Euro's reserve currency ambitions tested as Trump tariffs shake dollar confidence

When Christine Lagarde told a Brussels audience on Monday that Europe had begun its "march to independence", she was not speaking in metaphors. The European Central Bank president was reacting to a concrete sequence: Donald Trump's tariff barrage has erased trillions from equity markets in recent weeks, the dollar has fallen against almost every major currency, and investors have fled to gold, the yen and European equities. The next escalation arrives on Wednesday, 2 April, what the White House calls "Liberation Day", and the ECB's governing council is already pricing in further turbulence.

A structural deficit decades in the making

The euro was conceived partly as a counterweight to the dollar. Yet the currency's international role has been left to market forces, while Washington spent a century building the institutional architecture that makes the dollar the default for trade, reserves and crisis funding. The numbers are stark. The dollar still handles 88 percent of cross-border trade invoicing and comprises 58 percent of allocated global reserves. The US Treasury market offers €21 trillion of safe assets; the eurozone, with an economy of comparable size, supplies only €4 trillion. China's bond market is larger at roughly €22 trillion, but capital controls and the dominance of state-owned issuers keep it largely closed to foreign holders.

Jens van 't Klooster, professor of political economy at the University of Amsterdam, puts it bluntly: "The ECB has been sleeping. For decades, we just assumed we could rely on the US dollar. That now proves to have been a costly mistake. We have to very quickly prepare replacement systems that took the US a century to build." Together with Berlin-based economist Steffen Murau, he has documented what they call the euro's "failed" internationalisation and laid out a three-pronged remedy.

Three steps the ECB could take tomorrow

First, expand the pool of tradable euro-denominated debt that qualifies as a safe asset. The ECB's collateral framework currently relies on credit assessments from US rating agencies, Moody's and Fitch, a 2005 decision that effectively gives American firms veto power over whether Italian, Spanish or Polish sovereign bonds can be used in Eurosystem operations. Van 't Klooster and Murau argue the ECB should set its own eligibility criteria, a politically fraught move that would nonetheless end the anomaly of outsourcing European solvency judgments to Wall Street.

Second, broaden the network of swap lines, the credit facilities that let foreign central banks obtain euros during market stress. Today that function is dominated by the Federal Reserve, whose swap lines reached $450 billion at the peak of the 2020 crisis. The ECB's own network is limited to a handful of advanced-economy partners. Extending lines to emerging markets and energy exporters would create a direct channel for offshore euro liquidity, mirroring the Fed's playbook.

Third, foster trade invoicing and supply-chain finance in euros, particularly along the value chains of the energy transition. If batteries, solar panels and critical minerals are priced and financed in euros, network effects follow. The largest share of global green bonds is already euro-denominated, a foundation that could be leveraged.

Why the dollar's credibility is now in question

The catalyst for this debate is not European ambition alone. In an off-the-cuff remark last month, Trump suggested the €34 trillion of outstanding US debt would be "looked at" because some of it might be "fraudulent". Markets interpreted the comment as a trial balloon for selective default, a notion reinforced when Treasury Secretary Scott Bessent, often described as a moderating influence, endorsed the so-called "century bond" plan. Under that scheme, foreign holders of five- and ten-year Treasuries would be pressed to exchange them for 100-year, low-coupon instruments, potentially subject to an additional tax. In effect, a partial default enforced by the threat of higher tariffs and withdrawal of NATO security guarantees.

"Threatening to default on debt could trigger a fire sale of dollar assets," van 't Klooster said. "Not paying back US debt would tear through the international monetary system far more violently than the end of Bretton Woods." Former US Treasury officials have warned that the mere spectre of default could destroy American credibility. European central bankers, meanwhile, have privately questioned whether the Federal Reserve can be relied upon to provide dollar funding during the next severe strain.

The scale problem no eurobond can solve overnight

Even if political will materialised tomorrow, the arithmetic is unforgiving. The eurozone's total government debt stands at nearly €13 trillion, but only about one-third qualifies as safe under current definitions, half the US ratio. Expanding that share requires either mutualised debt issuance or a collective guarantee framework for national bonds. Both demand treaty-level agreement among member states that have spent the last decade resisting fiscal union. The patchwork that exists today leaves investors guessing: Italian debt may be treated as safe today, but a political crisis could change that overnight.

Van 't Klooster and Murau note with understatement that it is "questionable" whether US agencies should remain the ultimate arbiters of European solvency. Yet the ECB has avoided setting its own standards precisely to dodge the domestic disputes that would follow. Doing nothing, as van 't Klooster observes, is also a political choice, one that preserves the status quo at the cost of strategic autonomy.

Energy transition as the new anchor

History offers a template. The pound was anchored to coal, the dollar to oil. The euro could anchor itself to the critical minerals and renewable technologies that will power the next industrial era. "If the prices of batteries, solar panels, and renewable energy investments are increasingly set and financed in euros, the currency's global role would grow," van 't Klooster said. Trump's hostility to climate policy sharpens the contrast: Europe could offer a financial system where sustainable finance is the norm, not the exception, a direct counterpoint to a US administration that has restricted regulators from even assessing climate risk.

China dominates the upstream supply chains for rare earths and processed minerals, and Beijing is building its own payment rails. But the more European firms price and finance midstream and downstream activity in euros, from cathode production to grid infrastructure, the deeper the offshore euro market becomes. The infrastructure exists: euro-denominated green bond issuance leads globally. What is missing is a coordinated strategy linking trade policy, development finance and central bank operations.

A multipolar system, not a replacement

No serious analyst expects the euro to displace the dollar outright. The more plausible outcome is a multipolar reserve system in which the euro, yen, sterling and renminbi each carry meaningful weight. That would cushion the global economy if dollar markets convulse, and it would embed European regulatory norms, on sustainability, data governance and competition, into the plumbing of international finance. But the window is narrow. The ECB's next strategic review, the EU's competitiveness agenda and the next MFF negotiations will all test whether Lagarde's "march to independence" is a slogan or a work programme.