- Privilege under pressure: Trump’s tariffs, calls for aggressive rate cuts and threats to Federal Reserve independence are eroding the dollar’s status as the world’s anchor currency.
- Euro’s stalled rise: The euro’s share of international reserves climbed to 27.7 per cent by 2009 but slid back to roughly 20 per cent after the 2011-2012 sovereign-debt crisis.
- Mar-a-Lago threat: Miran’s proposal to compel creditors into low-yield century bonds, backed by tariff threats and the withdrawal of military support, has investors weighing a retreat from US assets.
- The eurobond fix: Blanchard and Ubide’s plan transfers existing member-state debt to the EU rather than issuing new debt, creating a deep market for euro-denominated safe assets.
- Resilience dividend: A larger pool of safe euro assets would lower domestic borrowing costs and shield the bloc against any sudden flight from the dollar.
The US dollar will likely retain its global primacy for years to come, but its supremacy is no longer assured. Erratic policy, swelling national debt and mounting pressure on the Federal Reserve’s independence are testing the currency’s status as the world’s reserve and trade anchor. The intensifying division of the global economy into geopolitical blocs adds a further strain. As the dollar’s grip loosens, the Euro Area has a rare opening to claim a larger share of the “exorbitant privilege” that flows to the issuer of a key international currency. Yet the prize is conditional: Europe must first build a deeper and more reliable supply of euro-denominated safe assets.
The Dollar’s Privilege Under Pressure
For more than 80 years, the United States has anchored the international monetary system. It has met every requirement of a key currency country: an economy large enough to dominate global markets, stable and transparent political institutions, and a deep, liquid market for safe assets accessible to investors worldwide. It has also held a clear lead in military power, technological innovation and productivity.
That position confers what economists call the “exorbitant privilege”: the ability to borrow more cheaply than other sovereigns while earning higher returns on investments abroad (Eichengreen 2010; Gourinchas and Rey 2022). The advantage rests on strong global demand for the issuer’s government bonds as reserve assets, demand that is underpinned by the currency’s quality and its dominance in trade invoicing.
Even so, the dollar has been losing ground for decades. By 2009, the euro’s share of international reserves had climbed 9.8 percentage points to 27.7 per cent, almost entirely at the dollar’s expense. The Euro Area crisis of 2011-2012 then exposed deep institutional flaws — above all, the absence of a broad and deep market for safe government bonds. The euro’s share fell to 19 per cent by 2015 and has since hovered between 19 and 21 per cent. Of the 13-percentage-point decline in the dollar’s reserve share between 1999 and 2025, only about two points migrated to the euro, the pound sterling and the Chinese yuan combined; the rest flowed into “other currencies”, chiefly the Australian and Canadian dollars.
Geopolitical conflicts over the past decade, including the sanctions imposed on Russia, have intensified trade among the BRICS+ countries and given rise to a new cross-border payment infrastructure, the Cross-Border Interbank Payment System (CIPS), built around the Chinese renminbi and operating independently of the dollar-based SWIFT network. With BRICS+ accounting for 45 per cent of the world’s population and almost 27 per cent of global GDP, the potential erosion of dollar invoicing and reserve holdings is substantial.
Current US policies threaten to accelerate this decoupling and may also prompt institutional and private investors to shift out of dollar assets. At the centre lies the uncertainty generated by Trump’s drastic and erratic tariff regime, his calls for aggressive interest-rate cuts and his open desire for a weaker dollar. The proposal of a Mar-a-Lago Accord — set out by Miran (2024), Chairman of the Council of Economic Advisers and appointed to the Federal Reserve Board of Governors in August 2025 — has compounded the financial risks. Miran’s narrative is that supplying a reserve currency is not an “exorbitant privilege” but a “burden”: persistent demand for dollar assets, he argues, overvalues the currency, undermines export competitiveness and hollows out US manufacturing. The role of macroeconomic policy in determining whether strong demand for the key currency results in overvaluation or lower interest rates — as well as the corresponding role of large and persistent US budget deficits (Obstfeld 2025, Krugman 2025) — is lost on Miran. Should foreign holders refuse to accept lower yields and a weaker dollar voluntarily, the United States, under Miran’s blueprint, would compel a conversion of Treasuries into 100-year bonds bearing little or no interest by wielding tariff threats and the withdrawal of military protection. Trump’s endorsement of this stance has forced investors to weigh, almost continuously, whether to retreat from US holdings before any sell-off begins.
That uncertainty was on full display after the global tariff salvo of Trump’s so-called “Liberation Day”. The S&P 500 fell 12 per cent over the next four trading days. Equity markets recovered most of the ground within nine days — largely after the temporary suspension of most tariffs on 9 April — but by then the dollar had slipped 5 per cent against the euro, to 1.135 USD/EUR. Over the same span, the yield on 10-year Treasuries climbed 0.3 percentage points while its German counterpart fell 0.1 percentage points. A weaker dollar paired with higher long-term yields signals a rising risk premium and waning investor confidence, further stoked by Trump’s repeated criticism of Federal Reserve Chair Jerome Powell and hints at Powell’s dismissal.
Potential Euro Area Gains
A loss of confidence in the dollar combined with a rising appeal for the euro would benefit the Euro Area by reducing domestic financing costs and lifting GDP (Theobald and Tober 2026). However, increasing the appeal of a “currency without a state” (Eichengreen 2010) as an international currency is challenging. Confidence in a currency rests not only on a credible, stability-oriented central bank but also on a sovereign with sound public finances and a large, reliable supply of safe assets.
In the aftermath of the Euro Area crisis, the merits of European bonds were widely debated, alongside ways to enlarge fiscal space for highly indebted member states while curbing moral hazard, jointly financing growth-enhancing investment and shoring up resilience to macroeconomic shocks. The last point is critical: a scarcity of safe sovereign bonds leaves the bloc exposed to abrupt shifts in expectations that can trigger a vicious cycle of rising risk premia, higher private borrowing costs, falling output and capital flight (Theobald and Tober 2020). None of the eurobond schemes tabled over the years gained traction. However, the Euro Area has since evolved, notably through joint borrowing via NextGenerationEU, the Eurosystem’s securities purchase programmes, and the European Central Bank’s Transmission Protection Instrument. EU bonds issued by the European Commission have therefore been identified by Blanchard and Ubide (2025) as a viable solution.
Under the Blanchard and Ubide (2025) plan, Euro Area countries would transfer a defined share of their existing sovereign debt to the EU and, in return, commit a corresponding share of their tax revenues to servicing it. With aggregate debt at around 90 per cent of GDP, it is essential for credibility that no fresh debt is issued in the process.
A larger and more liquid market for euro-denominated safe assets would do more than expand the euro’s global role; it would also strengthen the Euro Area’s resilience to a potential major loss of confidence in the US dollar — a risk that, given the present trajectory, should not be underestimated.
This article is part of a joint project with the Macroeconomic Policy Institute of the Hans-Boeckler-Stiftung examining Germany’s and Europe’s economic repsonses to the challenges of the second Trump administration.
