Trump turmoil has Europe eyeing a challenge to almighty dollar

Ms Lagarde had been trying to persuade EU leaders that Mr Trump’s return offers opportunities to the bloc, the people said.

As the US president tears up his nation’s economic playbook — creating market turmoil globally — some of Europe’s policymaking elite sense a window of opportunity for the continent’s single currency.

“We shouldn’t hide, the euro has been a great success for 25 years,” Bundesbank president Joachim Nagel said on a visit to the French capital earlier this month.

In the end, if we position ourselves as more competitive, then the euro as a reserve currency will benefit more strongly

Germany this month threw out decades of fiscal caution to help revive its economy and rebuild its military, triggering a broad repricing of European assets, and leaders are questioning other taboos that have long held the EU back.

The French president, a former investment banker, has seized the opportunity to push his vision of Europe as a truly autonomous geopolitical force.

Shaking the foundations

The door is opening as Mr Trump shakes the foundations of the dollar as the world’s global currency. 

He’s up-ending commerce with tariffs and verbal attacks on both friends and foes, weakening commitments to Nato, and advisers have talked of a so-called Mar-a-Lago Accord that could reorder global finance.

He’s also pursuing tax cuts that risk blowing budget deficits even wider.

The Congressional Budget Office warned this week that the US could default as soon as August without a deal to raise the debt ceiling

However, a structural shift of global reserves from dollars into euro is a very long-term idea, if it’s even possible. Past bouts of speculation about the US currency getting surpassed have repeatedly proved misplaced.

The latest figures show the euro made up only 20% of foreign reserves around the world, while the dollar had close to 60% — a dominance that has shifted little over time.

And while the Trump administration’s hostility spurs EU politicians to take some significant steps, efforts to complete the EU single market with a full banking union and capital markets union have been stalled for years.

Officials in Berlin are also still ruling out more joint EU bond issuance, another move that would consolidate the euro’s appeal to investors, but they acknowledge that the debate is gathering momentum, according to a person with knowledge of their thinking.

At the summit in Brussels, Paschal Donohoe, the head of the Eurogroup of finance ministers, said there is a huge long-term opportunity if the bloc can make its markets more efficient, the people briefed on the conversations said.

Ms Lagarde told leaders that the US’s status as a haven is under threat from Mr Trump’s policy decisions

The European Central Bank declined to comment on the specifics of the exchange.

If officials can make progress on integrating EU capital markets, they have a chance to attract more investment from those seeking an alternative to dollar assets, she added.

Appetite for US debt

The prospect of the euro stepping into any breach is tantalising for Europe’s economies, businesses, and households. The dollar’s so-called exorbitant privilege creates appetite for US debt — meaning deeper, more liquid markets that make financing easier and cheaper.

The bigger the role of a currency in the world, the greater the autonomy policymakers have to set the fiscal and monetary policies ideal for their economy without having to worry as much about exchange rate shocks on inflation.

Currency heft has also given American banks a leg-up in international markets and afforded the US a more influential voice in the international forums that write and enforce the rules of global capitalism.

“There are a number of advantages that are both economic but also geostrategic,” said Jens van ‘t Klooster, a political economist at the University of Amsterdam.

We’re not there yet, that’s clear, but people underestimate how quickly these things can move because they think about the pound sterling taking a century to be replaced by the dollar

Traders are buying the short-term perspective, boosting the euro and fuelling an outperformance of European stocks. The single currency has gained about 4% against the dollar this year, and pushed close to $1.10 earlier this month.

However, going beyond that is a big ask. Europe would have to overcome huge hurdles and competing national interests that have derailed so much in the past.

The key element is more integration of large but fragmented debt markets, potentially with more joint issuance that could act as an alternative safe asset to US treasuries.

Mr Macron has for years pushed for joint borrowing to this end, and more recently to fund defense and technology spending.

“We have a real opportunity to create a true financial system of trust in Europe with opportunities for European safe assets, but not right away, it’s a question of potential,” said Société Générale chief economist Michala Marcussen.

“I don’t think we are about to swing from a system based on the dollar to a system based on the euro.”

• Bloomberg