For nearly eight decades, the United States has stood at the centre of the global financial system, with the dollar reigning as the undisputed hegemon of international currency markets. But for the past decade, the euro has maintained a comfortable yet unremarkable position, consistently holding around 20% of global foreign exchange reserves. But 2025 might just be the year when Europe’s single currency finally gets its moment in the spotlight.
The world’s most powerful economy is throwing a tantrum on the global stage, imposing ultra-high tariffs left and right. At the same time, its leader openly questions whether being the world’s reserve currency is even worth the trouble. Meanwhile, across the Atlantic, Europe is quietly getting its act together, with Germany, the continent’s economic powerhouse, finally loosening its purse strings for the first time in decades. It’s as if the US is voluntarily giving up the keys to the global economy, and Europe is standing ready to pick them up.
The story of the euro’s potential rise begins with America’s apparent retreat from global leadership. For decades, the US has enjoyed what economists call “exorbitant privilege”, the ability to borrow cheaply and print money that the rest of the world eagerly holds as reserves. It’s been a pretty sweet deal, but the Trump administration seems determined to throw it all away. The turning point came in April 2025, when Trump announced sweeping tariffs on dozens of countries that ran trade surpluses with the US. The market’s reaction was swift and brutal. Treasury yields spiked, stocks tumbled, and the dollar weakened, which is a combination typically seen in emerging market crises, not in the world’s largest economy.
This isn’t just about one bad policy decision. The US is systematically undermining the very foundations that made the dollar dominant in the first place: institutional stability, economic openness, and reliable governance. When you’re the world’s reserve currency, trust is everything—and trust, once lost, is incredibly hard to rebuild. While America retreats, Europe is experiencing a renaissance of sorts. The euro has already strengthened nearly 10% against the dollar in early 2025, with the British pound gaining 6.6% over the same period. But this isn’t just a temporary blip; it reflects a fundamental shift in how investors view the prospects of European assets versus American ones.
The catalyst for this newfound optimism is Germany’s decision to reform its infamous “debt brake”—the constitutional limit on government borrowing that has kept public spending artificially constrained for years. The German government is now planning a massive fiscal stimulus focused on defence and infrastructure, with the legislation expected to pass in March 2025. The debt brake reform is a gamechanger. After years of fiscal austerity, Germany is finally opening the spending taps, and the implications reach far beyond its borders. Higher government investment means better growth prospects, which in turn make euro-denominated assets more attractive to global investors. Several factors are aligning to create the euro’s best opportunity in decades to challenge dollar dominance. First, there’s the simple matter of relativity—currencies are, after all, relative assets. As US economic prospects dim due to self-inflicted policy wounds, European assets look increasingly attractive by comparison. The interest rate picture is also shifting in Europe’s favour. For years, US bonds offered both the highest yields and the best hedge against market volatility, a combination that was irresistible to global investors. But as US growth prospects deteriorate and policy uncertainty rises, European bonds are starting to look more attractive. German Bunds and UK Gilts actually performed better as hedge instruments during April’s market turbulence, suggesting that the traditional safe-haven role of US Treasuries might be eroding. There’s also a psychological element at play. After years of capital flowing out of Europe toward the US, global investors are massively overallocated to American assets. That imbalance has been built up over a number of years, and it will take a long time to reverse. This shift is just beginning to happen, and it has room to run.
But becoming a truly global currency requires more than just favourable market conditions. It requires the proper institutional infrastructure. Here, Europe has some serious advantages but also significant gaps to fill. On the plus side, the eurozone has much stronger macroprudential policy frameworks than the US, making it better equipped to handle the increased capital flows and asset price volatility that come with reserve currency status. The European Central Bank is a powerful, credible institution, and Europe’s rule of law remains robust, crucial ingredients for international monetary leadership. However, Europe still needs to address some fundamental structural issues. The single market in goods and services needs to be deepened, and the long-promised banking union and capital markets union remain incomplete. The fragmentation of European capital markets, where funding originates from a patchwork of diverse sources rather than a unified system, is a significant barrier to the euro’s international role. One intriguing possibility is for Europe to capitalise on its global leadership in climate issues. By invoicing climate-friendly products, such as electric vehicles and renewable energy equipment, in euros, Europe could create a natural demand for its currency while building up corresponding financial instruments. It’s a way to turn Europe’s green credentials into a monetary advantage.
The future of international currencies is increasingly about digital payments and central bank digital currencies (CBDCs). Here, Europe has an opportunity to leapfrog some of the existing dollar-dominated payment infrastructure. Rather than remaining dependent on US payment systems, Europe is exploring its own sovereign payment infrastructure, which is likely to involve a digital euro as a wholesale central bank digital currency (CBDC). This technological advancement helps gain monetary sovereignty. Control over payment systems is increasingly seen as a matter of economic security, and Europe wants to ensure it’s not at the mercy of American financial infrastructure.
Before getting too carried away with visions of euro dominance, it’s worth remembering that international monetary systems don’t change overnight. The euro has experienced several “moments” before and during the 2008 financial crisis, the eurozone debt crisis, and various periods of dollar weakness, but its share of global reserves has remained stubbornly around 20%. The challenges are real. European capital markets remain fragmented compared to the deep, liquid markets that make the dollar so attractive. Political unity, although stronger than in the past, remains a work in progress. And there are other currencies waiting in the wings; the Chinese yuan, for instance, though China’s capital controls and political system present their own barriers to international monetary leadership. Moreover, even if everything goes right for Europe, we’re not talking about the euro overtaking the dollar anytime soon. What we’re likely to see is a more gradual shift. Perhaps the euro’s share of global reserves will inch up from 20% to 25% or 30% over the coming years, while the dollar’s share declines from its current dominance.
What we’re witnessing might be the early stages of a new international monetary order. One that’s more multipolar, with several major currencies sharing the global stage rather than one dominant hegemon. The euro is well-positioned to be a significant beneficiary of this shift, especially if Europe can continue to strengthen its institutions and deepen its markets. The timing couldn’t be better. As America appears increasingly reluctant to provide the global public goods that come with reserve currency status, there’s a genuine opening for alternatives. The euro, backed by the world’s second-largest economy and a commitment to multilateralism and institutional stability, is the most natural candidate to fill at least part of that gap. Whether this potential is realised will depend on Europe’s ability to overcome its historical tendency toward fragmentation and bureaucratic paralysis. But with Germany’s fiscal reawakening, improving growth prospects, and the backdrop of American policy chaos, the stars might finally be aligning for the euro’s rise. The next few years will be crucial. If Europe can maintain momentum on institutional reforms while America continues to undermine its own monetary leadership, we might look back on 2025 as the year when the global currency landscape began its most significant shift since World War II. For the euro, it’s time to step out of the dollar’s shadow and into the spotlight.
Author: Anika Tasnim
