9 minute read
Over the last few months, I’ve tackled the de-dollarization buzz surrounding the U.S. dollar.
And my question remains: Sure, the U.S. dollar might not be spotless - like a shirt with a stain in a basket of laundry. But isn’t it still the cleanest shirt in the pile?
Or said another way, if the dollar were dethroned, what could possibly take its place?
A BRICS currency? Not likely. I’ve covered this in The De-Dollarization Dream and The Flaws of a BRICS Currency. The idea sounds bold, but it falls apart in reality.
- Ironically, this might push them to move faster.
But while everyone watches BRICS, the euro waits quietly in the background. It’s already the world’s second-largest reserve currency. On paper, it could be a contender. In practice? it’s struggling.
So, let’s unpack why the euro is stumbling under European turmoil - and how this keeps the dollar standing strong.
Germany And France: Putting The Entire Eurozone at Risk?
There’s no other way to say it besides the eurozone is still looking at some trouble.
Why?
Because its two biggest economies - Germany and France - are stumbling. And hard.
Germany, the largest, is stuck in a rut. Factories are slowing, exports are falling, and consumer demand is weak. Some are even calling Germany the “sick man of Europe” again, a label it hasn’t carried since the early 2000s.
Germany’s economy heavily relies on exports, with a huge current account surplus of 6% of GDP in 2023. This dependence is risky – because if global demand drops (which it has) or tariffs rise, as Trump has said2, Germany could take another big hit.
Figure 1: Trading Economics, November 2024
Meanwhile, France – the second largest euro-zone economy - isn’t doing much better. Its finances are a mess. The government owes a lot of money, and investors are starting to worry. How bad is it? In 2023, France spent 57% of its money on government programs. That’s more than almost any other country in Europe3. And making matters worse, France's debt has reached a record €3.228 trillion - amounting to 112% of GDP. This puts a strain on the country’s finances - especially as growth prospects stay limited.
Adding to this mess is that France’s budget is so chaotic it’s triggered a vote of no-confidence - the first in over 60 years4. This means lawmakers are essentially saying, “We don’t trust you to lead anymore” and forced Prime Minister Michel Barnier and his cabinet to resign - throwing the country into deeper uncertainty.
Thus, when your star players are benched, the whole team feels the squeeze.
Germany and France account for nearly 50% of the eurozone’s GDP, and no other member states can fill the gap.
How Does This Affect the Euro?
When the euro launched in 1999, it quickly became a top reserve currency as many shifted away from the dollar. With rapidly growing economies like Portugal, Italy, Greece, and Spain (aka the PIGS), the euro looked like a serious rival to the dollar.
On the back of this, its global influence peaked in 2009, accounting for 28% of foreign exchange reserves. At the time, it was seen as a strong alternative to the dollar, especially after the 2008 financial crisis and the U.S. dollar’s sinking value.
But rapid growth rarely comes without cracks later. . .
By 2011-12, many of the eurozone nations were drowning in debt and began deleveraging. Since then, growth shriveled, demographic challenges worsened, war broke out (Ukraine and Russia), and political turmoil arose.
Now, the euro’s share has steadily declined to 20% (dropping nearly a third).
Figure 2: IMF, Q2/2024
Meanwhile, the U.S. dollar gained strength, supported by faster economic growth and above-trend equity performance.
For context:
- The S&P 500 has significantly outpaced Europe’s Stoxx 600 over the last decade6.
- U.S. stock values reached $63 trillion - four times the size of Europe’s markets.
- Europe lacks a single public company valued at over $500 billion - while the U.S. boasts eight companies worth more than $1 trillion each (Apple and Nvidia have each surpassed the $3 trillion mark, while Microsoft have exceeded $2 trillion).
Talk about a divergence.
At the crux of it, less growth (both economically and in markets) means less demand for a currency. It's not like investors globally are rushing in to So, unless this can turn around, it’s likely the eurozone and euro will further feel pressure.
- But, on the flip side of this, European stocks are trading at a roughly 40% discount to their American counterparts – so it does open up some potential opportunities.
The only issue is, will the gap widen against the U.S. or narrow?
Time will tell, but it will require some significant rebalancing from the eurozone economies. The kinds that many won’t want to do - such as Germany dropping its reliance on exports and France and Italy figuring out their bloated budgets.
Germany's Surpluses and Europe's Struggles: The Imbalance That Shapes the Eurozone
Germany has long relied on the eurozone to buy its massive exports. Since the euro’s creation in 1999, its trade surpluses have mirrored the deficits of France, Italy, and the PIGS nations.
But the 2008 financial crisis changed everything. And by 2011, struggling countries turned to austerity – aka cutting spending and raising taxes to slash deficits. Thus, growth suffered ever since.
Meanwhile, Germany maintained its surplus-driven model (exports), creating a deeper imbalance.
The chart below shows how Germany’s surplus contrasted sharply with the deficits of its neighbors (especially in the early 2000s). This imbalance has become a cornerstone of the eurozone’s fragile economic structure, making any rebalancing a tough sell.
Figure 3: World Bank, Eurostat, Dunham, 2024
In fact, the euro area collectively runs a current account surplus (see chart below).
Put simply, the Eurozone sells much more to the world than it buys. This brings in extra foreign money and reduces the need for others to hold euros. By exporting more, the Eurozone builds up savings and lends to others, which is why it owes so little globally.
- Compare this to the U.S. The dollar is the world’s reserve currency because the U.S. runs the largest deficits - far bigger than the next 19 deficit nations combined. To pay for these deficits, the U.S. floods the world with dollars, which end up as foreign reserves (unlike the euro).
Figure 4: World Bank. Dunham 2024
Now, you might ask, “Wasn't the PIGS reducing deficits a good thing?”
In many ways, yes. But those deficits fueled growth by driving extra demand.
- Think of it like a credit card splurge - it’s unsustainable, but it creates a temporary consumption boost while it lasts.
To put this into context – let’s take a look at Greece 15 years since their economy began imploding.
The Greece Example: How Austerity Crushed Growth and Wages
From 2001 to 2008, Greece was a high-spending, deficit-driven economy in the European Union. Then, it all fell apart.
To secure an IMF and EU bailout, Greece slashed spending and raised taxes. These austerity measures hit businesses and households hard, wrecking the economy. The damage was unprecedented for peacetime.
Now – over a decade later - Greece is the second poorest country in the EU7. Real wages are down 30% from pre-crisis levels, leaving it with some of the lowest average salaries among developed nations. Its economy is still 20% smaller than in 2007, while the EU’s GDP has grown by 17%.
Figure 5: Financial Times, April 2024
Austerity may have stabilized Greece’s public sector and markets, but it came at a steep cost to consumers and economic growth. The same trend hit other PIGS nations, leaving the eurozone with weak demand and risks of further stagnation – and it also negatively affected Germany’s growth.
I am not arguing that austerity is bad. It’s needed at times to purge excess and unsustainable growth. The problem is that it does come at a cost as we've seen throughout the eurozone.
Closing Thoughts: What Lies Ahead?
The eurozone and EU were built to bring unity and stability to post-WWII Europe. Economic integration was a means to this political goal, not the main focus. The euro brought some economic benefits, but it was rushed for political reasons. This left the region struggling to manage vastly different economies and cultures under one currency - essentially shaped by Germany.
Germany’s fiscal discipline and low inflation dominated the system, forcing “soft” currency economies like Greece, Italy, and Spain into a “hard” currency framework. Imagine a one-size-fits-all sock trying to stretch over very different feet - it doesn’t work without something tearing.
But since the euro is more of a political project, it’s likely here to stay. Still, don’t expect it to dethrone the dollar anytime soon. If it couldn’t in the early 2000s, when conditions were more favorable, it’s even less likely now.
Keep in mind there’s far more to this topic and many variables. So, I’m barely scratching the surface here.
But here’s a twist. . .
After exploring why a BRICS currency and the euro aren’t likely to topple the dollar, my next Morning Pour will dive into what would happen if one eventually did.
Or rather, what would a dethroned dollar mean for the U.S., its currency, and the global economy?
Stay tuned to find out.
Sources:
- Why is Trump threatening a 100% tariff on the BRICS nations? - CBS News
- Trump tariffs threaten to hobble Slovakia's thriving car industry
- Capital Markets Strategy | PowerPoint Presentation
- French government is toppled in no-confidence vote
- Budget woes push French borrowing costs above crisis-scarred Greece | Reuters
- European Stocks Are Losing to US by Historic Margins - Bloomberg
- Greece’s economic rebound in (painful) context
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