(Bloomberg) — The euro stands ready to benefit from any reassessment of reserve currencies by the world’s central banks as Europe grows more united over the need to fund its own defense, according to analysts at UBS Investment Bank, a unit of UBS Group AG (UBS).
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The currency, which is on its best four-day tear since 2015, has rallied in the wake of a weekend agreement by EU and UK leaders in London to increase military spending, with these gains augmented when Germany announced an unprecedented defense investment.
While the consequences are still rippling through markets, such unity has the potential to create a new form of “financial economic nationalism,” UBS strategists Shahab Jalinoos, Alvise Marino and Vassili Serebriakov say. That would see European savings reinvested at home and could bolster the common currency as an attractive reserve to rival the US dollar, they wrote in a March 5 note.
Currency moves this week recognize “the potential realignment of global capital flows,” the strategists wrote. If more European money stays in Europe, “it can also mean over time a structurally higher EURUSD level, and potentially even the EUR finally rising as a form of alternative reserve asset representing the ‘old liberal order’ and giving the USD a run for its money as a competitor for global funds.”
The euro comprised just 20% of official foreign-exchange reserves as of the third quarter of last year, compared to more than 57% held in dollars, data from the International Monetary Fund show.
However, the dollar’s hegemony has wobbled in recent years, with some nations choosing to diversify away from the greenback.
Defense Spending
The weekend security summit saw European leaders, along with Canada, agree to fast-track efforts to improve their own defense capabilities, after the very public falling out of US President Donald Trump and Volodymyr Zelenskiy. That included a push for what UK Prime Minister Keir Starmer called a “coalition of the willing” to provide peacekeeping forces.
On Tuesday, Germany followed up on these discussions with plans to unlock hundreds of billions of euros for defense and infrastructure investments. Chancellor-in-waiting Friedrich Merz declared Germany would do “whatever it takes” to defend itself.