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The Euro's Moment: Can Europe Challenge the US Dollar?

Strategic Insights

— 2 min read

The policy choices of the Trump administration have left the US dollar's global reserve status in doubt, prompting a reconsideration of alternative currencies. European officials are now willing to explore the euro's potential as a global reserve currency, but structuring a viable alternative to the dollar is proving challenging. Moody's recent downgrade of US government debt has sent shockwaves through markets, making the euro a more attractive option. However, current policies prevent the euro from effectively competing with the dollar.

Key Takeaways:

  • The Trump administration's policies have put the US dollar's global reserve status in doubt, with Moody's recent downgrade of US government debt contributing to the uncertainty.
  • European officials are aware of the opportunity to challenge the dollar, but making a viable alternative a reality is difficult due to the complex nature of joint borrowing and differing tax policies across EU member states.
  • Experts Jens van 't Klooster and Steffen Murau have proposed a "how to build a reserve currency" guide, which focuses on the euro's role in global trade and payments and the importance of proactive efforts to push the euro as a unit of global trade.
  • Joint borrowing is challenging due to various authorities' reluctance to encourage the use of the euro beyond the borders and differing priorities across EU member states.
  • European officials, policymakers, and academics agree on the need for more political will to promote the euro's internationalisation and embed it firmly in the global financial system.
  • Experts warn that making the euro a viable alternative to the dollar will require significant efforts to enhance its global role, including creating more tradeable euro instruments and facilitating its use in supply chains.

Statistics:

  • The US dollar's global reserve status has been put in doubt by the Trump administration's policies, with Moody's recent downgrade of US government debt sending shockwaves through markets.
  • The euro is an attractive alternative, with 30-year sovereign bond yields exceeding 5% due to the easing of US fiscal regulation.
  • European Commission President Jean-Claude Juncker lamented the "puzzling lack of clout" of the euro in 2018, highlighting the importance of using the euro as a unit of global trade and payments.
  • The world's energy import bill is worth €300bn a year, with 80% paid in US dollars, despite only 2% of energy imports coming from the US.

Sources:

  • Kati Martin, "The policy choices of the Trump administration have emphatically put the dominance of the dollar's global reserve status in doubt", Financial Times, [direct link to original article]
  • Jens van 't Klooster, Steffen Murau, "Building a Reserve Currency", [cited paper]
  • European Commission President Jean-Claude Juncker, "It is absurd that Europe pays for 80 per cent of its energy import bill -- worth €300bn a year -- in US dollars when only roughly 2 per cent of our energy imports come from the US", [cited quote]

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