ECB’s Gabriel Makhlouf: The Euro Isn’t Ready to Replace the US Dollar as Global Financial Anchor

• Why Can’t the Euro Challenge the Dollar’s Dominance?
• What’s Missing in Europe’s Financial Infrastructure?
• Is the Dollar’s Reign Under Threat?
• How Could Europe Strengthen the Euro?
• What’s Next for the ECB?
• FAQ: The Euro vs. Dollar Debate

Gabriel Makhlouf, a member of the European Central Bank’s (ECB) Governing Council, has dismissed claims that the euro could soon replace the US dollar as the backbone of the global financial system. Speaking at an economic conference in France, Makhlouf highlighted Europe’s lack of structural and fiscal integration as key barriers. He emphasized the need for deeper EU unity, a unified fiscal authority, and a common SAFE asset akin to US Treasuries. While demand for dollar alternatives grows, Makhlouf insists the euro’s infrastructure must evolve first. This article unpacks his arguments, the euro’s current limitations, and what Europe must do to strengthen its currency’s global role.

Why Can’t the Euro Challenge the Dollar’s Dominance?

Gabriel Makhlouf, who also serves as Ireland’s central bank governor, minced no words: "The euro isn’t ready to replace the dollar." His reasoning? Europe’s economic architecture remains incomplete. Unlike the US, the eurozone lacks a centralized fiscal system, a unified debt market, or a DEEP pool of safe assets. For instance:

• No "Eurobond" Equivalent: The US Treasury market, with its $25 trillion in outstanding debt, offers unparalleled liquidity. The eurozone has no comparable benchmark.
• Fiscal Fragmentation: While 20 countries use the euro, their budgets remain national—limiting crisis-response tools. During the 2011 debt crisis, this flaw nearly shattered the currency union.
• Political Hurdles: Germany and the Netherlands historically resist shared debt, fearing moral hazard. Meanwhile, the US federal system automatically redistributes funds across states.
• Market Depth: Euro-denominated assets comprise just 20% of global reserves, per IMF data, versus the dollar’s 58%.
• Geopolitical Muscle: The dollar’s dominance is reinforced by petrodollar deals and SWIFT sanctions leverage—tools Europe lacks.

Makhlouf’s blunt assessment: "Europe’s economic system isn’t fully formed yet."

What’s Missing in Europe’s Financial Infrastructure?

Makhlouf pinpointed critical gaps:

• No Common Safe Asset: US Treasuries are the global "risk-free" benchmark. Europe’s fragmented bond markets—German Bunds, French OATs—can’t match that status.
• Weak Fiscal Backstop: The €800 billion COVID recovery fund was a start, but it’s temporary. The US has permanent federal spending power.
• Banking Union Stagnation: A decade after its launch, deposit insurance remains incomplete, leaving banks vulnerable to local shocks.
• Capital Market Gaps: Cross-border investment within the EU is half the level of US interstate flows, ECB data shows.
• Institutional Shortcomings: The ECB lacks the Fed’s dual mandate (employment + inflation), limiting its crisis toolkit.

"Without these," Makhlouf warned, "the euro will remain a regional player."

Is the Dollar’s Reign Under Threat?

Recent currency shifts sparked speculation about "de-dollarization." Makhlouf dismissed this as premature:

• BRICS Alternatives: China’s yuan makes up just 3% of global payments (SWIFT), despite Belt and Road lobbying.
• Crypto Volatility: Bitcoin’s 2022 crash and stablecoin collapses (e.g., TerraUSD) reinforced trust in traditional reserves.
• Dollar’s Network Effects: 88% of forex trades involve dollars (BIS 2022). Even euro-priced oil contracts clear in dollars.
• Fed’s Crisis Role: During March 2023’s banking turmoil, the Fed’s dollar swaps calmed markets—a role the ECB can’t replicate.
• Historical Precedent: Sterling retained reserve status for 50+ years after Britain’s 19th-century decline.

"A few exchange-rate wobbles don’t unseat a hegemon," Makhlouf quipped.

How Could Europe Strengthen the Euro?

Makhlouf urged bold reforms:

• Complete Banking Union: EU-wide deposit insurance to prevent bank runs, like Spain’s 2012 crisis.
• Issue Joint Bonds: Permanent "Eurobonds" could rival Treasuries. Even skeptics like Germany now accept limited mutualization.
• Boost Capital Markets: Harmonize insolvency laws to mimic the US Chapter 11 system, encouraging risk-taking.
• Green Finance Edge: Lead in carbon-neutral bonds—a $5 trillion market by 2025 (BloombergNEF).
• Strategic Autonomy: Reduce reliance on dollar-priced energy. The EU’s €300 billion REPowerEU plan is a step.

"Global uncertainty is our chance to act," he declared.

What’s Next for the ECB?

Makhlouf hinted at policy shifts:

• QT Adjustments: The ECB’s balance sheet unwind may slow to avoid bond-market stress.
• Digital Euro Push: A CBDC could counter private stablecoins but requires privacy safeguards.
• Climate Mandate: Expect more "green" collateral rules, despite Bundesbank objections.
• Geopolitical Role: The ECB may expand euro liquidity lines to friendly nations, emulating the Fed.

"We can’t just mimic the Fed," he cautioned. "Europe needs its own playbook."

FAQ: The Euro vs. Dollar Debate

Could the euro ever replace the dollar?

Not without deeper EU integration. The dollar’s dominance rests on America’s unified fiscal system, deep capital markets, and geopolitical influence—advantages Europe currently lacks.

What are "safe assets," and why does Europe need them?

Safe assets (like US Treasuries) are low-risk, liquid securities used as benchmarks. Europe’s fragmented bond markets reduce the euro’s appeal for reserve managers.

How does the ECB differ from the Federal Reserve?

The Fed has a dual mandate (employment + inflation) and acts as lender of last resort for the entire US economy. The ECB focuses primarily on price stability and lacks fiscal backing.

Are cryptocurrencies a threat to the dollar?

Unlikely. Crypto’s volatility and regulatory scrutiny limit its reserve potential. Even Bitcoin’s market cap ($600 billion) is dwarfed by the $7 trillion held in dollar reserves.

What’s the biggest obstacle to euro reform?

Political will. Germany and other northern states resist debt sharing, while southern nations chafe under austerity. Until this divide closes, the euro will remain second-tier.