Euro Vs Dollar: Time For Europe To Step Up

As the global monetary landscape enters a period of fragmentation, the dominance of the US dollar is no longer absolute. Growing geopolitical fault lines, alternative payment systems, and increasing efforts by emerging powers to bypass dollar-based finance signal that the world is moving toward a more multipolar monetary order. For Europe, this is both a threat and an opportunity. The euro, despite being the world’s second most used currency, remains under-leveraged as a global reserve and transactional unit. The moment has arrived for the European Union to step up—strategically and systematically—to elevate the euro’s role and reduce its dependency on the US financial architecture.

The Euro’s Global Position: Second, But Not Equal

Since its introduction in 1999, the euro has established itself as a credible currency for trade, reserves, and debt issuance. It accounts for roughly 20% of global foreign exchange reserves and is widely used in regional trade and cross-border banking. Yet, when compared to the dollar—which still accounts for close to 60% of reserves and dominates in global invoicing, settlement, and funding—the euro's position is significantly weaker.

Part of the issue lies in structural limitations: Europe lacks a unified capital market, does not operate under a common fiscal authority, and has yet to complete its banking union. The result is a currency that enjoys credibility at the central bank level but lacks the financial system depth and cohesion needed to rival the dollar on a global scale.

The Risks of Dollar Dependence

Europe’s reliance on the dollar is not merely a technical inconvenience—it carries real economic and geopolitical costs. The extraterritorial reach of US financial sanctions has repeatedly placed European firms in difficult positions, as seen in the enforcement actions related to Iran, Russia, and other sanctioned jurisdictions. The reliance on dollar-based payment systems like SWIFT makes the EU vulnerable to unilateral decisions originating in Washington.

Moreover, eurozone economies remain exposed to spillover effects from US monetary policy. When the Federal Reserve tightens or eases, the ripple effects are felt across euro-denominated assets, often in ways that conflict with the European Central Bank’s objectives. This dependency constrains the EU’s ability to pursue independent macroeconomic strategies and weakens its strategic sovereignty.

A Strategic Opening

The weakening grip of the dollar is not only about American decline—it is about global realignment. China is accelerating the development of its own cross-border payment system (CIPS), while the BRICS bloc is exploring alternatives to the dollar for trade settlement. Several emerging market central banks are gradually diversifying reserves away from dollar assets in favor of gold, the renminbi, and—to a lesser degree—the euro.

Europe stands out as a region with the institutional maturity, political stability, and economic scale to offer a viable alternative. But doing so requires much more than passive alignment. It demands an active, coordinated policy push to close the credibility and infrastructure gaps holding the euro back.

What Europe Must Do

1. Capital Market Integration

At the heart of any global reserve currency is a deep, liquid, and unified bond market. The EU’s capital markets remain fragmented by national regulations, tax treatments, and liquidity barriers. Initiatives like the Capital Markets Union (CMU) must be accelerated and broadened. A single European debt market—mirroring the scale and depth of the US Treasury market—would dramatically enhance the euro’s appeal to global investors and central banks.

2. Completing the Banking Union

Europe’s banking sector is still defined by national boundaries when it comes to supervision, deposit guarantees, and crisis resolution. This undermines trust in the euro during times of financial stress. A complete banking union would increase cross-border confidence, improve risk-sharing, and promote resilience—critical prerequisites for a currency that aspires to global status.

3. Enhancing Fiscal Coordination

The issuance of joint EU debt under the NextGenerationEU fund during the COVID-19 crisis was a turning point. But it must not remain an exception. A regular program of pan-European debt issuance would provide the kind of safe, scalable asset that reserve managers seek. Greater fiscal alignment would also reassure markets about the long-term cohesion of the eurozone.

4. Modernising Payment Infrastructure

The EU must accelerate the development of euro-based cross-border payment systems that reduce dependence on SWIFT and the US financial system. Initiatives like the European Payment Initiative (EPI) and the ECB’s TARGET Instant Payment Settlement (TIPS) must be expanded and made interoperable with international platforms. This is vital not just for autonomy, but for digital competitiveness.

5. Political Commitment

Ultimately, these changes require a clear shift in mindset among EU leaders: euro internationalisation should not be seen as a technical or academic exercise. It is a strategic imperative. The geopolitical climate demands that the EU reduce its financial exposure to external powers and assert greater control over its economic destiny.

The ECB’s Role: Facilitator or Bystander?

The European Central Bank has traditionally adopted a neutral stance on promoting the euro as a global currency. Its mandate prioritises price stability, not strategic influence. However, the ECB possesses tools that can directly support euro internationalisation: swap lines, reserve arrangements, collateral frameworks, and regulatory signaling. It also plays a critical role in shaping market infrastructure and liquidity provision.

As the central institution overseeing the euro, the ECB must take a more assertive role in aligning its operations with the broader objective of strategic financial autonomy—provided political institutions create the framework to support it.

The Cost of Inaction

Failing to act would leave Europe increasingly marginalised in a world where financial power is shifting eastward and becoming more fragmented. In a future global crisis, or under new sanctions regimes, Europe could again find itself constrained by rules it did not write. Worse, without action, the euro risks declining in relevance, becoming little more than a regional currency in a global contest for monetary influence.

Conclusion: A Currency Worth Leading With

The global financial system is evolving—and so must Europe’s role within it. The euro was conceived as a tool of integration and sovereignty. In a world of great-power competition and weaponised finance, its internationalisation is not a luxury. It is a necessity.

If Europe wants to shape the rules of the new monetary order, it must invest in the infrastructure, cohesion, and institutional depth required to lead with its currency. The erosion of the dollar’s status is not an automatic gain for the euro. It is an open door. But it is up to Europe to walk through it.

Author: Ricardo Goulart