Summit
set to show how far the EU is from seizing the ‘global euro moment’
European
Council President António Costa wants to discuss international role for euro
but divisions over large-scale joint borrowing are as wide as ever.
June 25,
2025 4:00 am CET
By Johanna
Treeck
https://www.politico.eu/article/eu-not-ready-seize-global-euro-moment-dollar-us-donald-trump/
Europe’s
leaders are getting excited by the idea that Donald Trump’s erratic
policymaking is going to hasten the end of U.S. dominance of the world’s
financial system, but their meeting on Thursday will remind them how far they
still are from being able to exploit the situation.
In his
invitation to national government heads, European Council President António
Costa said the meeting would be “a good opportunity to consider how to further
strengthen the international role of the euro” — code for the long-term goal of
making the euro a global reserve currency to rival the dollar.
Amid signs
that the U.S. president has shaken global confidence in the dollar, some are
seeing a rare opportunity to compete for the power and prestige that reserve
currency status bestows. Europe’s comparatively sound economic policies and
strong rules-based institutions could give the euro a competitive edge over the
dollar, European Central Bank President Christine Lagarde said in a speech last
month proclaiming “a global euro moment.”
However, the
most obvious single step that would instantly make the euro more attractive to
world investors is one that leaders have fallen out over many times before and
are likely to again: large-scale joint borrowing.
“If Europe
is going to offer investors an alternative, it needs to increase the size of
the Eurobond market dramatically,” former International Monetary Fund Chief
Economist Olivier Blanchard and Ángel Ubide, economist at Citadel, wrote last
month in a joint paper, which has drawn much admiring commentary, including
from senior figures at the ECB.
The paper
revives a proposal first made in 2010 to divide the government debt market in
two: all national government bonds up to 60 percent of gross domestic product
would be swapped into ‘blue bonds’ guaranteed by the EU, while member countries
would stay responsible for all the debt above that level (‘red bonds’).
In theory,
this would allow Europe to create, at a stroke, a large, liquid pool of safe
assets that would finally offer global investors a real alternative to buying
U.S. Treasuries: something that offers a steady return with no credit risk,
something they can hold forever or turn into cash in an instant if need be,
somewhere to park their money while looking for the next big investment in
stocks or real estate, something to use as collateral for their next loan. The
absence of a large market for such assets today means that it is gold, rather
than the euro, that has benefited from the dollar’s weakness since the start of
the year.
This time is
different?
Joint debt
has long been an option for making Europe’s capital market more attractive and
competitive, but it has always been contentious. During the eurozone sovereign debt crisis,
leaders notably from Italy and Spain pushed for Eurobonds, trying to bring down
their borrowing costs. It never happened because their frugal northern
neighbors, led by Germany and the Netherlands, argued that that would leave
them on the hook for spending they never approved.
The EU has
tried to address such ‘moral hazard’ by creating and policing a set of rules
that would cap national governments’ borrowing. But those rules were suspended
during the pandemic and have only been restored in a fashion that is
watered-down and hard to enforce.
Blanchard
and Ubide argue that the world has moved on since 2010, and that the idea
deserves another look. Ubide told POLITICO that Europe’s successful experience
with joint debt during the pandemic suggests that this time may be different.
While Ubide
recognized that “there will surely be a debate about immediate costs and
benefits for some countries,” he stressed that the plan will benefit all
countries over the medium run.
Certainly,
the calls for more economic and financial integration have become louder than
ever, as the extent to which a stunted capital market is hurting Europe’s
broader competitiveness has become clear. As former Italian Prime Minister
Enrico Letta argued in a recent opinion piece, “in a world in which economic
power is increasingly weaponized through sanctions, trade restrictions and
financial coercion, this is no longer just an economic issue — it is a question
of sovereignty.”
The argument
is getting some recognition in Germany and the other ‘frugal’ states, which not
only backed joint debt issuance in response to the pandemic, but also approved
the SAFE (Security Action for Europe) program this year. SAFE will allow the EU
to issue €150 billion in new bonds to finance cheap long-term loans to member
states for coordinated military procurement.
Old habits
die hard
But even the
new government of Chancellor Friedrich Merz stresses those were temporary and
exceptional measures. And while Merz has radically adjusted domestic policy to
new realities with a dramatic U-turn on Germany’s strict spending rules, that
does not necessarily mean he will be equally flexible on joint borrowing.
A
spokeswoman said that Berlin does not support proposals for blue bonds and sees
“no reason for discussion of the topic” this week.
“Merz has
already crossed a red line for the German conservatives by largely suspending
the national debt brake,” said Berenberg chief economist Holger
Schmieding. “This has already cost his
party several percentage points of support and given the [far-right] AfD a
further boost.”
A senior
German government official did not rule out the possibility of more Eurobonds
to finance spending on defense, a common public good, but he noted that that is
an issue for negotiations on the EU’s next budget framework, starting in 2028.
Likewise,
the current Dutch minority government has no appetite for anything radical on
joint borrowing in the near term.
“The cabinet
is not in favor of common debts for new [Eurobonds],” a spokeswoman said,
adding that a large majority in parliament is also against the idea.
In the
markets, meanwhile, frustration is mixed with resignation.
“We can
continue to preach,” said UBS Investment Bank’s chief European economist,
Reinhard Cluse, but “I’m not holding my breath.”
Nette
Nöstlinger and Geoffrey Smith contributed to reporting
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