With the fall of the dollar, Europeans have an opportunity – can a euro be made a global currency?

Europe’s first reserve currency was Tetradrahmi, on which an owl was engraved. The symbol of wisdom was intended to inspire faith in the rulers of ancient Athens.

This bird still appears today in the Greek version of the currency 1 €.

Tetradrahmi is not only known for this among modern economists. As Barry Eichengreen points out of the University of California, Berkeley, throughout history, every main currency has belonged to a republic or democracy.

And Athens was a democracy. The restriction of the power of the most powerful people through the vote of the people, promises a degree of sustainability, which, along with a large economy and military power, is a key component for each currency.

The lack of such endurance today in America is pushing investors and politicians to question the role of the dollar as world reserve currency.

In these times of difficulty for the dollar, can it top the euro? Christine Lagarde, President of the European Central Bank (ECB), and Paschal Donohoe, the head of the Eurogroup, have recently spoken about how the international currency role could increase.

The euro is not yet ready to replace the dollar. But it can play an increasingly important role. And if this affordable case is used well, Europe can benefit from changes in global financial order.

Since birth in 1999, the euro has been a contender for global status. On the eve of the 2007-09 financial crisis, European officials hope that over time, the currency could rival the dollar.

Then came the 2010s euro crisis. The ECB was not created to be a lender of the latest opportunity, which increased the risk of government bond sales.

Europe’s banking system was divided along national lines and prone to crises, as a result of poor bonding between shaky sovereign debts and even more shaky financial institutions.

Capital markets were too small to compensate for such a risk. The Eurozone provided a few safe assets for those who were looking to « parked » the money: bond emitters were either too frugal (as in the case of Germany) or had no credibility (as in the case of Italy and Spain).

Common debt, supported by the entire block, existed with difficulty. The gloomy prospects of economic growth then forced the short and long term Yields to go below zero.

European assets provided low profit returns, so there was little demand for the euro and was not about an international currency role.

Switching

Today, the euro is secondary, but far from the dollar, constituting one -fifth of the global reserves of the central banks, against the three fifths occupied by the green coin. Even in terms of emission of foreign currency bonds, there are similar figures.

Over the last decade, as the world has slowly left the dollar, the euro has found it difficult to gain ground. However, some European officials now believe this may change, for four reasons.

The first is that the eurozone’s financial architecture has become safer. The ECB has already taken on the role as a lender of the last opportunity, though not in theory. This began with the bank’s response to the euro crisis. At that time the institution was led by Mario Draghi.

During the Covid-19 pandemia, the bank created a bond purchase program, with a budget of more than 1.8 trillion ($ 2.1 trillion). When the Yields of Sovereign Bonds expanded greatly during the 2022 inflation, monetary officials created an unlimited bond buying scheme to prevent such differences from causing future crises.

Investors have also realized that the European Union will support governments in difficulty and do so in a generous way.

During the pandemic, the Bloc established a recovery plan worth 807 billion euros, funded by the EU Joint Debt, to help countries in difficulty.

Moreover, the ECB is overseeing the 114 largest banks of Europe, which together hold 82% of the total banking assets of the continent.

Also, investment in Europe has become more direct, a second reason for optimism. The European Pandemia Recovery Fund created many common debts, and secure European assets. Germany is ready to start spending large amounts, through a deficit funded from the entire continent for protection costs.

The third reason is that Europe’s institutions now look more attractive, at least when compared to America. Strict right -wing parties are popular and are gaining ground in places like Germany and France.

One is in power in Italy. However, at the same time, the euro is the common currency of 20 sovereign states and has an extremely independent central bank that oversees it. Members must unanimously agree on any changes in the way of currency governance.

Moreover, sanctions on other countries would seek the consent of 27 EU members. The rule of law is essential in the EU. The balance and control of power are not in doubt.

The block is prevalent that the EU should be as open to trade and foreign investment as possible.

The ECB has created a framework for providing liquidity in euros for countries outside the eurozone, which may be more attractive to crisis-hit countries than the US Federal Reserve rules if Trump continues with current politics. No one wants to give the US president more influence.

Old continent, new tricks

There is also one last reason for optimism: the state of international trade. While America is withdrawing from global trade, Europe will play a more important role.

The goods and services billed in the euro will create secondary markets in this currency, such as trade financing, insurance and protective derivatives for interest rates and currencies.

Although currency derivatives outside the stock exchange continue to be dominated by the dollar, the interest rate derivatives in the euro have recently passed them in the green currency.

New trading links will also lead to the creation of credit accounts and deposits in euros, around the world.

These, in turn, will increase the demand for euros and then for reserves of central banks in the euro, as any lender of the last opportunity must maintain reserve currencies held by domestic financial institutions.

Europe has the chance to take the lead in a new liberal trade order, which would create opportunities to change the financial system. European Commission President Ursula von Der Leyen notes that « many countries around the world want to work with us ».

According to the ECB research, in the 2000s, Eastern eurozone neighbors began billing euro trade due to closer trade links with the block; Now the same phenomenon can spread elsewhere. Capital usually follows geopolitical extent.

Research by Elisabeth KEMPF and co -authors at the University of Chicago find that asset managers and banks invest less in states led by government with political tendencies other than them.

However, these opportunities will not fall to the Europeans. Difficult reforms will be needed.

First, countries with high debt, in particular France and Italy, must promote economic growth in order to have fiscal sustainability, rather than adding the pile of investable bonds simply to keep their budgets.

Germany, the Netherlands and the Scandinavian countries face the opposite task: they must use the fiscal space for investment in order to create safe assets.

Economic growth across the EU would help increase assets in the euro, including government bonds and making them even more attractive.

Europe also needs larger and deeper markets of capital to give investors more assets. Politics have so far focused on easy benefits as they are trying to connect the divided national markets together.

They are dealing with more issues such as the asset provision process, instead of more controversial topics, such as harmonization of bankruptcy laws and business regulation.

ECB’s plans to connect third countries with its internal payment system must progress faster. The creation of the digital euro would also help here.

European officials want to make the continent less dependent on America and China. A more international euro would reduce borrowing costs for national governments, which would be extremely useful at this time of increasing protection costs.

For now, few European politicians have publicly expressed such ambitions because they know that this would provoke the anger of the Trump administration. But that doesn’t matter.

International finances operate according to certain rules and do not need magnificent speeches. Just ask the Athenians.