Although international monetary and financial systems are not immutable, they rarely change. That is why the shock caused by US President Donald Trump's trade war is surprising. And it is difficult to explain. To understand what is happening, it is worth recalling Charles Kindlberger's theory of hegemonic stability, which he presented in his book The World in Depression: 1929–1939. According to this theory, an open and stable international system depends on the existence of a dominant world power.
In the 19th century, such a power was Great Britain. As the world’s financial hegemon (the leader of the global economic system and the issuer of the dominant international currency), Britain provided the most important public goods. Among these, Kindlberger counted “the maintenance of markets for goods during crises thanks to British free trade” and the countercyclical capital flows generated by the City of London. In addition, Britain helped “coordinate macroeconomic policy and exchange rates” through “the rules of the gold standard,” which were “legitimized and institutionalized by practice.” Finally, the Bank of England acted as “lender of last resort.”
However, World War I had weakened Britain. By the 1930s, it no longer had sufficient resources to maintain an international monetary system. America, although a rising power at the time, was not yet ready to take Britain's place. This "Kindlberger interval" - a transitional period between world hegemonies - coincided with the Great Depression and the escalation of political chaos, culminating in World War II.
Towards the end of that war, in 1944, delegates from 44 countries met in Bretton Woods (New Hampshire), where they organized the transition from the old hegemony to the new. In doing so, they confirmed the de facto superiority of US commercial, financial and military power.
At that time, the US share of world GDP was 35%. Although it has since declined, the dollar still retains its dominance as a reserve asset, a currency of account, and an anchor for fixing exchange rates. In addition, the policy decisions of the US Federal Reserve and indicators of the US economy continue to influence the global financial cycle.
However, we seem to be approaching a new “Kindlberger interval.” The current hegemon is self-destructing, refusing to provide global public goods, and there is no obvious candidate to replace it. The European Union is not ready to take on that role, and China is not even integrated into global financial markets.
While the rest of the world considers the dominance of the dollar an “unmitigated privilege,” the Donald Trump administration seems to believe that global demand for the dollar is a burden, because it is, in its view, driving up the exchange rate. But if the US continues on its current political trajectory, it will soon be “freed” of that burden — whether it wants to or not.
For a currency to play an international role, the country issuing it must have economic advantages and a central position in world trade. These characteristics depend on its innovative and economic potential, with military power and geopolitical alliances also playing an important role. All of this is impossible without an open economy and quality, stable institutions.
By pursuing policies that weaken American institutions, fundamental scientific research, the system of multilateral relations, and long-term economic prospects, Trump's America is rapidly eroding confidence in the dollar. This became especially evident when, in early April, Trump announced the introduction of very high tariffs on goods from dozens of countries with bilateral trade surpluses. U.S. bond yields immediately rose, the stock market fell, and the dollar weakened. Such a combination of events is usually characteristic of developing countries.
The economic and financial problems created by Trump in the US provide an opportunity for the eurozone (the second most important international currency issuing area) to partially take advantage of the "excessive privileges" that the US has long enjoyed. This includes making capital cheaper for governments and companies in the eurozone (which will help strengthen fiscal sustainability), as well as facilitating refinancing during crisis periods, as demand for "safe" euro assets will increase. In addition, it also strengthens geopolitical influence, which is extremely important at a time when the EU is striving to achieve strategic autonomy.
Although internationalization carries certain risks, the eurozone is well-positioned to mitigate them. The eurozone's macroprudential policy framework, for example, is much stronger than the US's and will help to cope with the increasing volatility of capital flows and asset prices. Europe also boasts strong institutions (starting with the European Central Bank) and the rule of law.
However, further steps are needed for the euro area to enhance the international authority of the euro. First of all, the euro area needs to deepen the single market for goods and services, as well as strengthen trade relations where possible. Given Europe’s global climate leadership, consideration could be given to invoicing climate-friendly products in euros (e.g. decarbonised energy equipment, electric cars, electrification goods), while creating appropriate financial instruments (e.g. for hedging climate risks).
The euro area should commit to completing the Banking Union and the Savings and Investment Union, as recommended in recent policy reports. To create deep, integrated capital markets (which are essential for innovation and economic growth), efforts should be made to provide truly safe assets across the euro area. A good start would be to issue common debt to cover extraordinary defence costs.
In addition, the eurozone needs to increase the sovereignty of its payment system, preventing it from remaining heavily dependent on US systems. This will likely require relying on a central bank digital currency (CBDC), complemented by a reliable payment system (perhaps with stable digital currencies pegged to the euro).
Finally, the ECB’s role as lender of last resort needs to be carefully structured to ensure broad and strong confidence in the euro. Implementing all these changes is not easy. But if Kindlberger has taught us anything, it is this: the world economy will be better off if Europe quickly fills the void left by America’s withdrawal as global economic and financial leader.
The author is a professor of economics at the London Business School.
Copyright: Project Syndicate, 2025. (translation: NR)
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