How the Euro Could Capitalise on the Dollar’s Waning Dominance 

The US dollar’s decades-long dominance of the international monetary system is coming under renewed scrutiny. Concerns are mounting over the country’s deteriorating public finances and the increasingly intrusive role played by the Trump administration in economic and financial regulation. 

This shifting environment opens a rare window of opportunity for other major currencies—most notably the euro, but also China’s renminbi—to gain ground in the global monetary architecture. A stronger international role for the euro would translate into cheaper funding costs and greater resilience to external shocks for the European economy. 

The euro is already the world’s second most used currency in international markets. But its share remains significantly smaller than the dollar’s. 

Recently, the single currency has seen renewed interest from international investors, largely driven by geopolitical instability stemming from the US. That has led to sizeable capital inflows into European assets. 

This trend could, over time, become a strategic asset for Europe. But it requires tangible steps toward deeper financial integration—steps that remain elusive. 

The most widely discussed idea involves creating a European “safe asset”: a jointly issued debt instrument that could rival US Treasuries and serve as a benchmark for euro-denominated financial markets.

While attractive in theory, the proposal faces stiff political resistance. And it risks diverting attention from a more urgent European priority. 

The numbers are telling. The US remains the world’s largest public debt issuer, with some $33 trillion outstanding. China follows with $15 trillion, and Japan with $11 trillion. Euro area countries collectively account for around $14 trillion in public debt, led by France (€3.4tn), Italy (€3.1tn), and Germany (€2.9tn). 

To achieve critical mass, a large share of the member states’ national debt would need to be converted into jointly guaranteed eurobonds—a move that would require treaty changes and the pooling of fiscal sovereignty. For now, no EU government appears ready to accept such a shift. 

Even issuing new common debt, as in the case of the €750 billion Next Generation EU programme, would require fresh EU-level resources and still fall short of establishing a true benchmark asset. 

As the experience of Japan and China shows, size alone is not enough. 

What makes the dollar so attractive is not just the depth of the US Treasury market but the breadth and liquidity of the broader dollar-based financial ecosystem. Investors worldwide can access a vast array of instruments—beyond government bonds—quickly, efficiently, and without cross-border friction. 

The dollar’s strength is built on an open financial system, efficient market infrastructure, a responsive legal environment, and regulation that combines rigour with competitiveness. 

Europe lacks all of these elements. 

It has yet to establish a unified and transparent regulatory framework, a truly integrated supervisory architecture for banks and capital markets, or globally competitive financial players—banks, asset managers, private equity funds—capable of scaling operations across the continent and beyond. 

European policymakers, both at the national and EU level, are well aware of these shortcomings. Over the years, they have repeatedly pledged to build a fully integrated capital market—an essential condition for enhancing the euro’s global standing. 

Yet solemn declarations have rarely been matched by meaningful policy action. In fact, national decisions often move in the opposite direction, further fragmenting Europe’s financial landscape into smaller, less relevant markets and stifling the emergence of EU-wide financial champions. 

The euro will only compete with the dollar when Europe builds an efficient financial marketplace—not simply by issuing more debt. 

A first version of this article was published in the Italian daily Il Foglio