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U.S. President Donald Trump’s volatile economic policies have tanked the dollar and thrown its status as the world’s reserve currency into question. The euro is poised to take advantage. Uncertainty over the transatlantic alliance may finally remove the political obstacles to the all-important creation of a euro zone safe asset to rival U.S. Treasury bonds.
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This relative underperformance is explained above all by the third test that a global currency must fulfil – and the fact that on it the Eurozone unfortunately falls down flat. This is the existence of a euro-denominated ‘safe asset’ to compete with US Treasury bonds. Such an ultimate safe haven security is the most fundamental building-block of a modern financial system – the collateral for repurchase and derivative contracts, the pricing benchmark for all other asset markets, and the basic savings instrument for domestic and foreign investors alike. Without a like-for-like Eurozone substitute for the US Treasury market, the euro simply isn’t at the races.
That fact is not lost on policy-makers. In 2011, the European Commission (EC) floated the idea of joint and severally guaranteed Stability Bonds which Eurozone members would be able to issue in an amount up to 60 per cent of their Gross Domestic Product. The European Systemic Risk Board proposed an alternative plan in 2018 for European Sovereign-Backed securities (“ESBies”), securitised pools of existing national government bonds, tranched into safer and riskier lines. In 2021, the EC even issued EUR750 billion programme of joint bonds to finance its post-Covid NextGenerationEU Recovery and Resilience Facility – though as a strictly time-limited experiment only.
The obstacle to the creation of a Eurozone safe asset, however, has always been political rather than technical. Bluntly, the more fiscally conservative Eurozone members have never accepted the principle of joint liability for Eurozone public debt. Yet in the era of America First, maybe even that shibboleth will fall.
Canada shows how fast public attitudes can change. President Trump’s economic and diplomatic blitzkrieg has just produced one of the biggest turn-arounds in recent political history. At a stroke, it transformed the incumbent Liberal party’s trenchant multilateralism from its Achilles’ heel to its strongest selling point, and turned a giant polling deficit into a narrow lead going into next Monday’s General Election.
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Likewise in the Eurozone, the prospect of further financial integration appeared vanishingly slight just a few short weeks ago. Yet with the greatest threat to incumbent parties in both France and Germany coming from the Trump-adjacent nationalist right, the heightened transatlantic tensions may prove a political gift to the dream of a truly global euro.
After all, what self-respecting patriot would now dare to oppose the project that, more than any other, will finally put Europe First?
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