Why Eurozone expansion should be welcomed around the world
Bulgaria is poised to be the 21st country to adopt the euro. Can the EU currency offer the world an alternative to the US dollar? As America roils global trade, hopes are pinned on Europe getting its act together.
The news that Bulgaria is poised to join the Eurozone with effect from 2026 is good news for the euro. Born in 1999, Europe’s common currency has acquired a safe-haven sheen in the aftermath of US tariff announcements and their variability, which have combined with the resultant uncertainty to promise America’s economy both slower growth and higher inflation.
For the US, if stagflation is rare, its self-induced version would be rarer still. Bond investors have been particularly nervous. Yields on US government bonds jumped after Moody’s cut its sovereign credit rating in mid-May. This sell-off was in contrast with the market’s response to downgrades by S&P and Fitch earlier, when the dollar’s safe-haven appeal had attracted capital and pushed those yields down.
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If the US under Donald Trump’s leadership turns inward and abdicates its role in the wider world, much will need to adjust. This includes the dollar, which has served as the world’s anchor currency ever since the global financial order was reset at Bretton Woods towards the end of World War II. The euro is not a perfect substitute for the dollar, yet qualifies as the most likely contender as an alternative.
A look at International Monetary Fund data on the currency composition of official foreign exchange reserves makes it clear that the euro is the world’s second most preferred reserve currency. Of the forex worth $12.75 trillion held by various countries, about 53% is in dollars and 19% in euros. The third-placed Japanese yen accounts for only 5% of the total.
The dollar is not about to lose its top status, but the greenback has been losing its global glow as a result of the Trump administration’s mercurial policy outlook on trade and finance. Rather than any single currency filling a vacuum left by the dollar, it is likely that several currencies will share the burden.
But, unless a dramatic innovation leaps up—like a digital stablecoin linked to a basket of currencies on a blockchain under supervision of the Bank for International Settlements—the euro is best placed to succeed the dollar. Hence, to the extent an alternative might be needed, it is in everybody’s interest for the euro to be managed well.
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Although the euro is the EU’s currency, not all its constituents use it. Only 20 of its 27 members do. Bulgaria would be the 21st should its monetary system meet all five convergence conditions. Set in terms of inflation, debt, fiscal health, currency stability and long-term yields, these criteria are stiff.
But the euro’s stability and strength are derived from the robustness of the EU, which depends not just on its ability to deepen the union, but also keep a structural source of frailty in check. While the European Central Bank (ECB) runs a common monetary policy for the Eurozone, each EU country has its own fiscal policy.
This complicates the ECB’s job.
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It also means investors are not equally drawn to debt issued by all EU constituents, so the yields on various state-issued bonds vary; German bunds have the lowest (2.52% on 10-year paper) and Italy the highest (3.5%).
The EU must take bold steps to reform its economic institutions, not just to match the US on business dynamism, but also for the sake of its own cohesion. A robust market for common bonds created by expanded issuances of joint debt could enhance the euro’s appeal. And that would also count as good news. If central banks need to diversify their forex holdings, they shouldn’t be short of options.
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