Can the euro replace the dollar?
15 July 2025
The euro should play a bigger role on the world stage. That's what European Central Bank president Christine Lagarde recently argued. As protectionism rises and confidence in the US economy wanes, she claims the dominance of the dollar is "no longer certain". What she means: the euro should replace the dollar as the global reserve currency.
Global reserve what? This currency is what central banks and major financial institutions hold in large quantities as part of their foreign reserves. It prices commodities like oil, settles international trade, backs debts, and stores value during times of instability, even by countries that don't use it as their domestic currency.
The dollar's status as this global reserve currency was cemented in 1944 with the Bretton Woods system, which pegged global currencies to the dollar and the dollar to gold. After World War II, the US economy dominated the world, the Marshall Plan flooded Europe with dollars, and by the 1970s, a deal with Saudi Arabia made oil trade dollar-exclusive, giving rise to the petrodollar system.
Even after the US abandoned the gold standard, the dollar held on, backed by deep capital markets, relative economic stability, and trust in US institutions. Today, 60% of global foreign reserves and most global trade and debt remain dollar-denominated.
That's the challenge Lagarde wants the euro to take on. Currently, the euro makes up around 20% of global reserves, a distant second place. To close the gap, she calls for deeper EU integration: completing the single market, harmonising capital markets, and issuing more shared EU-level "safe assets" (like common bonds).
But there's a catch: Europe's economic model is fundamentally different from the US'. The US runs large trade deficits: it exports more than it imports, essentially exporting dollars to the world (that's what Trump wants to end with his tariffs, the latest round of which threaten to hit the EU badly).
The EU does the opposite, with persistent trade surpluses that keep euros inside its borders. That means there simply aren't enough euros circulating globally to rival the dollar's dominance, and changing that would require a major shift in how Europe does business.
 | Henrique Tizzot Should the euro become a global reserve currency? It comes with serious trade-offs. When a currency becomes the world's go-to for trade, finance, and reserves (like the US dollar today), demand for that currency rises. That demand can push up its value, making a country's exports more expensive abroad. Over time, this can hurt domestic manufacturers, as foreign buyers turn to cheaper alternatives. This dynamic is part of what economists call the "strong currency paradox": global financial dominance can lead to deindustrialisation – something many blame for the decline of US manufacturing. So if Europe wants the euro to rival the dollar, it would need to reckon with this risk, especially at a time when many European economies are already grappling with deindustrialisation, high energy costs, and weaker global competitiveness. Ultimately, the euro's global ambitions face high hurdles: economic, political, and institutional. And while the dollar may not be invincible, its replacement won't come easily – or without consequences. So the real question isn't just whether the euro can replace the dollar; it's whether Europe is willing to pay the price to try. |
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