes embedded in global trade, switching costs are enormous.
But switching costs are only part of the answer. The Euro also suffers from structural weaknesses that stem from its unusual design as a multi-country currency.
The Eurozone is a monetary union without a fiscal union. It has a central bank but no central treasury. It has one interest rate policy but 20 different bond markets.
All this creates a fundamental problem: unlike US Treasury bonds, Euro-denominated sovereign debt comes with varying risk profiles. German Bunds are not the same as Italian, Spanish or Greek government bonds.
This fragmentation is the result of European politics. The Eurozone was designed to leave sovereignty with member states. This was not an oversight but a necessity – German and Dutch voters would never have accepted joint debt liability.
Even the EU’s pandemic recovery fund, which involved limited joint borrowing, was framed as a one-off emergency measure during Covid. Without permanence and scale, such initiatives cannot create a deep bond market that a global reserve currency requires.
Reserve currencies must offer ‘safe’ assets where central banks can park their money. Without a deep, liquid market of safe government bonds, no currency can command reserve status.
Macron understands this. Indeed, over his presidency, he has always pushed for the European Union to develop its own bond-issuing capabilities. He might hope to make progress on this plan with incoming Chancellor Friedrich Merz, now freed from Germany’s constitutional debt limitations.
But even if France and Germany cooperated on joint debt issuance, further obstacles remain. Other Northern European countries could still resist the idea of guaranteeing for Southern Europe’s borrowing. Capital markets remain fragmented. Europe’s banking union is incomplete. And Macron is a lame duck, with just two years left in office.
Meanwhile, Trump keeps undermining the dollar at every opportunity. He attacks Powell openly. His administration has floated radical ideas like a “Mar-a-Lago Accord” to deliberately weaken the dollar. Budget deficits are ballooning. This month’s tariffs will likely push up inflation while dampening growth.
Has any American president done more to jeopardise the dollar’s international role? Probably not.
Yet because of the Euro’s own design flaws, even Trump’s monetary vandalism may not lead to Macron’s dream of the Euro as the new dollar.
In any case, history teaches us that reserve currency transitions occur over decades, not years. The British pound’s replacement by the dollar after World War I took at least 30 years (and another World War).
The dollar eventually became dominant because it was backed by America’s industrial might, its military power and its deep financial markets. All three elements were necessary, and they reinforced each other.
Can the Euro replicate this? We may doubt it. Europe still lags the military capacity of the United States. Its productivity growth has stalled for decades. Its economy is barely growing. Its population is ageing. Its political unity remains fragile.
Europe is simply not in a position to run the world’s reserve currency.
Instead, we may see a more chaotic multipolar currency system. The dollar might weaken, but without a clear successor. The Euro could gain some ground, alongside the Chinese renminbi, the Japanese yen, the British pound and even gold.
Small economies like New Zealand would face greater uncertainty in such a world, having to manage exposures across multiple reserve currencies.
In this scenario, and despite Macron’s ambitions, Europe’s currency will remain what it has been for a quarter-century: an important currency, but not a dominant one.
Europe is not a global leader, and it will not be home to the world’s leading currency.
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