Can the Euro Seize Its Global Moment?

For most of its quarter-century history, the euro has been the world's second currency: important, respected and firmly behind the dollar. This year, European policymakers have begun to talk about something more ambitious. As investors reacted to US tariff shocks and questions about American institutions by selling dollars, senior officials at the European Central Bank argued publicly that the euro could take on a larger global role, if Europe makes the necessary changes. The euro has risen sharply against the dollar since January. The question is whether a cyclical rally can become a structural shift.

Why now

The case for a larger euro role rests partly on developments in Washington. The dollar's appeal as a safe haven depends on predictable policy, independent institutions and open markets. This spring's tariff announcements, public pressure on the Federal Reserve and concerns about US fiscal policy led some investors to question those assumptions. At the same time, Europe has made decisions that improve its own prospects. Germany loosened its constitutional debt brake in March to allow much higher spending on defense and infrastructure, and the EU has discussed joint financing for defense.

These moves matter because the euro's biggest weakness has always been the absence of a large, unified pool of safe government debt. US Treasuries form a single market worth tens of trillions of dollars. The euro area has many separate government bond markets, each with its own credit risk, and a smaller but growing volume of EU-level bonds issued mainly to fund the pandemic recovery program.

The strengths

The euro has real advantages. The euro area is one of the largest economies in the world, with a central bank that has a strong record on price stability and legal institutions that investors generally trust. The euro is already the second most important currency in reserves, payments and trade invoicing. It is widely used in trade between Europe and its neighbors, and it plays a central role in parts of Africa and Eastern Europe.

Europe's regulatory approach may also be an asset. The EU's Markets in Crypto-Assets regulation has provided a clear framework for crypto and stablecoins since 2024, and the ECB is preparing a digital euro, which it sees as a way to preserve monetary sovereignty in the digital age.

The obstacles

The obstacles are well known and difficult to overcome:

• Fragmented safe assets. Without a large, liquid market in common euro area debt, global investors lack an equivalent to US Treasuries.
• Incomplete capital markets union. Europe's financial markets remain divided along national lines, with different rules and limited cross-border integration.
• Political divisions. Decisions on joint borrowing and fiscal integration require agreement among member states with very different views.
• Security dependence. A currency's global role is often linked to military and geopolitical power, and Europe still relies heavily on the United States for security.

A currency does not become global because others stumble. It becomes global because it offers something they cannot find elsewhere.

The capital markets problem deserves particular attention. European companies rely much more on bank lending than their American counterparts, and equity and bond markets are smaller relative to the economy. Savings in Europe are high, but a substantial share flows into US markets in search of higher returns. Reports commissioned by the EU in 2024, including one on competitiveness led by a former ECB president, argued that Europe needs deeper and more integrated capital markets to finance its own investment needs. Progress on that agenda would help the euro's international role as a side effect, because foreign investors want a currency backed by a large and liquid pool of investable assets.

Supervision and legal harmonization are part of the same puzzle. Differences in insolvency law, taxation and market supervision make it harder for investors to treat the euro area as a single market. Several of these reforms have been discussed for more than a decade with limited progress.

The digital dimension

One area where Europe is trying to get ahead is digital money. The ECB has been preparing a digital euro for several years and has argued that it would give Europeans a public digital payment option independent of US card networks and technology companies. The project requires EU legislation, which is still under discussion in the European Parliament and among member states.

Stablecoins are a sensitive topic. Almost all stablecoins are pegged to the dollar, and the US Congress is moving toward a federal framework through the GENIUS Act, which passed the Senate last month. European officials have expressed concern that widespread use of dollar stablecoins in Europe could weaken the euro's role and the ECB's control over monetary policy. MiCA includes provisions to limit the use of non-euro stablecoins for payments, and some European banks are exploring euro-denominated tokens, but euro stablecoins remain a tiny fraction of the market.

What would success look like?

A realistic goal for the euro is not to replace the dollar but to increase its share of reserves, trade and financial transactions over time. Indicators to watch include the euro's share of global reserves in IMF data, the volume and pricing of EU-level bond issuance, progress on capital markets integration, and the legislative path of the digital euro.

There are also risks. A strong euro makes European exports more expensive at a time when trade tensions are already high. And a larger international role brings responsibilities, such as providing liquidity to foreign banks in a crisis, which the ECB would have to accept.

An opening, not a guarantee

Europe has talked about a global role for the euro since the currency's launch in 1999, with limited results. What is different this year is that US policy has created a genuine opening, and Europe has shown some willingness to make fiscal changes it previously resisted. Whether that leads to a lasting shift depends on decisions in Brussels, Berlin and other capitals over the next few years. For now, the euro's global moment is an opportunity that has been identified, not one that has been seized. None of this is investment advice.