Will the euro acquire global wings?

We’re in the throes of watching the American century end and a new multipolar order come into being. The EU is looking to boost the euro’s reserve currency role in response. What part for the UK?

It's hard to recall but almost exactly 13 years ago - 26 July 2012 - Mario Draghi, then president of the European Central Bank, solved the euro (and sovereign debt) crisis by pledging to do "whatever it takes" to save the single currency. As French president Emmanuel Macron pays a state visit to the UK, the talk is instead of the euro challenging the US dollar as the reserve currency par excellence.

A bit of a turnaround for the currency launched 26 years ago - on 01 January 1999 - but conceived at least three decades before. Macron is a key proponent of the euro's global role as he pushes for a significant extension of EU joint borrowing along the lines of that seen under #NextGenerationEU and related programmes to reboot the European economy during and after the Covid-19 pandemic.

Another albeit unwitting proponent is Donald Trump whose labile economic and reckless fiscal policies, not least on trade and tariffs, and ill-judged attacks on Jay Powell, Federal Reserve chairman, have undermined confidence in the dollar which is down 14% against the euro this year alone. Once down to parity with the US greenback the euro is now at $1.17 after briefly touching $1.18.

This American volatility has not gone unnoticed in the Global South and the BRICS which, now 11-strong and accounting for going on half the world's population, said goodbye to globalisation and noted what Brazil's president Lula called the "unparalleled collapse of multilateralism." They also discussed a new cross-border payments system although some participants downplayed any idea of a common currency or of conspiring to unseat and/or replace the dollar.

Nevertheless, even as Trump's belligerent, bombastic threats on tariffs, including on the BRICS (and EU), swing back and forth, Lula nailed the US president as a would-be "emperor" trying to impose his will on the entire world. Ironically, Trump's tergiversations on trade only serve to underline that the end of the American empire aka the post-1945 liberal world order is upon us and in its last throes.

Europe: economic giant, political dwarf

My last post highlighted conservative US/European views of the EU as a third-rate, quasi-basket-case economy, falling heavily behind dynamic American and Chinese rivals, notably as regards productivity and innovation. Despite the emergence of some European unicorns ($1bn start-ups), Europe has been unable to produce the giant tech companies to rival the likes of Amazon, Meta or Tencent or Alibaba. And it's lagging behind Korea, say, in terms of R&I as a share of GDP. Its capital markets, despite long-standing efforts to promote greater integration, remain fragmented, often along national lines.

The EU recovery post-Great Financial Crisis (2008) and pandemic has indeed been less than stellar. But many of the stats used simply ignore the currency effect. But, at least according to some commentators, it has performed well in terms of output growth per capita/worker/hour, out-punching then US. However, in 2008 - often used as the baseline - the EU economy outperformed the US in size because the euro was worth €1.47 compares with just €1.05 in 2022...On a purchasing power parity (PPP) basis the EU's share of global GDP has been declining but then, so has the USA's albeit at a slightly reduced rate - reflecting the rise of China, other BRICS and emerging markets as a whole.

What is indisputable is that, despite myriad policy papers arguing for a much greater presence, Europe's geopolitical clout is significantly less than that of the US, China and, arguably, Russia...What role does it have in the Gazan tragedy other than to look away helplessly? Can it fill the gap in Ukraine left by the US withdrawal under Trump? Its divisions are obvious (ironically, France and the non-EU UK are much closer together on this score). But, geo-economically, it can still punch its weight and the incipient proposals for a greater currency role reflect this.

A global euro

In recent years the dollar's role as global reserve currency has shrunk - from 65% to 58% in the past decade. Admittedly, the euro's share of foreign exchange reserves remains stagnant at around 20% but the environment for that to rise is more favourable now. The recent One Big Beautiful (budget) Bill or BBB Act passed by the US Congress will raise American debt by more than $3trn - up to and beyond Italian levels. The debt-to-GDP ratio at 124% already surpasses the 89% of the eurozone. The budget deficit is 7.3% and rising despite the influx of tariff bounties.

That's why people like Kristalina Georgieva, (Bulgarian) managing director of the IMF, are saying: " There is a great opportunity for the euro to play a bigger role globally..." while Christine Lagarde, Draghi's successor, talks of "a global euro moment." " By eroding free trade, shaking global alliances, undermining the independence of the Federal Reserve and threatening to weaponise the dollar for political purposes, it (Trump 2.0) has prompted the world to question whether the dollar is still a safe bet. This should be a wake-up call for the euro area," Yannis Stournaras, Greek central bank chief, told the Economist.

So, what's stopping them? Several eurozone members, most recently Denmark and Finland, are inimical to joint debt ("those profligate southerners...") - unless it's for rearmament. Germany under Friedrich Merz is now happy to lift the debt brake (Schuldbremse) at home but not elsewhere in Europe. Far too much of EU trade is, ironically, invoiced in dollars. There's been talk of completing the capital markets union since before I "retired" from Brussels a decade ago but zero evidence of the will to do so. If only it were a case of "reculer pour mieux sauter!"

Macron is urging the UK and the EU-27 to, at the very least, reduce its dual dependencies on the US and China. “We want an open world. We want to co-operate, but not to depend,” he said. That's an easy given. But some of us are keen to see the EU's faltering steps replaced by a more confident stride. The first six months of Trump 2.0 have proven there can be no more European reliance on the US in a world rapidly dismantling the "American century" and moving into a multipolar, shifting array of competing/co-operating blocs. Even if the UK cannot join the drive to turn the euro into a reliable, stable reserve currency it can and should support the move and end its deluded transatlantic fixation once and for all.