Euro Seeks Stronger Global Role Amidst Shifting Order
The euro is at a pivotal juncture as the global monetary system faces fragmentation and increased competition. Although the U.S. dollar continues to dominate, its supremacy is being challenged amid geopolitical tensions and trade conflicts, potentially opening new opportunities for the euro.
Europe’s Opportunity
Europe has the chance to establish the euro as a reliable anchor of global stability, but this requires focused and coordinated policy actions, more than just relying on market dynamics. According to **Christine Lagarde**, President of the ECB, this is a global euro moment.
Building on Resilience
Despite economic shocks from war and inflation, Europe’s economy demonstrates growth and resilient institutions. Inflation has been brought back to the target of around 2%. A recent ECB strategy assessment confirmed a symmetric 2% inflation target over the medium term, stressing the link between price and financial stability.
Navigating Trade Tensions
Recent exchange rate movements indicate a re-evaluation of the euro’s global role amid weaponized economic policies and elevated uncertainty. Renewed tariff threats have accelerated this shift, requiring a strong and coordinated response from the European Commission.
The Foundation of Trust
Despite China’s economic power, its currency lacks the necessary foundations for global trust: free capital flow, legal certainty, and political accountability. As **Barry Eichengreen** argued, trust, not size, is what establishes a reserve currency. The euro benefits from considerable trust, supported by strong institutions and macroeconomic stability. In fact, the Eurozone’s government effectiveness score is 0.91, according to the World Bank (World Bank 2023).
Strategic Thinking and Policy Choices
Trust needs constant renewal through strategic thinking and bold policy decisions. Europe must prove its decisiveness, especially in reinforcing its financial infrastructure and ensuring sound fiscal policies. Furthermore, the EU is progressing with the competitiveness agenda outlined in the **Draghi** Report, which aims to cut red tape, scale innovation, and integrate financial markets.
Three Key Priorities
To strengthen the euro’s international role, three priorities stand out: defense, competitiveness combined with the green transition, and digital sovereignty.
1. Defence: A European Public Good
The war in Ukraine highlighted Europe’s strategic vulnerabilities. While member states have increased defense spending, the risk of inefficiency remains without coordination. Coordinated defense investments can boost innovation and strengthen industrial resilience.
A strategically autonomous Europe is crucial for the euro’s credibility. While Europe cannot mirror the U.S. military power projection, it must ensure its economic strength isn’t undermined by strategic dependencies.
2. Competitiveness and Green Transition
The euro’s strength is tied to Europe’s economic dynamism, which requires greater investment and smarter regulation. Germany is now mobilizing funds for both defense and innovation, addressing previous underinvestment issues. The green transition also plays a key role.
Europe’s early move towards clean energy, battery technologies, and carbon pricing is a source of long-term competitiveness. By 2030, reduced dependence on fossil fuel imports will stabilize inflation and reinforce the euro’s credibility.
3. Digital Sovereignty and Resilient Payments
The rise of stablecoins and crypto-assets presents systemic risks, potentially fragmenting payment systems and undermining monetary sovereignty. Europe is pursuing a digital euro project to ensure access to legal tender in the digital age, complementing cash and prioritizing security and privacy.
The Eurosystem is also piloting wholesale financial transactions using distributed ledger technology (DLT) in central bank money, which is essential for resilient and sovereign infrastructure.
The Need for Euro Safe Assets
These priorities converge on the need for genuine euro-denominated safe assets, which are currently lacking. Creating a deep and liquid market for these assets would fund shared investments and reduce overreliance on the U.S. dollar.
A Call to Action
This is not about replacing the dollar, but about rebalancing the global monetary order. The euro can rise to the occasion if Europe acts decisively, understanding that safe assets, joint defense, the green transition, and digital resilience are interconnected.
