The Global Role of the Euro: Challenges and Opportunities

Introductory statement by Thorsten Beck, Vice-Chair of the Advisory Scientific Committee of the ESRB, at the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 14 April 2026

Introduction

Since its inception in 1999, the euro was widely expected to emerge as a premier global reserve currency capable of rivalling the US Dollar (USD). Decades later, that transition has not materialised. While there was an increase in the international role of the euro in the early years of this century, it declined significantly after the Global Financial Crisis. Currently, composite indices show a role of less than 20%.^[1] And while there has been a decline in the role of the USD as reserve currency (from 71% in 1999 to 59% in 2021), this shift out of dollars has been to a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries (Arslanalp et al., 2022), so the euro has not really benefitted from this decline.

While there are short-term fluctuations in the international role of the euro related to business and monetary policy cycles, I would like to focus on long-term trends but link this discussion to recent events and discussions. Importantly, the debate over the euro’s international standing has been reignited by the dramatic geopolitical and geoeconomic shifts of the past year.

To understand the euro’s potential, we must first define what a "global role" entails. It is multifaceted, encompassing a currency's use as a reserve currency for central banks, a funding currency for international debt and equity, and an invoicing currency for global trade.

Why the US Dollar Remains Dominant

To understand why the euro has struggled to gain ground, we must look at the pillars of USD dominance as global reserve currency:

1. Market Depth and Liquidity: US financial markets possess unparalleled depth and liquidity. US Treasuries are universally regarded as the global safe asset, supported by a dynamic and innovative economy.
2. Institutional Strength and Legitimacy: The US has historically offered a robust institutional framework characterised by strong property rights and rule of law, reliable contract enforcement, and government efficiency and transparency. Political and constitutional checks and balances have fostered global confidence in US monetary, fiscal, and trade policies.
3. Geopolitical Alignment: Historical data suggest that military alliances play a crucial role in countries’ choice of reserve assets. Countries allied with the US through military alliances tend to hold a higher share of their reserves in USD, even when accounting for trade links (Eichengreen et al., 2019). The role of the US as global hegemon over the past 80 years (and even more so after the end of the Cold War) has strengthened the role of the USD as global reserve currency, including in transactions related to critically important commodities (e.g., petrodollar indicating the use of USD as unit of account for oil in global markets).
4. Network Effects: The USD benefits from an "incumbency advantage". Its role is baked into the international system, including through a self-reinforcing positive feedback loop among its three primary functions (the wider use in one dimension increases its attractiveness in the other two); change occurs slowly due to network effects, though history suggests shifts can happen "gradually, then suddenly" (and we might get to a point like this in the near future). Furthermore, the Federal Reserve acts as the indispensable international lender of last resort.

The European Shortfall

Comparing the euro area, and the EU more generally, to the US reveals why the euro’s global role remains limited. European capital markets are significantly shallower and lack a unified "safe asset" comparable to US Treasuries. Currently, only German Bunds are viewed as truly safe and sufficiently liquid, and their supply is limited (German government bonds amount to 2 trillion euro compared to 30 trillion USD of US Treasuries).

Institutionally, Europe faces internal fragmentation. There is a notable divergence in the legal frameworks and government efficiency across the 27 Member States, with the average in indices of institutional quality well below the US. Furthermore, the common law systems of the US and UK are often perceived as more flexible and reliable for international finance than the varying civil law frameworks within the EU.

Finally, while the EU is an economic powerhouse, it has yet to project equivalent geopolitical weight given the absence of a common foreign policy. Until recently, the EU has explicitly avoided any military role (leaving this to NATO, where 23 EU Member States are also members) and has a limited role as geopolitical player.

In sum, compared to the US, the EU falls short on capital market depth and liquidity, a European safe asset, institutional strength, and a geopolitical role. These are some important factors that can explain why the euro does not have the same global role as the USD.

A Shifting Horizon: The Erosion of Dollar Trust

While the recent history favours the USD, the future is less certain. Several current US policy trends may be undermining the dollar’s hegemony:

• Institutional Erosion: Domestic political volatility, political interference into judicial processes, and a perceived slide toward authoritarianism reduce international trust in the US and thus the USD.
• As military alliances are questioned, the incentive for allies to hold USD reserves may diminish. At the same time, the decoupling in international trade and investment flows between rival geopolitical blocks^[2] and attempts at building alternative global payment systems to the USD dominated system might further undermine the role of the USD as global currency. Further, there is an increasing fear that the US may "weaponise" capital flows just as it has trade, including towards countries that until recently were considered allies.
• Fiscal Instability: Rising deficits and debt levels raise questions about the long-term safety of US Treasuries, even though so far there has been no clear adverse reaction by investors.
• Regulatory Independence: Threats to the independence of the Federal Reserve and other regulatory and supervisory authorities undermine the foundations of the US financial system and raise questions about international cooperation between central banks and regulatory and supervisory authorities, so urgently needed during systemic distress situations.

The Path to European Strategic Autonomy

Recent global events have exposed Europe’s heavy dependence on the US financial system—from payment rails (Visa, Mastercard) and Central Counterparties (CCPs) to the reliance of European banks on USD funding. Reducing this dependency is not just an economic goal; it is a prerequisite for strategic autonomy.

Strengthening the global role of the euro is inextricably linked to the project of a Savings and Investments Union. By deepening our internal markets, we simultaneously build the infrastructure needed for a global currency. I would be happy to elaborate on this further during the questions.

Strategic Recommendations: How to Promote the Euro

To elevate the euro's international standing, Europe must act decisively, looking at benefits in the long-term and avoiding short-termism, in several areas:

1. Create a Unified Safe Asset, with sufficient volume, variety in tenors and frequent issuances: This is a necessary, though not sufficient, condition for a global currency. I can talk more about this at a later stage if requested so.
2. Deepen Capital Markets: Following the recommendations of the Draghi and Letta Reports, the EU as a whole and EU Member States must foster an environment conducive to innovative and transformative large-scale investment. This includes more investor-friendly legal framework and financing models for innovative projects and start-ups.
3. Maintain High Standards: We must preserve the independence of central banks and regulatory and supervisory authorities while holding a consistent line on regulatory and supervisory standards for crypto-assets, including stablecoins.
4. Innovate in Payments: The development of a Digital Euro on the retail level, Appia on the wholesale level and Pontes as distributed ledger technology (DLT) settlement platform are important first steps, alongside support for private European payment initiatives, to reduce reliance on US-based rails, such as Wero, a pan-European mobile payment system built on SEPA Instant Credit Transfer, and initiatives to establish interoperability between domestic payment systems.
5. Expand Liquidity Networks: The ECB should work with other non-US central banks to establish and expand liquidity swap lines to thus reduce reliance on the US.
6. International Cooperation: Europe must remain a champion of multilateralism, continuing to work with other international partners—including the UK—even in instances where the US is not a partner. This also includes initiatives to interlink euro area payment systems with other fast payment systems globally.^[3]
7. Finally (and somewhat beyond the brief of this committee and my own area of academic expertise), the EU must project a stronger geopolitical role, in cooperation with other friendly countries but independent and focused primarily on its own interest (and obviously those of its citizens). All these actions require looking beyond short-term national interests and focusing on Europe’s long-term interest to maintain and grow its prosperous and democratic societies.

Conclusion

As the hegemony of the USD as global reserve currency is being questioned, it is unlikely that there will be a smooth transition to a new equilibrium. The euro area and the EU therefore stand at a crossroads, with challenges and opportunities. By addressing internal fragmentations and building a robust, independent financial infrastructure, the euro can finally begin to fulfil the global role envisioned at its birth. Strengthening the euro is not merely about competition; it is about ensuring Europe's resilience in an increasingly volatile world.

References

Arslanalp, Serkan, Barry Eichengreen, and Chima Simpson-Bell (2022): The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies, IMF Working Paper 22/58.

Eichengreen, Barry, Arnaud Mehl and Livia Chitu (2019): Mars or Mercury? The geopolitics of international currency choice, Economic Policy 34, 315-63.

European Central Bank (2025): The International Role of the Euro. Frankfurt a.M., Germany

Gopinath, Gita, Pierre-Olivier Gourinchas, Andrea F. Presbitero, and Petia Topalova (2024): Changing Global Linkages: A New Cold War?, IMF Working Paper 24/76.