Trump has created an opportunity for the euro to rival the greenback | USAEMALL.com

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It has long been an EU aspiration that the euro would rival the US dollar for global dominance, or at least for monetary sovereignty at home. Now, the self-sabotage of Donald Trump’s Washington is a golden opportunity to realise the dream — if European leaders can overcome their political timidity over doing what it takes to grasp it.

True, as in many areas of economic policy, it is unclear what the Trump administration’s goals are for the greenback. Some of its members think the dollar’s attraction — the “exorbitant privilege” of guaranteed cheap credit from the rest of the world — is in fact an exorbitant burden that, by driving up the currency, depresses American manufacturing. Others, notably Treasury secretary Scott Bessent, insist the US is committed to a strong dollar policy.

There is also a push to corner the nascent market for cross-border payments via dollar stablecoins, creating another captive source of US Treasury holdings.

The administration may not have made its mind up, but investors are increasingly making up theirs. Trump’s “liberation day” tariffs were followed by a highly unusual market reaction to a rise in global risk: a sell-off in both US Treasuries and in the dollar more broadly. At least for now, global money managers are no longer treating the greenback as the ultimate haven.

Confidence in the dollar has taken a knock from Trump’s tariff policy, but also from his team’s airing of bizarre financial policy ideas. These include forced conversion of Treasury bonds or charging fees for the privilege of lending to the US government. The administration’s aggression against the rule of law makes all legal claims uncertain, including financial ones.

Can European leaders hear the markets’ scream for help in the form of an alternative asset? If ever the time was ripe for a “Hamiltonian moment”, in which Eurozone countries issued a large and permanent stock of common debt to gradually replace the fragmented landscape of national sovereign bonds, this is it. Global investors would lap up a large-scale and liquid Eurozone safe asset.

The politics for this, needless to say, are not in place. But simpler steps could be taken in short order to exploit US errors as a European opportunity. First, put off the scheduled paying down of pan-EU debt taken out to bankroll the post-pandemic “Next Generation EU” fund. This debt stock, meant to decline over the 30 years to 2058, should be rolled over indefinitely instead.

Second, consolidate the various stocks of debt already issued with the joint backing of EU member states. A single issuer and set of bonds could over time replace the jigsaw of national bonds, as well as cover all new ones, such as those for the mooted pooling of €150bn in defence spending.

Third, the EU could pre-fund future spending. Over the next two years, member states will negotiate a seven-year budget of well over €1tn. Borrowing ahead of time could be calibrated to maintain a stable, large total EU debt stock.

Such initiatives would help satisfy demand for holding large amounts safely in euros and give assurance that the EU was committed to a deep and liquid euro asset market for the long run. That should lower European borrowing costs just as member states gear up for more investment in defence and industrial policy.

The change in relative safety of the dollar and euro assets is not the only driver favouring the latter. Historically, global businesses’ choice of invoicing and funding currencies in international trade have preceded countries’ choice of reserves denominations. Ask yourself this: if you stopped trading with the US, would you need to hold its currency? And if Trump eliminates everyone’s bilateral surplus with the US, how would they keep accumulating net claims on US assets? 

In other words, the global trade outlook matters for currency questions, too. Europe can use its agenda to deepen trade with the rest of the world to boost the euro’s attractiveness. That requires not just taking the agenda seriously — passing the trade deal with the Mercosur bloc, for example. It also demands offering financial tools to encourage trading in euros, from swap lines with trade partners to a digital currency designed to work for cross-border corporate trade. Unifying stock markets and a pan-EU so-called “28th regime” of corporate law should help boost risk capital in euros.

These measures are mostly well known, but political impetus has been lacking. What is needed is for leaders to see their connection to the geopolitical goal of autonomy from US caprice, to understand the urgency today.

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