How Europe Could Share the Dollar’s Privilege
The challenge is finding another financial harbour large enough for the world’s savings. Illustration generated with AI.
Imagine that central banks begin moving a much larger share of their reserves from dollars into euros. Demand for European bonds rises, borrowing becomes cheaper and, unless other flows offset the shift, the euro appreciates. European exporters face higher foreign prices or lower margins. This is a serious adjustment problem for an economy with important export industries. But it does not establish that Europe cannot share the dollar’s international role. To understand the possibilities, we have to follow both directions of investment: the money entering Europe and the money Europeans could invest abroad.
China provides a useful starting point because it already combines a large trade surplus with extensive foreign investment. At the end of 2025, Chinese residents held approximately $11.8 trillion of external financial assets. These included $3.6 trillion of direct investment, $2.0 trillion of portfolio investments and $3.7 trillion of official reserve assets. These are accumulated holdings across the economy, not one year’s purchases or a portfolio belonging entirely to the central bank. They are reported in dollars, but that does not mean they are all dollar-denominated. China’s State Administration of Foreign Exchange.
China also imports substantial quantities of goods. Its official figures put merchandise imports at $2.58 trillion in 2025. Describing it as buying almost nothing from abroad misses the distinction that matters: it exports considerably more than it imports. The resulting external surplus is associated with net investment abroad. That investment can include bonds, shares, loans and ownership of businesses. There is no requirement that every additional unit of Chinese saving ends up in US government debt. Chinese customs figures.
Now suppose foreigners want to acquire an additional 100 billion renminbi of Chinese bonds. Their demand could strengthen the renminbi. But suppose Chinese investors also want to exchange 100 billion renminbi for foreign assets. The two flows can broadly offset each other’s pressure on the currency. China has acquired more overseas investments while foreigners have acquired more claims on China. Its international balance sheet has expanded on both sides. A country can supply assets in its own currency to the world while investing abroad; becoming a reserve issuer does not require it to become a net importer.
Europe could accommodate additional reserve demand in the same way. Foreign central banks could hold more euro bonds while European pension funds, insurers, companies or public investment institutions increased their foreign holdings. Their overseas purchases would create demand for foreign currencies and help offset the incoming demand for euros. The flows would not automatically match, and their timing would matter. Nevertheless, this is a practical alternative to assuming that every increase in the euro’s reserve share must produce an intolerable appreciation.
Nor would those purchases have to be confined to dollars. Europeans could acquire yen bonds, Canadian securities, Australian businesses or Korean shares. The currency exposure matters more than the issuer’s nationality: a dollar bond issued by a Korean company remains a dollar asset. Buying US shares diversifies away from US government debt, but does not automatically diversify away from dollar exposure. A strategy intended to spread currency demand would therefore have to consider both the investments purchased and how their exchange-rate risks were managed.
Central banks can hold equities as part of a diversified foreign portfolio. Switzerland demonstrates the possibility: at the end of June 2026, equities represented 28% of the Swiss National Bank’s foreign-exchange reserves, which also included several currencies and different classes of bonds. This does not mean the ECB currently operates the same investment policy. The ECB gives priority to liquidity and security in managing its foreign reserves. A large European programme of overseas equity or infrastructure investment would require an explicit institutional design and an agreement about who carried the risks. SNB portfolio; ECB reserve management.
Those risks explain why the arrangement is not free money. Foreign shares can fall; infrastructure can be difficult to sell; borrowers can default. If Europe issued dependable euro liabilities and invested the proceeds in riskier foreign assets, someone would have to absorb the losses when those investments performed badly. Appreciation would also reduce the euro value of unhedged foreign holdings. The potential advantage would be obtaining finance on favourable terms and investing it productively. The price would be accepting investment and currency risk while preserving confidence in the assets offered to the world.
There could be substantial gains beyond investment returns. A larger international role could reduce financing costs for European governments and businesses. More borrowing and trade invoicing in euros could reduce European firms’ need to manage foreign-currency exposures, although it would not remove foreign customers’ sensitivity to prices. European financial institutions could handle more international business. Less reliance on dollar funding and payment channels could give Europe greater room to pursue its own policies. Christine Lagarde has explicitly connected the euro’s international role with cheaper financing, reduced currency exposure and greater strategic autonomy. Lagarde’s assessment.
Could that justify an initially painful adjustment? Yes, if cheaper finance supported investment that raised productivity and strengthened domestic demand. Better infrastructure, more reliable energy and growing businesses could help an economy prosper with a stronger currency. But the gain would not be guaranteed by reserve status itself. Money could instead inflate existing asset prices, and export industries could lose capacity before replacement activity developed. The policy objective would be to turn financial demand into productive capacity while managing the transition. International monetary influence would support that work; it would not substitute for it.
Cooperation with Canada, Japan, Korea and Australia could make the transition more manageable. A plausible programme would expand borrowing and trade settlement in partner currencies, improve access to each other’s securities markets and strengthen arrangements for emergency liquidity. Such cooperation would build on existing mechanisms: the ECB already participates in a reciprocal swap network that includes the Bank of Canada and the Bank of Japan. Extending cooperation to additional partners would require further agreements. These arrangements help institutions obtain currency during funding stress, making routine use of that currency more dependable. ECB liquidity arrangements.
The partners would still need to accept real economic consequences. Large European purchases could raise their currencies or asset prices. A smaller financial market cannot absorb unlimited investment at unchanged prices. Cooperation could distribute these pressures across more markets and connect financing with useful investment, but it could not make every member’s currency cheaper against every other member’s currency. Nor would buying one another’s bonds create additional real resources by itself. The durable gains would come from better financing, better investment and less dependence on a single international currency.
China’s opportunity follows the same logic, but its institutional choices differ. It already owns overseas assets and can expand them. A much larger reserve role would additionally require foreigners to trust the assets China issues: they would want reliable access, deep markets and confidence that they could convert or move their money during stress. China’s capital controls constrain that freedom. Managed channels can support growing renminbi use, but broader international acceptance would involve decisions about how much financial control Beijing was willing to relax. Its foreign investments demonstrate that outward investment is possible; they do not settle the separate question of foreign confidence in renminbi claims. Federal Reserve analysis.
Sharing the dollar’s role is also a different ambition from eliminating it. In the first quarter of 2026, dollars represented approximately 57% of global foreign-exchange reserves and euros 20%. A world divided roughly equally between dollars and all other currencies is therefore much closer to the present than a world in which the euro alone matches the dollar. An illustrative parity scenario might be 40% dollars, 40% euros and 20% other currencies. Reserve holdings, trade invoicing and international borrowing are separate measures, however; parity in one would not establish parity in all three. IMF reserve data.
A gradual transition would allow institutions, asset supplies and outward investments to develop alongside incoming demand. Reaching a larger reserve share would not require the euro to appreciate indefinitely: a portfolio adjustment changes desired holdings, while subsequent flows depend on reserve growth and investors’ decisions. Multiple reserve currencies could increase diversification and the supply of safe assets, although investors’ ability to switch between them could also amplify financial volatility. IMF research recognises both possibilities. The outcome would depend on the institutions supporting the currencies and their response to stress. IMF analysis.
The dollar’s incumbency remains valuable, but export dependence does not make it economically unchallengeable. Europe could gain from a larger role while using outward investment and stronger domestic activity to accommodate the demand. China could also expand its role while retaining substantial foreign assets. Both would have to provide trustworthy financial claims and manage the risks associated with them. The practical question is how much monetary influence they want, and whether they will build and sustain the institutions needed to earn it.
Originally published on Substack on 21 September 2026.