Financial Futures: Literacy, Inclusion, and Innovation
Every year, FBF organizes an Chatham-House style Executive Seminar to discuss a topic of interest for European financial sector policymakers, practitioners and academics. This year, we discussed financial literacy. In the following, some insights I took away from the discussions, certainly not an exhaustive list of issues related to this important topic and not all of these points are linked to each other - so, not exactly random thoughts, but a collection of thoughts.
What is financial literacy? Google AI tells you that it is the "the possession of the knowledge, skills, and behaviours required to make informed and effective money-management decisions.” This already shows the multi-dimensional nature of financial literacy. There are knowledge and skills, on the one hand, and attitudes and behaviours, on the other hand. It is somewhat different from financial health or financial well-being, which also includes resilience and stability.
There are big differences across countries in financial literacy, including across Europe (as can be seen in this OECD report), but also within countries between different groups. There are also big cultural differences in the settings in which financial literacy programmes can be successful (for example, Northern European societies are often considered individualistic than Southern European societies). This therefore also requires national financial literacy strategies, even though the basic skills to be taught are still the same. So, certainly not one-size-fits all, but a 'comparison of sizes’ makes sense.
The digitalisation of the financial sector offers new opportunities and new risks, but raises also concerns of the necessary digital literacy. Similarly, Artificial Intelligence offers new opportunities for the interface between financial institutions and customers, but also risks, including scams, cyber attacks and mis-selling.
What is working and what is not working in financial literacy programmes? There used to be a tendency towards teachable moments and there has been a strong focus on including financial literacy in school curricula, to thus teach future generations. While a perfectly legitimate objective, it is important to look beyond school-age students towards other population groups, even if they might be harder to reach. For example, one topic often less focused on is savings for retirement - this is not only important in the context of the current discussions on the Savings and Investments Union (SIU) and strengthening the non-bank and market segments of the financial sector but also for the working population that is preparing for retirement and who might not be able to rely completely on state-funded pensions during their retirement age. In this context, the Swedish experience is very informative, where pension reforms in the wake of the 1990s crisis involved a stronger participation of individuals across all three pillars of the pension system, which drew attention to the need of improving financial literacy, which in turn allowed better informed savings and investments decision by individuals - a virtuous cycle. It shows that financial literacy is not only about acquiring skills and attitudes, but also applying them.
I also learned that some good policy ideas can have bad side consequences. The Markets in Financial Instruments Directive, for example requires separation of the sale of investment advice from the sale of investment management. While clearly resolving incentive problems, it might also result in fewer people looking for advice, as the costs are no longer bundled into the management fee, with consequent negative repercussions.
Ultimately, financial literacy is also linked to democracy. Managing your life in modern market economies requires economic and financial literacy. More literate people are certainly less likely to follow populist pipe dreams and false promises. While rather a high-level political comment, it is certainly an important guiding principle, especially in the current political environment.
12. July 2026
The Brexit referendum - 10 years on
10 years ago, on 24 June, we were woken by our older son before 6 am, telling us that the UK had voted to leave the EU. I was shell shocked. Over the years, it became clear that - as in so many referenda on European question - the Leave voters’ primary target of opposition if not anger was not Brussels but the national government, after six years of austerity (yes, the Tories had won the general elections a year earlier, but with less than 37% of the popular vote!). The difference between this and so many other referenda was that here the alternative to EU membership was never spelled out; it was simply a vote against the status quo without defining the alternative. Ever since the UK has been struggling on how to define its relationship with the EU. While Leave won the referendum, the UK lost the subsequent negotiations with the EU (partly because it was so focused on negotiating with itself) and Boris Johnson did not get to have and eat his cake, as he had promised. The UK is significantly worse off and the current fiscal policy dilemmas can be directly attributed to the smaller GDP and lower tax revenues as result of Brexit.
Beyond the UK, the Brexit vote can be seen as the starting point for the era of geopolitical and geo-economic fragmentation. In November 2016, Trump won his first presidential elections and soon started his trade wars. Ten years later, the trans-Atlantic partnership is being seriously tested (to put it mildly). While the EU came out stronger from Brexit, the current situation is the most serious test so far, with Europe’s socio-economic and democratic model at stake.
On a personal level and being a convinced European, this was a watershed moment, when the idea of being able to freely move across a tolerant and open Europe was seriously questioned. I had grown up in a Europe, divided between East and West, lived through the fall of the Berlin Wall and German unification, the democratic transition in Central and Eastern European countries and their accession to the EU. While maybe not the ‘end of history’, progress was palatable and history seemed to go the right way. By now, Russia (only 20 years ago declared ‘a normal country’ by leading economists) has turned (some would say: re-turned) into an imperialist aggressor, using military to terrorise the Ukrainian population and covert operations, both violent and non-violent, against the rest of Europe, including cyber-attacks and election interference. We are living in an era of poly-crisis and shocks, some exogenous (such as Covid 19), but most caused by populist authoritarian-style leaders in the West or dictators to the East. To put it bluntly, there is no ‘happily ever after’ - rather, the last ten years have shown that every generation has to fight again for democracy, prosperity, and peace.
26. June 2026
Looking back: what did I get right, what did I get wrong?
Below the blog entry I wrote three days after the Brexit referendum. The one prediction (like many economists) I got clearly wrong was that of a recession after the referendum. But I did get quite a lot right (like many other observers, most prominently my favourite Brexit commentator Chris Grey). Below I will comment on what I wrote ten years ago.,
2016: The vote to leave the European Union by a majority of British voters is a historic watershed moment. It is almost impossible to spell out all the implications that this will have for the UK, the European Union, global cooperation and the global, but especially UK, economy. We economists have been ridiculed during the campaign for providing a rather negative outlook for a UK outside the EU and while predictions on the growth impact of Brexit to one digit after the comma are certainly hard to believe (rather than stressing that these are predictions of a mean impact across a range of possible growth outcomes), the UK is slowly waking up to the reality that the “experts” might not have been so wrong after all. And it is easy to predict that the high degree of uncertainly, in financial markets, in exchange rates and therefore inflation rate, all driven by the uncertain future relationship between the UK and the EU and its political and economic repercussions, will result in a recession. And while some of this uncertainty has a self-fulfilling effect on consumer demand, there are important supply-side channels, such as that financial institutions might be less willing to support the real economy, given the high degree of uncertainty. It seems all but certain now that the UK will slip into recession: length and recovery will certainly depend on how quickly certainty can be established on the future of the UK relationship with the EU.
2026: As mentioned above, I got the prediction of a recession completely wrong. But I did get the long-term growth implications right, like 99% of economists. The UK is poorer because of Brexit, with the only discussion being about by how much.
2016: Beyond the immediate effect of the Brexit vote on the economy, what are the longer-term repercussions? Specifically, what are the repercussions for the financial center London of a possible exit of the UK not just from the EU but also from the Common Market (thus not choosing the Norwegian or Swiss model)? Well, one institution will certainly have to relocate: the European Banking Authority, responsible for ensuring effective and consistent bank regulation and supervision across the European Union (and thus beyond the Eurozone). As banks in the UK would lose their passporting rights across the EU (which allows a bank authorized, regulated and supervised by one of the bank regulators in the European Economic Area to be active across the EEA), London would become less attractive as location for European and non-European banks. And there will certainly be a lot of political pressure to relocate much of the euro-related trading away from London to Frankfurt and Paris.
2026: Even though some Brexiters saw the presence of EBA in London as negotiation chip, this never became part of the negotiations and EBA has now relocated to Paris. The effect of Brexit on the financial centre London was negative but not as much as predicted. And the EU has continued to extend the equivalence of UK CCPs, mainly because there is no obvious candidate in the EU as the new financial centre.
2016: Will the Brexit lead to substantial regulatory deviation of the UK from the rest of Europe? This is somewhat doubtful. First, the major regulatory reforms after the Global Financial Crisis have been initiated on the global rather than European level, including the Basel III accord. Second, UK banks that want to continue to be active across Europe will still have to comply with EU law. The EU will also pressure the UK to not adopt too light-touch regulation that might result in negative externalities for European host countries of London-headquartered banks. However, the Brexit will certainly make cross-border regulatory cooperation more difficult, with one major player - the Bank of England – being outside the EU institutional framework.
2026: While there has been some divergence in the financial sector (less so in other sectors), as also discussed in my report with Christy Petit, Singapore-upon-Thames has not been implemented. The Bank of England did get a secondary objective of competitiveness and growth, but regulatory and supervisory reforms have been cautious.
2016: Beyond the financial system, Leave campaigners have suggested to get rid of red tape and unnecessary regulation "forced upon" the UK by the Brussels bureaucracy. As pointed out before, some of this red-tape is very much home-made, while being EU member has not prevented the UK from offering one of the most market-friendly business environments in Europe. Importantly, the devil is in the fine print – many of these regulations are part of national legislation; a decade-long challenge for UK government officials and MPs. Not to speak of the constitutional repercussions for the devolution of Scotland and Wales, which relied on some of the policy responsibilities being shifted from London to Brussels and which will now have to be renegotiated (and not to forget the possible need to reintroduce border controls in Northern Ireland). More generally, one can expect a long soul-searching policy debate in the UK about the future role of the state, a topic on which many of the Leave campaigners and their voters certainly do not see eye-to-eye. Just observe the recent discussion on possible state aid to keep the Tata-owned steel plants in Wales open; state aid is rather restricted under EU law and would certainly also not be consistent with the libertarian approach of some of the Leave campaigners; however, there will be much more political pressure in an “independent” UK to provide such state aid.
2026: The bonfire of EU regulations never took place; even the most convinced Brexiters shied away from this, once in government (as the current Tory leader Badenoch said in 2023 when in charge of this brief: “I am not an arsonist. I am a conservative”). And while many Brexiters still claim that Brexit has not been done properly, there is clearly no political appetite (and no majority) for such a ‘proper Brexit’ - whatever this means. At the same time, red tape has increased due to the new customs border with the EU (as the UK government announced itself proudly in 2020: “We are committed to growing the customs sector”).
2016: As the UK woke up on Friday morning, there was an intense discussion of a split country among many dimensions: geography, income level and education. One important split was along age groups, with the overwhelming majority of below-25 years having voted for Remain. Looking at my own (EU passport holding) teenage boys, I can understand the recriminations that British teenagers and young adults will make their parents and grandparents for taking away their opportunities of moving freely around the European continent in the future.
2026: Needless to say that this still very much holds. And even though Brexit might not be a primary concern for most voters, the population is clearly split into ‘Brexit-liking’ voters and ‘Brexit-opposing’ voters, with different outlooks on politics and the world.
2016: On a final note, one wonders whether this first major reversal of European integration after 60 years is part of a broader trend that points to the end of a long globalization cycle. Populist movements calling for more nationalist and closed societies have gained strength across both sides of the North Atlantic. For Europe the question is whether the dam has broken or whether this crisis will be the one not wasted, in terms of fundamental reform!
2026: As discussed in my previous blog, this was indeed the start of a longer geopolitical and geo-economic fragmentation period. And the dam still holds, but barely!
26. June 2026
Research in bank regulation and supervision
Last month, my colleague Giancarlo Corsetti and I co-organised a conference on bank regulation and supervision, together with the Bank Policy Institute in Florence. In addition to a policy panel and an excellent keynote by Patrick Montagner (ECB Bank Supervision), six papers were presented that together give a nice overview of where the research on bank regulation and supervision literature currently stands.
A question often asked in 2020/21 was why banks did not use the released capital buffer to the full extent for lending. In the Economics of Capital Buffer Usability, Jose Abad and co-authors explore this question. Using data for 159 listed US and European banks over the period 2018-2024, they find that usability of buffers is non-linear: effective buffer use peaks at moderate releases (about 1–2% of risk-weighted assets) and collapses beyond that point. Even at the optimum, banks deploy only about half of the capital nominally released. Critically, banks use released buffers based on profitability calculations, not simply based on the permission to do so.
Do stress tests matter? In Disciplining Digital Risk: Evidence from Cyber Stress Tests, Nordine Abidi and co-authors use confidential ECB data to assess the impact of the 2024 ECB Cyber Resilience Stress Test. Having identified laggard European banks that underinvest relative to their cyber-risk profiles, they show that following the stress test announcement, laggard banks increased cybersecurity investment by about 80% relative to their peers. So, supervisory scrutiny can have an impact on banks’ behaviour.
Does supervision matter? In Bank Supervision as Information Production: Evidence form U.S. Bank Holding Companies, Mehdi Beyhaghi and co-authors use confidential supervisory data for U.S. bank holding companies from 2005 to 2023 to analyse variation in supervisory ratings. Specifically, they construct a benchmark model for supervisory ratings based on prior ratings, observable financial characteristics, and market data, showing that this benchmark explains 70–80 percent of rating variation. However, ratings deviate more from the benchmark when examiners have greater access to private information and there is examiner-level heterogeneity in stringency and pro-cyclical rating patterns These supervisory innovations have also real effects on banks' behaviour: unexpected stringency reduces asset growth and lending while increasing capitalisation; unexpected leniency is associated with higher future risk-taking. So supervision does matter!
How do regulation and supervision interact with each other? In Mitigating the Risks of Deregulation: The Role of Supervisory Attention, Elena Carletti and co-authors start with the relaxation of liquidity requirements for mid-sized banks in the US in 2018/19. They show that these banks were subject to an increase in supervisory examination intensity. This suggests that supervision can partially substitute for regulatory discipline and highlights the importance of supervisory capacity for financial stability.
Do supervisory reporting requirements translate into higher costs for borrowers? In The Large Exposure Premium Bank Market Power and the Cost of Borrower Lock-In (paper not publicly available yet), Felix Corell and Melina Papoutsi assess the effect of banks’ requirement to report exposures to borrowers with loans 10% of the respective bank’s capital. There seems to be indeed a ‘large exposure penalty’, especially for for smaller, unrated firms in areas with weaker bank competition.
In Evading the Same Standards: Supervisory and Risk Convergence (paper not publicly available yet), Consuelo Silva-Buston and co-authors revisit an old question - does convergence leads to higher risks? Using supervisory cooperation agreements between countries as positive shocks to de jure supervisory convergence, they show that this leads banks in affected countries to increase their common risks; these banks are also more likely to lend to the same firms and countries, extending to unaffected countries. Systemic risk, including the risk of a joint crisis, thus increases as a result.
As cross-reference, here is a separate blog entry on the conference on the BPI website.
21. June 2026
Artificial Intelligence and research in finance
At the recent 15thFEBS Conference in Florence I moderated a panel on the role that Artificial Intelligence will and should play in finance academia. I intentionally balanced the panel from very junior (recent PhD candidate) to very senior (journal editor) colleagues. The discussion touched on the use of AI in the research process as well as in the editorial process, but also on PhD training.
One first thing that struck me was the generally positive attitude and optimism about the role of AI in the research process. It has been only a few years since ChatGPT was released, but AI is being actively used, especially for coding and for editing. For those who have been around for a longer time, they really see this as more of a game changer than anything else during the past 30 years (maybe being finally able to run regressions on computers some 50 years ago was similar). It has a profound impact on the type of research we can do, including the use of unstructured text, turning it into interpretable data. So, AI opens new venues of research (including addressing new research questions) and can make us more efficient in the research process. Critical is the human oversight (a point often made about the use of AI more generally). Will AI make us researchers lazy? Will AI ever be able to come up with actual ideas for research, this moving from being a tool to being a driver of research? One (younger) panelist stated the potential for that in 5 or 10 years, given the rapid progress in AI.
When it comes to the editorial process, there are quite some concerns. How many papers are submitted that have been written by AI? How can an editor note this? Should a paper be automatically rejected if there are references that are wrong (AI hallucinations) or the paper mis-represents such references? There is certainly a trade-off between type I and type II errors here. What about referee reports that were written by AI? It is fairly easy to do so, but it would take away the expert element of the individual researcher as reviewer. Again, human oversight seems critical. Most importantly, any use of AI should be clearly stated. Personally, I am glad I am no longer an editor as I see, at least for a transition period, quite some challenges.
Do we have to teach the proper use of AI in graduate school? There was skepticism about this, given how quickly the technology progresses. If students take such a course during the first year, the knowledge might be obsoletetwo years later when they start working on their thesis. However, basic principles of, say, machine learning, are certainly something that should be on the syllabus. Critically, I think that teaching ethical principles for the proper use of AI are important to pass on to the next generation of researchers.
A fascinating discussion, which will certainly continue.
31. May 2026
Stablecoins - new assets, old risks?
I talked at a Bundesbank conference today about stablecoins. Given that my presentation was framed as “view from academia”, I started talking first about financial innovation more generally, a topic I have worked on quite a lot.
Financial innovations have driven the development of the financial sector over the past centuries. The 13th century saw the development of double book-keeping in Italy. The late 19th century saw the rise of universal banks in Germany to fund industrialisation and bond markets in the US to fund railway expansion. The 1950s saw the introduction of the credit card and the 1960s of the ATM.
Three technological innovations have triggered a new wave of financialinnovation in the 21st century.. First, mobile technology, the Internet and Internet application programming interfaces, APIs which have enabled much quicker information exchange, new delivery channels for financial innovation and a better exploitation of economies of scale, scope and networks. Second, the IT revolution has facilitated the creation, processing and the use of big data for financial risk measurement and management. And finally, distributed ledger technology (DLT), which started with blockchain and with cryptocurrencies, but has of course gone far beyond, also by allowing for smart contracts.
All of these new technologies have led to financial innovations with big benefits. Mobile technology has increased financial inclusion, especially in developing countries, by allowing more people at a cheaper rate to access financial services than having to go to branches that are not as common in less populated, less densely populated countries. Big data and new sources of data have allowed non traditional clients to be included, by allowing new types of data, such as social media data or the digital footprint to assess applicants' credit worthiness. And distributed ledger technologies can reduce processing time, allow almost instant trading and settlement.
However, financial innovation also poses risks. Specifically, financial innovation can contribute to systemic risk by allowing banks to take more risks. Better risk diversification, if everybody diversifies the same way, might result actually in higher rather than lower systemic risk. Financial innovation can be used for regulatory arbitrage, and we've seen this in the run up to the global financial crisis with special purpose vehicles. But it can also lead to additional risks of operational failure or vulnerabilities to cyber attacks.n. More generally, digitalization AI might put too much emphasis and too much trust on technology rather than human judgment.
If we analyse stablecoins with this framework for financial innovation, we can see that they are use cases for stablecoins, such as cross-border payments, even though almost 90% of transactions with stablecoins are for on- and off-ramping into the crypto world or to use them as collateral for crypto lending. So, for the moment, all they are used for is as bridge between the crypto world and traditional finance. And in Europe, there seems even less of a use case, given the relatively high efficiency of our cross-border payment system. But ultimately, it is the consumer and the market who decide. And competition to the traditional banking and payment system is to be welcomed!
It is for the regulator and supervisor to minimise the risks, of which there are quite some. First, stablecoins are not stable, i.e., they can break the peg or (to make the equivalent to money market funds) the buck, which poses a problem for stablecoin holders. This leads to a second problem: possible runs on stablecoins, which might force them to liquidate their assets, in the form of bank deposits and government bonds. Or alternatively, the failure of a bank where a stablecoin holds large share of its asset might result in the breaking of the peg (as happened in March 2023 with the failure of SVB and USD Circle breaking the peg). This leads to a third problem, the knock-on effects of a stablecoin run and depegging on the rest of the financial system: it can result in bank liquidity problems and even disruptions on the government bond markets. Given the current stablecoin capitalisation, this does not seem a problem yet, but given growth projections, it might turn into a problem eventually.
Regulators and supervisors have learned to balance benefits and risks of financial innovations, such as stablecoins. However, there is now an additional dimension, that of geopolitics. Given the actions of the Trump administration undermining the status of the US dollar as global reserve currency while at the same time increasing the US fiscal deficit and thus the supply of US Treasuries, the US administration has decided that pushing USD denominated stablecoins is a good instruments to attract more demand for US government bonds. This push for USD denominated stablecoins risks undermining monetary sovereignty of other jurisdictions and global financial stability. While before one could count on the US - for simply selfish reasons - to coordinate globally during financial distress situations originating in the US, once can no longer count on that. Taking a clearer stance against what can only be described as ‘weaponisation of finance’ is therefore strongly in the European interest.
In my discussion I also referred to the recommendation of the ESRB to either prohibit or more stringently regulate and supervise third country multi-issuer stablecoins, but I have covered this in a previous blog entry, so will not repeat it here.
7 May 2026
Unicredit and Commerzbank
The Shareholder meeting of Unicredit approved today an increase in capital to fund a take-over offer to the shareholders’ of Commerzbank. I was interviewed on this and the more general question of cross-border mergers in Europe by WDR 5(in German). While I cannot talk about the commercial details of this specific deal, I can talk about the need for more pan-European banks. Europe has large banks, but they are all national and dwarf in comparison to US banks. Now, big is not always better, but in times of need to invest in digitalisation and AI, scale economies are important. Larger scale can also be important for big banks to support the development of capital markets within Europe (which will ultimately help also innovative start-ups through the development of a venture capital ecosystems that depends on deep and liquid capital markets).
So, there is a natural trend towards consolidation in banking; the problem arises if such consolidation takes place exclusively on the national level, which would raise too-big-to-fail concerns and concerns of the bank-sovereign doom loop we saw during the Eurodebt crisis. So, having large European rather than national banks can be helpful, as it would ultimately help create a truly European Single Market in finance, something we do not have at this stage.
But are we not missing the European financial safety net to prevent turmoil like in 2008, with a European deposit insurance missing and the resolution framework missing a backstop? Yes, that is indeed the case and ideally a complete European financial safety net would be created before pan-European bank mergers take place. However, the political reality is a different one and one can only hope that more of such cross-border mergers will provide the necessary momentum to complete the banking union.
Will SME finance in Germany suffer if Unicredit takes over Commerzbank? First, Unicredit is as much an SME lender as is Commerzbank and not only in Italy but also Central and Eastern Europe where it has subsidiaries. Second, there is no indication that Unicredit would shut down this part of Commerzbank’s business especially if profitable. Third, Germany is not suffering from a lack of financial institutions that focus specifically on this enterprise segment.
So, why is it that German politicians are against this merger? It cannot be about jobs, as the previous government tried to induce a merger between Deutsche Bank and Commerzbank, which would have cut many more jobs than the takeover of Commerzbank by Unicredit. Is it rather banking nationalism, i.e., the closeness of politics in a country to the banks in the same country? Something well documented in Germany (e.g., in this paper, by Rainer Haselmann and co-authors) and many other countries.
To come back to my initial sentences - I cannot judge the commercial details of Unicredit’s take over bid, but I can clearly see the need for more pan-European banks! And cross-border mergers are the only sensible way to get there.
4. May 2026
The Global role of the euro
I was invited to a public hearing of the European’s Parliament ECON Committeeto discuss the ‘global role of the euro’. Below I paste in my introductory remarks.
An important topic that came up during the Q&A session was the why we would want to strengthen the global role of the euro. There are benefits and costs of providing the global reserve currency (referring to the Triffin dilemma and Kindleberger’s hypothesis that a stable, open global economy requires a single dominant hegemon to act as a stabilising force which comes with obligations for the country providing this currency); more importantly, I would consider it naive to push to aim that the euro replace the US dollar as global reserve currency, even if all the conditions I mention below are being met.
I would rather see the strengthening of the global role of the euro as a way to strengthen the strategic autonomy and thus resilience of Europe. We need less dependence on the US, aim for global cooperation where and when possible but also be able to stand alone if necessary. Further, a true Savings and Investments Union in Europe will also strengthen the global role of the euro; so, to an extent, stronger European capital markets and a stronger global role for the euro are two sides of the same coin.
Introduction
Since its inception in 1999, the Euro was widely expected to emerge as a premier global reserve currency capable of rivalling the US Dollar (USD). Decades later, that transition has not materialised. While there was an increase in the international role of the Euro in the early years of this century, it declined significantly after the Global Financial Crisis. Currently, composite indices show a role of less than 20%. And while there has been a decline in the role of the USD as reserve currency (from 71% in 1999 to 59% in 2021), this shift out of dollars has been to a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries (Arslanalp et al., 2022), so the Euro has not really benefitted from this decline.
While there are short-term fluctuations in the international role of the euro related to business and monetary policy cycles, I would like to focus on long-term trends but link this discussion to recent events and discussions. Importantly, the debate over the Euro’s international standing has been reignited by the dramatic geopolitical and geoeconomic shifts of the past year.
To understand the Euro’s potential, we must first define what a "global role" entails. It is multifaceted, encompassing a currency's use as a reserve currency for central banks, a funding currency for international debt and equity, and an invoicing currency for global trade.
Why the US Dollar Remains Dominant
To understand why the Euro has struggled to gain ground, we must look at the pillars of USD dominance as global reserve currency:
The European Shortfall
Comparing the Euro area, and the EU more generally, to the US reveals why the Euro’s global role remains limited. European capital markets are significantly shallower and lack a unified "safe asset" comparable to US Treasuries. Currently, only German Bunds are viewed as truly safe and sufficiently liquid, and their supply is limited (German government bonds amount to 2 trillion euro compared to 30 trillion USD of US Treasuries).
Institutionally, Europe faces internal fragmentation. There is a notable divergence in the legal frameworks and government efficiency across the 27 member states, with the average in indices of institutional quality well below the US. Furthermore, the common law systems of the US and UK are often perceived as more flexible and reliable for international finance than the varying civil law frameworks within the EU.
Finally, while the EU is an economic powerhouse, it has yet to project equivalent geopolitical weight given the absence of a common foreign policy. Until recently, the EU has explicitly avoided any military role (leaving this to NATO, where 23 EU member states are also members) and has a limited role as geopolitical player.
In sum, compared to the US, the EU falls short on capital market depth and liquidity, a European safe asset, institutional strength, and a geopolitical role. These are some important factors that can explain why the Euro does not have the same global role as the USD.
A Shifting Horizon: The Erosion of Dollar Trust
While the recent history favours the USD, the future is less certain. Several current US policy trends may be undermining the dollar’s hegemony:
The Path to European Strategic Autonomy
Recent global events have exposed Europe’s heavy dependence on the US financial system—from payment rails (Visa, Mastercard) and Central Counterparties (CCPs) to the reliance of European banks on USD funding. Reducing this dependency is not just an economic goal; it is a prerequisite for strategic autonomy.
Strengthening the global role of the Euro is inextricably linked to the project of a Savings and Investments Union. By deepening our internal markets, we simultaneously build the infrastructure needed for a global currency. I would be happy to elaborate on this further during the questions.
Strategic Recommendations: How to Promote the Euro
To elevate the Euro's international standing, Europe must act decisively, looking at benefits in the long-term and avoiding short-termism, in several areas:
All these actions require looking beyond short-term national interests and focusing on Europe’s long-term interest to maintain and grow its prosperous and democratic societies.
Conclusion
As the hegemony of the USD as global reserve currency is being questioned, it is unlikely that there will be a smooth transition to a new equilibrium. The Euro area and the EU therefore stand at a crossroads, with challenges and opportunities. By addressing internal fragmentations and building a robust, independent financial infrastructure, the Euro can finally begin to fulfil the global role envisioned at its birth. Strengthening the Euro is not merely about competition; it is about ensuring Europe's resilience in an increasingly volatile world.
References
Arslanalp, Serkan, Barry Eichengreen, and Chima Simpson-Bell (2022): The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve Currencies, IMF Working Paper 22/58.
Eichengreen, Barry, Arnaud Mehl and Livia Chitu (2019): Mars or Mercury? The geopolitics of international currency choice, Economic Policy 34, 315-63.
European Central Bank (2025): The International Role of the Euro. Frankfurt a.M., Germany
Gopinath, Gita, Pierre-Olivier Gourinchas, Andrea F. Presbitero, and Petia Topalova (2024): Changing Global Linkages: A New Cold War? IMF Working Paper 24/76.
16. April 2026
Trump’s war, everybody’s problem
One month has passed since President Trump decided to attack Iran, joint with (and maybe pushed by) Israeli Prime Minister Netanyahu. The goals of regime change or unconditional surrender have not been achieved. In the meantime, the Iranian regime has taken the global economy hostage by partly blocking the Strait of Hormuz. So far, one can argue, the costs of the war are significantly higher than the benefits. It is also not clear there is an exit strategy and that the cost-benefit balance will favour the US any time soon.
The situation is hard to capture in slogans and protest signs. The theocratic Iranian regime is a terror regime, not just within its own country but throughout the region with its allies Hizbollah, Hamas and the Houthis. Containing the threat posed by this regime is a legitimate geopolitical goal as is to foster democratic resistance in Iran. The question is how to go about it. In 2015, the Obama administration together with several European countries came to an agreement with the Iranian regime on limits on nuclear enrichment and third-party inspections of nuclear facilities. While far from perfect, it was seen by many as an important first step towards the threat by Iran. Trump exited from the agreement during his first presidential term, resulting in new tensions between Iran and the US. Forcing Iran through sanctions to abandon any nuclear ambitions has not resulted in a success either, ultimately leading to the stand-off before the current conflict. There are strong indications (including directly from Marco Rubio) that Israel might have forced the hand of the US by deciding to unilaterally attack Iran. And now we are in a situation of the US throwing around its military might without achieving its goal. So as laudable the goals of regime change and containing a terror regime are, the current US strategy to achieve these goals has clearly failed so far.
There are a lot of suggestions that the European partners in the NATO are somewhat obliged to help the US in this war; these suggestions are simply wrong. First, NATO is a defence pact, but the US has not been directly attacked by Iran. And the US has not even asked to trigger Article 5 (joint defence if one member state is attacked), which shows that this argument simply does not hold. It is important to note that in the one case that the US did trigger Article 5 (after 9/11), the European NATO partners did respond and helped defeat the Taliban and Al Qaeda in Afghanistan (and no, they did not stay behind the lines, like president Trump did during the Vietnam War). Second, comparing the Iran war to the Ukraine conflict is similarly wrong. One, Ukraine is not the aggressor, but Russia is, violating the Budapest Memorandum; two, European countries provide by now more military aid than the US. While security assurances provided in 1994 by Russia, US and UK cannot be interpreted as defence guarantee, they certainly cannot be interpreted either as simply ‘looking away’, as Mr. Trump sometimes suggests.
Even though the European countries are not morally or legally obliged to help the US, ultimately, they will have no other choice than to step in if the situation deteriorates further. With oil prices rising and the threat of supply chain disruptions, other countries might have to intervene to secure shipping routes. The important point is that this cannot happen ‘on command’ but rather in coordination and cooperation, words that are rather foreign to Mr. Trump’s world view.
Beyond the current crisis but reinforced by it, one important lesson learned over the past 15 months of the second Trump administration is that one can no longer trust the US. The flip-flopping in terms of policy actions, public humiliations, and open blackmailing will ultimately lead to a clear distancing of countries from the US; the cautious reaction of European countries to the call for assistance by the US in the Strait of Hormuz is a clear indication of that. Ultimately, this will damage the US, with the winner being China.
Another important lesson learned is that dismissing experts will come back to bite you eventually - a lesson learned the hard way by the UK during the Brexit process. The staff of the National Security Council in the US is an impressive collection of foreign policy and defence experts, but has been reduced both in numbers and influence and the impulsive decision to go to war with Iran without any scenario planning shows that. Many experts would have warned the president Trump that Iran might block the Strait of Hormuz, but he was not interested in their views and thought he knew better. The world is worse off because of that.
31. March 2026