The euro has staged a quiet but notable comeback in 2025, buoyed by shifting global dynamics and cracks in the US dollar’s dominance. As of end of the third quarter, the euro appreciated by 11.9% versus the US dollar. While this outsized gain mostly reflects dollar-specific headwinds, the euro’s overall strength is confirmed by its trade-weighted performance. Over the same period, the euro effective exchange rate has appreciated by 7% in nominal terms and 6% in real terms.
While the eurozone faces its own structural challenges, the currency’s relative stability, institutional credibility, and external balance sheet strength are helping increase its share in portfolio allocation decisions worldwide. Despite its appreciation this year, our valuation metrics suggest the euro remains moderately undervalued against the US dollar.
The question now is whether this momentum can be sustained. Despite its strong fundamentals and supportive valuation, the euro is still missing a reform-oriented narrative capable of unlocking its full potential and firmly strengthening its role in the evolving global currency landscape. We argue that a swift and credible implementation of the Savings & Investment Union can be that catalyst. By deepening financial integration and pooling euro-area capital, this reform would provide the structural backing necessary for the currency to secure sustained gains over the medium term.
5 Key Forces Shaping the Euro’s Outlook
- Internal balance: While a credible fiscal consolidation plan in France is still missing, debt dynamics for the euro area on aggregate are improving with lower deficits than peers. The household sector maintains a robust financial position with low debt and rising real incomes.
- External balance: The euro area’s current account surpluses and net international investment position provide a solid structural buffer against global economic volatility.
- International status: The euro is entrenched as the world’s second-most-used currency, and it holds substantial unused potential for further capital allocation.
- Central bank credibility: The ECB’s institutional independence and success in anchoring inflation expectations enhance the euro’s appeal as a uniquely stable store of value.
- Geopolitical risks: Heightened global tensions expose Europe’s deep vulnerabilities in trade, defense, and energy reliance, requiring rapid institutional reform for strategic autonomy.
Internal Balance
The eurozone’s internal financial position is broadly robust. Aggregate fiscal dynamics are improving relative to those in the United States, characterized by significantly lower deficits and more manageable interest burdens. Persistent large fiscal deficits in France increasingly look like an isolated but concerning divergence within the euro area, as political fragmentation and deeply entrenched social spending pressures have effectively stalled the adoption of a credible and comprehensive fiscal consolidation plan.
The household sector in the euro area maintains a strong financial position, underpinned by elevated savings rates, historically low debt leverage, and the recent turn toward positive real income growth. This provides a solid foundation for domestic demand and cushions the economy against external shocks.
However, a key underappreciated structural drag on long-term growth is the eurozone’s excessive savings ratio. While household prudence is positive, these high savings rates begin to stall the economy when not efficiently channelled into productive investment. In the eurozone, a disproportionate high portion of household savings is trapped in low-yield bank deposits, failing to adequately finance innovation or boost capital deepening. Furthermore, this excessive saving directly suppresses household consumption, limiting the domestic demand component of growth. This creates an overreliance on net exports and dampens the efficacy of monetary and fiscal policy transmission. Addressing this imbalance through targeted reforms—particularly those that mobilize savings into productive investment—could unlock a more resilient and domestically driven growth model.
External Balance
The eurozone’s external balance remains one of its core strengths. Unlike the US, the bloc consistently runs a current account surplus and a positive net international investment position. These factors provide a structural buffer against global shocks and support the euro’s valuation.
This strength is not without challenges. The eurozone’s export market share is increasingly exposed to US tariff policies, which target European industrial goods and green technologies. At the same time, China’s industrial overcapacity—particularly in sectors like EVs, solar panels, and steel—is flooding global markets, putting downward pressure on European exporters’ margins and competitiveness.
International Status
The euro’s international role remains a cornerstone of its resilience. It accounts for around 20% of global foreign exchange reserves, 30% of international debt issuance, and more than 40% of invoicing for global goods exports, reflecting its entrenched position as the world’s second-most-used currency after the dollar. However, the euro has failed to meaningfully capitalize on the steady decline in the share of USD in global official foreign exchange reserves, with its share remaining broadly stable over the past decade, while the share of the US dollar declined 11 percentage points, net of exchange rate valuation effects.
To fully capitalize on its potential, the euro must evolve into a strategic global currency. This requires building deeper and more integrated capital markets, expanding the availability of high-quality euro-denominated assets, and improving the eurozone’s financial infrastructure. The current fragmentation in regulations, tax regimes, and market access limits the euro’s ability to absorb capital inflows productively and support much-needed investment.
Central Bank Credibility
The European Central Bank’s credibility proved its worth during the recent inflation surge. Despite a long sequence of adverse price shocks and an admittedly slow initial response to the post-pandemic rise in prices, long-term inflation expectations didn’t substantially de-anchor. This allowed the disruptive effects of various price shocks like energy, food, and supply shortages to fade without triggering a much-feared potentially destructive price-wage spiral.
Unlike the Federal Reserve, the ECB faces less direct political interference, and its complex governance structure offers critical insulation from populist pressures. Europe’s robust democratic checks and balances and the central bank’s independence are powerful guarantees of stability in a world where institutional integrity is increasingly under test. This institutional resilience significantly enhances the euro’s appeal as a reliable store of value. The latest Eurobarometer survey registered the highest support ever for the common currency, both in the European Union (74%) and the euro area (83%).
Geopolitical Risks
The era of rapid world-trade growth has passed, subjecting European companies to greater foreign competition and reduced access to global markets. This landscape is further complicated by the abrupt loss of Russia as the bloc’s most important energy supplier. The McKinsey Global Institute recently emphasized the shifting nature of global interdependencies in its 2025 update on geopolitics and global trade, stating that “Declining geopolitical stability means former external dependencies have now become dangerous vulnerabilities.”
Among these vulnerabilities, the most pressing ones for Europe lie in defense capacity, critical raw materials, and digital technology. We have already witnessed the direct economic consequences of the EU’s defense deficit and its reliance on the US, notably in having to accept tariffs imposed by its largest trading partner and longstanding ally.
Unless the EU’s institutional structure and political organization are reformed to enable Europeans to speak with one voice in critical areas, the block will remain vulnerable and become less prosperous over time. Europe’s ability to shape its own future will depend on whether it can transform these vulnerabilities into strategic capabilities through bold and coordinated reform.
Overall, the euro is unlikely to supplant the dollar as the world’s dominant currency any time soon, but it doesn’t need to. The currency’s credibility and stability provide a strong foundation. Its future as a strategic currency will depend on the eurozone’s ability to act decisively, deepen integration, and build the institutional capacity to shape its own destiny.
Completing the Single Market, advancing the Savings and Investment Union, and harmonizing financial regulations are essential steps to unlock the euro’s full international potential and turn the single currency to a strategic stabilizer in a fragmented global order. In this environment, euro-denominated assets may offer diversification benefits, and unhedged euro exposure could become a strategic rather than a tactical position in global portfolios.
