Emancipating the Euro

Donald Trump and his team are introducing an unprecedented level of unpredictability into international and domestic affairs – something financial markets generally abhor. As a result, a growing number of investors and institutional cash managers are daring to imagine a world beyond the dollar. The European Union has a rare opportunity to capitalize on this shifting sentiment by significantly expanding the global availability of euro-denominated bonds and bank deposits, and by moving forward with the implementation of the digital euro. This would improve Europe’s monetary and financial infrastructure sovereignty, and strengthen the international role of the euro.

For eight decades, the US dollar has been the dominant international currency, actively promoted by the US Treasury and the Federal Reserve through the large-scale issuance of safe assets and generous swap lines to other central banks. These swap lines and the New York-based Clearing House Interbank Payments System (CHIPS) have facilitated the large-scale offshore creation of dollars issued by private banks outside the US, strengthening the dollar’s global role. This granted the US considerable economic and geopolitical advantages, including lower borrowing costs, enhanced macroeconomic flexibility and the power to impose economic sanctions.

The second Trump administration’s unpredictability harms the dollar’s global position in at least three ways. Firstly, the administration’s handling of international affairs, particularly the Ukraine–Russia war, the implementation and threat of tariffs against traditional allies, and the abrupt cessation of overseas development assistance, have led many countries to question the reliability of the United States as a partner. For example, some European central banking and supervisory officials are beginning to question whether they can still depend on the long-standing Federal Reserve swap lines in times of market stress.It appears that under Trump, the US is prioritizing short-term direct power over long-term systemic power. Secondly, significant federal tax cuts are projected to substantially increase public debt and deficits in the coming years, indicating an unsustainable fiscal trajectory in the US. Combined with weaker growth prospects due to high tariffs, this unsustainable fiscal trajectory may erode confidence in US Treasury securities and jeopardize their central role in the global monetary and financial system. Thirdly, Trump signed an executive order in January prohibiting the development of an American central bank digital currency (CBDC): the digital dollar. Instead, the Trump administration favours offshore dollar creation by private entities, including reliance on relatively new monetary instruments such as stablecoins. Opposition to CBDCs predates the Trump administration and emanates from mainstream Republicans, financial institutions, Silicon Valley libertarians and anti-establishment leftists, who cite concerns over privacy, government overreach, and potential financial surveillance. However, several analysts – including Lipsky and Kumar (2024), Bilotta (2024) and Arnold (2025) – have argued that the US is underestimating the risks to the dollar’s dominance posed by developments such as new cross-border CBDC arrangements. The US seems to be facing a classic innovator’s dilemma, in which dominant entities underestimate emerging alternatives and struggle to adapt, risking their leading position.

In addition to Trump’s activities, the ongoing weaponization of the dollar-based financial architecture poses a significant threat to the dollar’s global position. Between 2000 and 2021, US-imposed financial sanctions increased by 933 per cent. Following Russia’s invasion of Ukraine, this trend accelerated further with more sanctions and the freezing of Russian assets. This weaponization has incentivized other countries to seek and develop alternatives to the dollar-dominated system.

China has taken a different approach, looking to establish its own long-term systemic power. Since 2014, the Chinese Communist Party has laid the foundations of a new global monetary order by developing the digital yuan, launching the Cross-Border Interbank Payment System (CIPS), and actively participating in multilateral experiments involving cross-border CBDC transactions, most notably the mBridge project. This project has demonstrated clear benefits: almost instantaneous payments (reducing processing times from 3-5 days to just 2-10 seconds), a 50 per cent reduction in transaction costs, simplified currency conversion and crucially,although this is not officially acknowledged,reduced reliance on the dollar. By granting private banks and financial institutions direct access to currencies issued by foreign central banks, mBridge eliminates the need for intermediaries or settlement systems based in or influenced by the US. Furthermore, over the past decade China has strengthened international cooperation through initiatives such as the Belt and Road, the Digital Silk Road and BRICS. Collectively, these efforts have established key components for the support of a global monetary and financial system capable of bypassing Western-controlled, dollar-based institutions such as the SWIFT network, CHIPS and Fedwire.

If US policies continue to be turbulent and unpredictable, and if Europe fails to strengthen the international role of the euro, China could seize the moment. Should this scenario materialize, it is conceivable that not just China’s traditional allies but other authoritarian regimes, developing nations, and the world’s 1.4 billion unbanked individuals might turn, either voluntarily or of necessity, to the Chinese monetary and financial infrastructure. A successful global rollout of the digital yuan and its underlying technology would allow China to collect and analyse vast amounts of transactional data, deploy programmable money worldwide – potentially favouring its allies in strategically critical transactions such as the procurement of rare natural resources – and impose targeted sanctions on individuals and countries.

A strategic opportunity also exists for the EU, as China’s international monetary ambitions remain constrained by internal policy inconsistencies. Capital controls, exchange rate interventions and an unpredictable regulatory environment continue to limit the yuan’s global appeal. Ironically, the second Trump administration is steering the US in a similar direction. Meanwhile, the euro is the world’s second largest reserve currency and the European economy is the third largest economy globally. Despite the EU becoming more geopolitically aware, there is much more to do. For instance, the digital euro project has so far been framed primarily as a modernization of banknotes, a monetary anchor, or a way to reduce reliance on major American payment companies, rather than as a fully fledged geopolitical instrument. Political debates in Brussels and the national capitals remain narrowly focused on issues like banking stability, privacy and programmability. While these concerns are undeniably important, this is to overlook the fundamental strategic question: should Europe passively accept a future in which either the US private sector (backed by the Fed) or the Chinese Communist Party dictate the trajectory of global money, or should it actively shape the emerging monetary order itself?

The rapid transformations in the geopolitical landscape demand a shift in perspective. The digital euro should not be viewed merely as a domestic monetary tool but as a strategic asset to enhance European sovereignty and global influence. A key consideration is whether foreign entities should have access to the digital euro ledger. Allowing such access would enable international actors to store value and make payments using digital public euros, rather than relying on privately created offshore dollars, physical greenbacks or, in the future, digital yuan.

Beyond this, the EU could follow three additional strategies to strengthen the euro’s international role. First, it could actively encourage the integration of euro-denominated money creation into cross-border value chains. Second, the ECB could stimulate offshore euro money creation by extending more generous swap lines to foreign central banks, an approach similar to that of the Federal Reserve. Third, Europe could significantly expand the supply of euro-denominated safe assets, not only through the digital euro but also through substantially increased issuance of euro-denominated bonds. These bonds should have varying maturities, in order to offer financial intermediaries, investors and institutional cash managers a wide range of euro-denominated options.

Moreover, Europe faces an immediate strategic dilemma: should the EU seize the €200 billion in frozen Russian assets? Although several actors appear eager to quickly access this substantial sum, such weaponization risks damaging the euro’s international standing over the long term, undermining Europe’s ability to reduce dependence on the dollar. So Europe faces a strategic choice between short-term gains and long-term autonomy.

In summary, in the face of mounting uncertainty and inconsistency in US policies, the EU now faces a rare opportunity to strengthen its control over its monetary and financial infrastructure and to establish itself as a leading monetary power in the 21st century. Realizing this potential requires more than incremental policy changes. The fundamental question is not just whether the euro can become a more important international currency, but whether Europe is willing to shape the future of the international monetary system and to take bold steps to realize independence both from the current US order and from a possible future Chinese alternative.