The Euro’s Quiet Expansion

For years, the debate about the international monetary system has been reduced to one question: when will the dollar lose its dominant position?

It is an attractive question because it produces dramatic headlines. It is also the wrong place to begin.

Currencies do not become globally important only because central banks hold them as reserves. They become important because companies borrow in them, banks lend in them, investors buy securities denominated in them, governments issue debt in them, exporters invoice in them and markets trust that liquidity will remain available during a crisis.

The latest data from the Bank for International Settlements reveal a development that deserves more attention than another abstract debate about de-dollarisation: the euro is quietly expanding as a currency of international credit.

This does not mean the dollar is being displaced. It does not mean Europe has solved its growth problem. And it does not prove that the euro has become a fully developed global safe asset.

It means something more precise and, in some ways, more interesting.

Borrowers and investors are using the euro more frequently to finance activity outside the euro area. That is a measurable change in the plumbing of global finance. If it persists, it will affect funding costs, currency mismatches, capital flows, European financial power and the transmission of monetary policy far beyond the eurozone.

The number that changed the argument

At the end of June 2026, global cross-border bank credit reached $40.7 trillion, according to the BIS. It was growing at an annual rate of 11%.

During the second quarter alone, cross-border bank credit increased by $877 billion after adjustment for exchange-rate movements and statistical breaks. Euro-denominated credit accounted for $424 billion of that expansion. Dollar-denominated credit accounted for $383 billion.

In other words, almost half of the quarterly increase was denominated in euros.

The separate BIS global liquidity indicators tell a similar story. These indicators track foreign-currency credit to non-bank borrowers through bank loans and international debt securities. Euro-denominated international debt securities grew by 13% year on year, almost twice the 6.7% growth of dollar-denominated securities. Euro-denominated bank loans have also grown faster than their dollar equivalents since the third quarter of 2024, although by a smaller margin.

Most importantly, the euro’s share of foreign-currency credit has increased since 2022 at both current and constant exchange rates. This matters because it reduces the possibility that the movement is merely an optical effect created by currency appreciation.

The trend also appears in official reserves. IMF data show that the euro’s share of allocated global foreign-exchange reserves rose from 20.04% in the first quarter of 2026 to 20.60% in the second. Euro claims increased by almost $100 billion, while the dollar’s share declined from 57.18% to 56.70%.

These movements are too small to announce a new monetary order. They are large enough to demand an explanation.

Reserves are only one layer of monetary power

Public discussion often treats reserve shares as the definitive ranking of international currencies. They are important, but they are only one layer.

A currency can perform at least five international functions:

1. a reserve asset for central banks;

2. a financing currency for borrowers;

3. an investment currency for asset managers;

4. an invoicing and settlement currency for trade;

5. a safe and liquid asset during periods of stress.

The dollar remains dominant across most of these functions because the United States supplies a unique combination: a very large economy, deep capital markets, a vast stock of liquid government securities, open financial accounts, global banking networks and a central bank capable of supplying dollars internationally during crises.

The euro has scale, institutional credibility and a large trade area. What it lacks is a single sovereign issuer and a unified safe asset comparable in depth and simplicity with the US Treasury market.

That is why the new credit data matter. They show that a currency can gain ground in financing even before the political and fiscal architecture behind it is complete.

The euro’s paradox

The euro is becoming more useful internationally while the European economy remains structurally weaker than the United States in several areas: productivity growth, capital-market depth, technology financing and fiscal integration.

This apparent contradiction disappears once currency use is separated from economic performance.

Borrowers do not choose a currency because they admire the issuing economy. They choose it because the total cost of financing, hedging and refinancing appears attractive.

Investors do not buy euro-denominated bonds because they believe Europe will necessarily grow faster. They may buy them because they want diversification, regulatory compatibility, a particular duration profile, exposure to European rates or access to a large sustainable-finance market.

The European Central Bank reported that international bond and loan issuance in euros exceeded $1.1 trillion in 2025, roughly 30% higher than in 2024. The euro’s share of international issuance rose to almost 30%, while the dollar remained near 60%. Euro-denominated international bond issuance grew by almost 50%, and the euro became the leading currency in the international green and sustainable bond market.

That is not a story of dollar collapse. It is a story of a second currency becoming more useful in specific segments.

Why is the euro expanding now?

The data establish the trend. They do not establish a single cause. Four explanations should be tested.

1. Relative funding costs

If borrowing in euros is cheaper than borrowing in dollars after considering the expected currency path and hedging costs, issuers have a strong incentive to choose euros.

This can be especially attractive for companies with euro revenues, European assets or natural hedges. It can also attract borrowers without such protection. That second group creates the more important financial-stability question: are companies reducing funding costs today by accepting a currency mismatch that may become expensive later?

The answer cannot be inferred from issuance volumes alone. It requires data on the currency composition of revenue, derivatives and debt maturity.

2. Investor demand for diversification

Central banks, sovereign funds, insurers and global asset managers do not need to abandon the dollar to increase their euro holdings. A modest portfolio reallocation across trillions of dollars can create very large flows.

IMF reserve data for the second quarter suggest that active purchases, rather than exchange-rate valuation alone, contributed to the increase in the euro’s reserve share. That is evidence of diversification, although one quarter cannot establish a permanent strategic shift.

3. Europe’s position in sustainable finance

European regulation, investor mandates and the size of the region’s green-finance ecosystem have created a natural market for euro-denominated sustainable bonds.

This can strengthen the currency’s international role without improving the broader supply of safe assets. A green corporate bond and a German government bond do not perform the same function during a crisis. The growth of a specialised market should therefore be recognised without being confused with full monetary sovereignty.

4. Geopolitical hedging

Governments and companies are increasingly aware that payments, reserves and cross-border finance can become instruments of foreign policy.

The response does not have to be a dramatic exit from the dollar. It can be a gradual reduction in concentration: more euros, more gold, more regional settlement and more bilateral arrangements.

The euro benefits from this search for optionality because it is the only existing currency with sufficient scale, convertibility and institutional depth to provide a broad alternative across several financial functions.

Why this is not de-dollarisation

The dollar still represented 56.70% of reported global foreign-exchange reserves in the second quarter of 2026. The euro represented 20.60%. The renminbi represented 2.11%.

In international bond and loan issuance, the ECB estimated the euro’s share at almost 30% in 2025 and the dollar’s at around 60%.

The difference is not cosmetic. A dominant currency benefits from network effects: the more it is used, the more liquid its markets become; the more liquid its markets become, the cheaper and easier it is to use.

The dollar also benefits from the global demand for Treasury securities, the reach of US financial institutions, the central role of dollar funding markets and the Federal Reserve’s demonstrated capacity to provide international dollar liquidity.

Europe cannot reproduce that architecture through speeches. It would need deeper capital markets, more integrated banking, a larger common safe asset, credible fiscal coordination and a political willingness to provide liquidity internationally during stress.

The correct conclusion is therefore narrower: the international monetary system may be moving from overwhelming dollar concentration towards greater functional diversification. The euro is currently the main beneficiary, but it remains a distant second.

The hidden risk: cheap funding can export instability

An international funding currency does not only receive prestige. It exports its monetary conditions and imports financial responsibilities.

When non-euro-area companies borrow in euros, ECB policy begins to influence their refinancing costs. If the euro strengthens sharply, borrowers without matching euro revenues may face a rising debt burden in domestic-currency terms. If European rates rise, debt-service costs can increase even when the borrower’s own central bank is easing.

This creates three risks.

First, currency mismatch. A borrower earns in one currency and owes in another.

Second, maturity mismatch. Short-term euro funding finances long-term assets.

Third, market-liquidity mismatch. Securities appear liquid in normal conditions but become difficult to refinance during stress.

The global dollar cycle has taught emerging markets how destructive these mismatches can become. A larger euro funding cycle could reproduce similar mechanisms on a smaller scale.

Europe would then confront a strategic choice. It could enjoy the benefits of international currency use while leaving crisis management largely national and improvised. Or it could build the swap lines, repo facilities, common collateral standards and capital-market infrastructure required to support a genuinely global currency.

The ECB has already strengthened its international euro liquidity framework through facilities such as EUREP. But the political architecture remains less developed than the financial ambition.

The fiscal question Europe cannot avoid

A global currency requires a large supply of assets that investors can buy without having to perform a political-risk analysis of nineteen different fiscal stories.

Europe has high-quality sovereign issuers, but it does not have a Treasury market. The distinction becomes critical in a crisis.

German Bunds are scarce. Italian debt is deep but carries sovereign-spread risk. EU joint issuance has grown but remains tied to specific programmes and a fiscal structure that is still evolving.

This fragmentation imposes a ceiling on the euro’s international role.

The contradiction is clear: Europe wants the geopolitical influence that comes with a global currency, but several member states resist the fiscal and financial integration that would make that currency more credible.

The euro can continue to gain market share through private issuance and relative funding costs. It cannot fully challenge the dollar without a deeper pool of common safe assets and a more unified capital market.

Who wins and who loses?

European banks may gain from a larger international euro balance sheet, particularly in underwriting, market-making, trade finance, derivatives and custody. Yet they also inherit greater exposure to foreign borrowers and global funding shocks.

European asset managers gain a broader investable universe and stronger demand for euro products. Borrowers may gain lower costs and more diversified funding. The ECB gains international transmission power.

The risks fall disproportionately on borrowers who mistake a favourable coupon for a low-risk liability.

If a company issues in euros but earns in dollars, yuan, lira or local currency, its true cost is not the coupon. It is the coupon plus the future currency movement plus the cost and reliability of hedging.

That distinction is often ignored when issuance is booming and rediscovered when volatility returns.

What investors should monitor next

Six indicators will show whether the current shift is structural:

1. the euro’s share of international debt issuance after adjusting for exchange rates;

2. the currency composition of loans to emerging-market borrowers;

3. the share of euro borrowing that is naturally hedged by euro revenues;

4. cross-currency basis and hedging costs between euros and dollars;

5. foreign holdings of euro-area sovereign and EU debt;

6. the use of ECB liquidity facilities during market stress.

A seventh indicator is political: whether Europe advances capital-market integration and common issuance, or continues to ask a fragmented system to perform the work of a unified one.

The contrarian conclusion

The strongest interpretation of the new data is not that the dollar is dying.

It is that the euro is becoming more international for reasons that may have little to do with European growth.

That matters because financial power can expand before economic dynamism improves. It also creates a danger: Europe may acquire the external liabilities and crisis responsibilities of a global currency faster than it builds the institutions needed to support them.

The euro’s quiet expansion is therefore both an opportunity and a test.

The opportunity is to convert a market-driven shift into deeper financial influence.

The test is whether Europe can supply the liquidity, safe assets and political coherence that international borrowers will eventually expect.

The next chapter of the monetary system will not be decided by slogans about de-dollarisation.

It will be decided by who lends, who borrows, in which currency, at what maturity and with whose balance sheet standing behind the market when conditions deteriorate.

Follow the credit.

Methodological note

The BIS cross-border banking statistics and global liquidity indicators measure different but related universes. Cross-border bank credit includes bank loans and banks’ holdings of debt securities across borders. Global liquidity indicators focus on foreign-currency credit to non-bank borrowers outside the issuing currency area. Reserve shares, issuance shares and payment shares should not be combined as if they measured the same activity. The latest BIS observations refer to end-June 2026, not to conditions in October. Causal explanations in this article are hypotheses consistent with the data, not findings proven by the statistical release.

Sources

● BIS — International banking statistics and global liquidity indicators at end-June 2026, 29 October 2026

● IMF — Currency Composition of Official Foreign Exchange Reserves, Q2 2026 data brief

● ECB — The international role of the euro, June 2026

● ECB — International role of the euro increased moderately in 2025, 2 June 2026

Roberto Balbino — CEO, Fintech SCB
International Finance & Banking Executive | Independent Analyst of Finance, Economics, Geopolitics & Global Markets
www.fintechscb.com