Since the euro’s inception, policymakers have dreamed of eroding the dominance of the U.S. dollar in global finance and trade, which gives the U.S. government and businesses lower financing costs, a vital advantage in a global competition for capital. But so far, the single currency has fallen short of expectations.
The dollar accounts for about 90 percent of global transactions and it remains the benchmark against which other currencies are measured against, said Joan Feldbaum-Vidra, senior managing director of sovereigns at credit rating agency KBRA.
According to the ECB’s 2024 report on the role of the euro, about 60 percent of foreign bonds are issued in dollars. The euro, meanwhile, stands at 20 percent, a share that has stayed roughly stable for 10 years. To the extent that the dollar has lost ground, for example in countries’ reserves of foreign exchange, it’s been due to the rise of third currencies, while the euro’s share has remained stable.
The U.S. dominated the international financial landscape since World War II. This was established with the Bretton Woods Conference in 1944, which placed it at the heart of a global system of fixed but adjustable exchange rates. It was entrenched by the U.S.’s status as a military superpower, the size and dynamism of its economy, and the consolidation of Wall Street as the prime nexus of global financial flows. By 1964, the dollar’s hegemony had reached the point that French Finance Minister Valéry Giscard d’Estaing talked about the “exorbitant privilege” of the currency.
Despite the collapse of the Bretton Woods system, the globalization of financial markets and the U.S.’s constant ability to attract capital have ensured that that exorbitant privilege has not only survived, but increased: one study last year said it was worth a full 0.9 percentage points of GDP annually.
Everything under heaven is in chaos
In theory, the European Union could rival the U.S., with its large economy, mature banking sector and the functioning rule of law. In practice, despite talks of an internal market, the financial system remains fragmented into 27 different national sectors.
