President Trump's reforms to the global trading system have trembled through his long-standing view that the United States is the world's safest source of financial assets. that's right It created opportunities for Europe.
The market turmoil in which investors sold US dollars simultaneously and sold US stocks and US Treasury bonds simultaneously last week tried to reassure that trade deals would be stricken as Trump retreated the threat of firing Federal Reserve Chairman Jerome H. Powell and Treasury Secretary Scott Bescent.
However, many European officials attending the International Monetary Fund and World Bank spring meeting in Washington last week were skeptical that uncertainty about Trump's trade policy would soon be dissipated. They said the unpredictable nature of the Trump administration's approach to setting policies is not easily forgotten. Instead, they saw the possibility of attracting investors to European assets, from the euro to the bond market.
“We see that the stability, predictability and respect of the rule of law already prove to be strong,” Valdis Dombrovskis, the European Commissioner responsible for the trade bloc's economy, said Wednesday in a discussion of bystanders at the IMF conference. “We already have a stronger investor interest in euro-denominated assets.”
The most comprehensive indication that funds are flowing to Europe: Since the beginning of April, the euro has scored 5.4% against the dollar, rising above the highest level of $1.13 since the second half of 2021.
The question between policymakers and investors is whether the recent jump to euro and other euro-denominated assets is merely a short-term rebalancing of portfolios, or not, is the beginning of the long-term trend in which the euro is firmly caught up in the role of the dollar as the world's leading currency.
Problem past
“There's a lot of enthusiasm in Europe,” said Christine J. Forbes, an economist at the Massachusetts Institute of Technology, in an interview.
She said excitement about the euro reminded her of the establishment of a currency in 1999, when some economists and policymakers raised the prospect of replacing the dollar. In the early days, international use of the euro exceeded the total use of the currency it replaced.
However, the euro was hit by a crisis. Despite having a financial coalition of dozens of members, including Germany, Europe's largest economy, the region remains politically fragmented, robbing trust in the currency. The 2012 sovereign debt crisis meant that 10 years of super interest rates continued, with local bonds offering low returns.
The euro is currently used in 20 countries and represents around 20% of the world's central bank's foreign exchange reserves. 30% of global exports are billed in euros, but over half of them are in dollars.
Speculations about the new dominant currency should be taken “cautiously”, but there's more momentum behind the euro, according to Forbes.
“It feels like there are more feet because it's a stronger, more unified European combination,” she said. “At the same time, there are more issues with US dollar assets.”
There have been improvements on some of the issues that previously blocked foreign investors. Today, European bonds offer better returns, investors trust that the European Central Bank will become a last resort lender, minimizing the risk that a country's economic problems could affect all euro assets.
Safer assets
For investors, the most promising new development is expected to be considered the safest euro-denominated asset, with Germany issued around 1 trillion euros in rich additional government debt.
For years, strict financial conservatism in Germany has been curbing the supply of levees. However, last month, Congress changed the so-called debt brake, a constitutionally fixed borrowing restrictions, so that the government could borrow hundreds of millions of euros to invest in military and infrastructure.
“Europe has cheers,” said Christarina Georgieva, managing director of the IMF. “And that adds something that's not specific, but that's important – confidence.”
Demand for German debt precedes additional issuance. During recent market turmoil, band prices have risen, pushing down yields, and are a clear indication of investor interest. At the same time, US government bond yields have moved in the opposite direction. By the end of last week, the 10-year residue yield was 2.47%, reversing almost all increases following the stimulus announcement.
Investors also expect an increase in debt jointly issued by the European government. This is proposed to fund more military spending across the block. The economists point out that this has happened before. The European Union has issued more than 600 billion euros in bonds to fund past recovery programs. However, its borrowing will face fierce opposition and future issuances will also struggle to beat the support of all member states.
Despite Trump's trade policy and turmoil and frustration, many European officials, including the central bank, stressed the need for Europe to seize this moment.
“This is an age of creativity and pragmatism, and it drives things,” said Oli Lane, governor of the Central Bank of Finland. “I am very seriously working on strengthening the common defense of Europe, so I look forward to this period as a positive challenge. By the way, we need safe assets.”
“Long and difficult road”
There is growing optimism about the role of the euro. Klaas Knot, governor of the Netherlands Central Bank, said he went from agnostics about the international use of the euro to “cautious followers.”
However, he added that the “outside strength” of the Euro “reflects the internal strength of Europe,” and that the government needs to go further to increase that strength, he said in a speech on the bystanders of a conference in Washington.
Officials must continue to deepen the single market connecting the block's 448 million and allow businesses to trade freely, Knot said. He said lawmakers need to build a single capital market that will make money easier to cross European borders. “In Europe there's still a lot to do.”
Alfred Kramer, director of the IMF's European division, warned against the “overinterpretation” of the recent shift to the euro. “The “movement towards European exceptionalism” is “still a long and difficult path,” he said.
The region needed more structural changes, he said, allowing businesses to reach larger markets and capital pools, allowing them to have a more dynamic business sector.
Many officials said the euro is likely one of several assets that become more prominent as investors reduce their holdings in the dollar. For example, in recent weeks, gold prices have skyrocketed, exceeding $3,300 per troy ounce, and the Swiss franc has also surged, up nearly 7% against the dollar this month.
“We don't see everyone breaking out of the dollar and moving to the euro all of a sudden. I think it's healthier diversification,” Forbes said. But private investors overseas have built up a lot of holdings in US debt and are now seeing a drop in the dollar seeking alternatives.
“Europe,” she added. “It's a natural place to diversify.”
Melissa Eddie I contributed a report from Berlin.
