As the dollar wobbles, why has there not been more flight to the euro?
Amid rising US debt, trade tensions, and geopolitical conflict, questions are mounting about the long-term dominance of the dollar. In June, European Central Bank President Christine Lagarde said we are “witnessing a profound shift in the global order,” one which offers opportunities for “the euro to gain global prominence.” She is not alone in this view. As volatility grows, many are asking if the euro could offer a credible alternative to the dollar.
There are compelling reasons to believe the euro could play a larger international role. It currently accounts for 20 percent of global foreign exchange reserves—a share it has maintained steadily, even as the dollar’s share has declined. The euro is also used to invoice 40 percent of global trade.
The current global climate plays to the euro’s advantage, as countries facing high tariff rates seek to diversify away from the dollar. A new wave of free trade agreements by the European Union (EU) could boost euro-denominated trade and gradually shift investor preferences toward euro assets. Additionally, with concerns around the politicization of the US Federal Reserve, the European Central Bank’s high degree of independence and institutional credibility may attract investors seeking stability.
So far, however, there has not been a global rush to the euro. This serves as a good reminder that a weak dollar does not immediately equate to a decline of dollar dominance. But it also raises a critical question for the euro’s international ambitions: If not now, then when, and under what conditions? Many factors underpin currency dominance, and not all are in immediate reach for the euro. However, it is worth exploring what is realistically achievable for the euro.
Limited supply of safe euro assets
Lagarde has emphasized that the euro remains “underdeveloped” as a reserve currency. One major reason is the lack of scalable, safe euro-denominated assets—a role that the US Treasury market has long played for the dollar.
When combined, the eurozone government bond market stands at around eleven trillion euros, which is roughly half the size of the US Treasury market, but it is fragmented across member states with different credit ratings, political dynamics, and liquidity profiles. While Germany’s Bunds dominate the AAA-rated space (€2.25 trillion), they are not issued in volumes comparable to US Treasuries. Supranational bonds remain limited in size and are often tied to specific projects or crises, such as the NextGenerationEU program, or potentially Europe’s defense spending, which Lagarde has suggested could be a joint safe asset.
The EU structurally incorporating joint debt could improve this. It would create a safe euro-area asset, lower borrowing costs for weaker EU economies, and strengthen the bloc’s crisis response capacity. But so far this has faced political resistance, with some member states wary of debt mutualization, moral hazard, and erosion of national fiscal sovereignty.
But the question is not only whether the EU can issue more debt. It is also whether it should. While the global role of US Treasuries has contributed to the dollar’s dominance, it has also encouraged the United States to rely heavily on debt issuance. This has led to chronic fiscal deficits and a high and rising debt-to-gross domestic product (GDP) ratio.
The “exorbitant privilege” of issuing the world’s reserve currency can cause structural imbalances and debt problems, and the EU already has enough of both. Under the current fiscal governance framework, the Stability and Growth Pact stipulates that EU countries should not accumulate public debt above 60 percent of GDP. In practice, however, many member states have breached this ceiling, with the average debt-to-GDP ratio standing at 81 percent in 2025. While this remains below the US public debt amount of 124 percent of GDP, the Economic and Monetary Union depends on member states pursuing sound fiscal policy for the effective transmission of monetary policy, as the ECB has repeatedly emphasized.
If policymakers in the eurozone want the euro to play a greater global role, they must do so on more sustainable terms. This means building scalable and trusted financial instruments, yes, but without falling into the trap of excessive debt-fueled growth.
Fragmented capital markets
Another major obstacle to a global euro is the lack of a unified capital market. Despite launching the Capital Markets Union initiative in 2014, progress has been slow. European financial markets remain fragmented along national lines, with different legal systems, tax codes, insolvency regimes, and regulatory standards.
This fragmentation discourages cross-border investment and hampers the EU’s ability to mobilize domestic savings for productive investment. In 2023, €11.6 trillion of private wealth—about a third of total EU household wealth—sat idle in bank accounts and cash, while roughly €250 billion flowed to deeper markets such as the United States.
Following the September 2024 competitiveness report by former European Central Bank President Mario Draghi, which warned that the EU would fall behind the United States and China without increased investment, there has been a renewed push to complete capital markets integration. The European Commission has proposed a savings and investments union aimed at channeling more domestic capital into strategic investments. Central to this effort is the push to strengthen EU-level financial supervision, giving the European Securities and Markets Authority powers similar to those of the US Securities and Exchange Commission.
Despite political opposition to this by smaller states such as Luxembourg and Ireland, who see risks in outsourcing the supervision of their highly developed financial sectors, this remains one of the most promising strategies for strengthening the euro’s global role. Integrated capital markets would allow capital to flow to where it is most productive, mobilizing European savings and attracting foreign investment. This would bolster economic growth and deepen global holdings of euro assets, boosting its use in reserves, trade, and finance. Additionally, stronger capital markets would mean more international companies could issue debt in euros, use euro-backed derivatives, and denominate contracts in euros.
Don’t bet the house on the digital euro
The digital euro has been touted as a way for the euro to gain ground internationally. European policymakers view it as a tool to reduce dependence on dollar-denominated payment systems and strengthen the euro’s international role. But the digital euro is not a silver bullet, and its proposal still lacks political momentum, having been stalled in the European Parliament for more than two years.
At the retail level, the EU faces stiff competition from payment networks dominated by US credit card companies. A digital euro could diversify the system, but only if widely adopted—something that hinges on incentives and user experience. Wholesale applications hold more potential, particularly as financial markets move toward tokenization, or the digital representation of assets. But this will take time and depends heavily on cross-border coordination.
While the digital euro may improve payment efficiency and enhance monetary sovereignty, it will not resolve the structural constraints holding back the euro’s global ascent. Deep and liquid capital markets, large-scale safe assets, and a unified political strategy still matter far more.
External pressures on euro growth
In addition to internal constraints, the euro also faces external challenges—most notably from China. Chinese firms have expanded into strategic sectors, such as electric vehicles (EVs), renewable energy technologies, and specialized machinery—areas where European companies, particularly German ones, have traditionally led. Facing overcapacity, a slowing domestic economy, and escalating trade tensions with Washington, Beijing is increasingly redirecting its industrial surplus toward Europe. At the same time, Chinese firms are outcompeting European manufacturers in global markets, and China is buying fewer high-value European exports as it develops its own capabilities. This poses a direct challenge to Europe’s export-led growth model, particularly for economies such as Germany’s, where manufacturing and trade surpluses are foundational. The resulting pressure on Europe’s industrial base threatens to erode the real economic strength that underpins the euro’s credibility as a global currency.
The EU has recognized the need to “de-risk” from China, and it has taken important steps to do so, including the Critical Raw Materials Act, the Foreign Subsidies Regulation, and anti-subsidy probes into sectors such as EVs and solar panels. However, many of these efforts remain underfunded, reactive, or politically fragmented. Meanwhile, the EU’s trade defense and investment screening instruments are constrained by limited enforcement capacity and a narrow focus on specific companies rather than systemic risks. This has allowed China to continue to find workarounds.
To safeguard the euro’s international position, EU member states need to align on a coherent de-risking strategy and commit to an EU-wide industrial policy including bold investments in European green and digital technologies. Divergent national interests—Germany’s dependence on China, France’s reluctance to antagonize China, and southern and eastern Europe’s preference for engagement—have thus far weakened Europe’s collective leverage and have blunted its policy response. If the EU fails to act cohesively, then it will not only lose ground in strategic sectors but risk diminishing the euro’s credibility as a stable, globally relevant currency anchored in real economic strength.
A political union without political unity
While each of these issues has technical dimensions, they are all ultimately political. Fundamentally, the euro’s global ambitions are constrained by the EU’s institutional design: a monetary union without a true fiscal or political union. Each member state has its own priorities, domestic constituencies, and red lines—making consensus slow and hard-won.
The EU has shown it can act boldly in times of crisis, overcoming these divisions. But once the immediate danger passes, momentum stalls. Even now, with rising national security threats and trade tensions pushing EU member states closer together, the prospects of a stronger euro and deeper integration are falling victim to the familiar pattern of national vetoes, legal ambiguities, and competing visions for the EU’s future.
The European Central Bank and the European Commission can promote initiatives, but without member-state alignment, implementation will be piecemeal. The EU has many of the ingredients for a globally dominant currency, but it cannot rely on crises alone to drive change. To make the euro truly global, EU members would need to align political priorities around a shared strategic vision.
Lize de Kruijf is a program assistant within the GeoEconomics Center’s Economic Statecraft Initiative and she previously worked for the Dutch Ministry of Foreign Affairs in the International Trade and Enterprise department.
Further reading
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Image: Several 100 euro bills are lying on a table. (Karl-Josef Hildenbrand/dpa via Reuters Connect)
