Executive Summary
- European Union efforts to elevate the euro’s global influence are largely stalled, hindered by national divisions, competing priorities, and a lack of political consensus on key reforms despite calls from ECB President Christine Lagarde.
- Key initiatives such as jointly issued euro-denominated debt, centralizing capital market supervision, and legislation for a digital euro face significant resistance from member states, contributing to market fragmentation and slow progress.
- Due to the entrenched resistance to necessary reforms, the euro is not expected to challenge the dollar’s dominance in the near term, with its current focus on strengthening its position as the world’s second-most-favored currency, albeit at a slow pace.
The Story So Far
- The European Union’s long-standing ambition to elevate the euro’s global influence, viewed as crucial for protecting its economies, is consistently hampered by deep-seated national divisions and competing domestic priorities among member states. These internal obstacles have repeatedly stalled key reforms, such as creating jointly issued “safe” euro-denominated assets, centralizing financial supervision, and launching a digital euro, even when external pressures, including those related to President Trump’s policies, underscore the need for a stronger, more unified currency.
Why This Matters
- The European Union’s ambition to elevate the euro’s global influence is significantly undermined by national divisions and policy inertia, stalling crucial reforms like jointly issued debt, centralized financial supervision, and the digital euro. This lack of consensus, despite geopolitical concerns including President Trump’s trade policies, means the euro’s ability to challenge the dollar’s dominance or provide greater stability for EU economies remains limited, leaving the bloc more vulnerable to external economic pressures and delaying essential financial market integration.
Who Thinks What?
- ECB President Christine Lagarde and advocates for a stronger euro believe that significant reforms are crucial to enhance the euro’s global standing and express disappointment over the lack of political consensus and slow progress on these initiatives.
- EU national governments, including fiscally conservative northern nations, resist proposals for jointly issued euro-denominated debt and centralized supervisory powers, citing concerns over shared liability, national sovereignty, and potential negative impacts on national banking systems and markets.
The European Union’s ambition to elevate the euro’s global influence is encountering significant headwinds, with national divisions and competing priorities hindering key reforms. European Central Bank (ECB) President Christine Lagarde, who in late May advocated for a “global euro moment” amidst concerns over President Trump’s trade policies, has expressed disappointment regarding the lack of political consensus needed to bolster the single currency’s international standing, according to sources familiar with her thinking. Four months after her appeal, and a year since her predecessor Mario Draghi’s proposals, measures intended to strengthen the euro’s appeal to investors are largely stalled, reflecting a pervasive sense of policy inertia across the eurozone.
Stalled Reforms Amidst Competing Priorities
Despite the euro’s status as a tangible achievement for the EU, national disagreements and pressing issues such as the war in Ukraine and domestic political turmoil are overshadowing efforts to enhance its global role. Interviews with eurozone officials, central bankers, and Brussels-watchers reveal that proposals for jointly issued euro-denominated debt, centralizing supervisory powers, and establishing a clear framework for a digital euro have faced considerable resistance.
Enrico Letta, Italy’s former prime minister, observed a “Europe divided,” struggling to manage multiple crises simultaneously. This fragmentation risks undermining the EU’s goal of fortifying its export-driven economies against global economic fluctuations and potential sanctions by strengthening the euro’s presence in trade and global reserves.
The Quest for Safe Assets and Market Integration
A primary challenge for the euro is the scarcity of a sufficiently large stock of “safe” euro-denominated assets for investors. The eurozone’s outstanding government bonds, totaling approximately $13 trillion, are significantly dwarfed by the $30 trillion U.S. Treasury market. While German government bonds are widely considered safe, the same confidence does not extend to all member states’ debt, contributing to market fragmentation.
Proposals for jointly guaranteed “blue bonds,” first mooted in 2010, have consistently met resistance from fiscally conservative northern nations, who are reluctant to share liability with southern European countries. Even the COVID-19 pandemic-era Next Generation EU (NGEU) recovery fund, an 800-billion-euro joint debt initiative, was seen as a one-off, failing to set a lasting precedent for shared liabilities.
More recently, the impetus to fund European defense initiatives, spurred by President Trump’s questioning of NATO, presented another opportunity for jointly issued debt. However, German Chancellor Friedrich Merz opted to loosen Germany’s national “debt brake” for defense spending, keeping control firmly within Berlin. At a subsequent meeting in Warsaw, proposals for joint arms procurement borrowing were met with skepticism from Germany and France, who cited concerns over financial specifics and national sovereignty, respectively.
Fragmented Markets and the Digital Euro
The fragmentation of Europe’s capital and banking markets across multiple national jurisdictions remains a significant obstacle. Efforts to create a Capital Markets Union, aimed at aligning national rules on bankruptcies, public offerings, and tax treatments, have seen slow progress due to concerns among EU capitals and bankers about shifting decision-making power to EU agencies.
Lagarde’s suggestion to extend the powers of the European Securities and Markets Authority (ESMA) to create a European equivalent of the U.S. Securities and Exchange Commission (SEC) faced opposition, particularly from smaller states like Luxembourg, Malta, and Ireland. While a networked approach for ESMA, with national offices, might gain more traction, the broader goal of centralizing market and securities supervision faces considerable headwinds.
On the digital front, the proposed legislation for a digital euro has been stalled for over two years. Concerns from banks and lawmakers about potential drains on bank deposits, high setup costs, and a lack of clear purpose have hampered its progress. Despite a recently agreed roadmap for its launch, the earliest approval is mid-2026, with several more years required for technological implementation. Lagarde has reportedly voiced disappointment over the slow pace, acknowledging it would not be ready by the end of her term in 2027.
Long-Term Outlook for the Euro’s Global Standing
Given the entrenched resistance to necessary reforms, a near-term challenge to the dollar’s dominance by the euro is not anticipated. The focus remains on strengthening its position as the world’s second-most-favored currency. Some argue that simply emphasizing the EU’s commitment to the rule of law and the independence of the ECB could be sufficient to enhance the euro’s appeal.
A May survey by the Official Monetary and Financial Institutions Forum (OMFIF) indicated that 16% of central banks plan to increase euro holdings over the next 12-24 months. However, the survey also noted that gold and, in the long term, China’s yuan, were seen as primary beneficiaries of diversification away from the dollar. ECB President Lagarde, despite the slow progress, remains committed to her push, urging Europe to address “chinks in the armour” of its geo-economic standing, albeit acknowledging the process is “possibly too laboriously and too slowly.”
