Two of the biggest geopolitical issues facing Europe are the status of the US dollar as the global currency reserve and the need for EU states to increase defence spending. Both were discussed at the European Investor Summit, held by Societe Generale Securities Services in Paris. And in both instances, the role of the funds industry will be key.
Firstly, if Europe is to capitalise on the demise of US dollar (USD) dominance, then it will have to move faster on a number of fronts – solving an energy crisis, increasing defence spending and encouraging a stronger long-term investment and savings culture among its citizens.
At the turn of the century, USD represented 75% of global reserves, equivalent to $16 trillion. However, today this percentage is closer to 58%.
But, despite the statistics, talking about the USD’s demise may be premature, said Dorothee Rouzet, chief economist of the French Treasury. “In Europe, some like to look at the erosion of the USD and what happened in April (after Liberation Day) and think this is the end of the USD. But there is a lot of inertia in the system.”
The USD is also embedded in more than just reserve currencies, said Rouzet. Global commodities and most global trade (apart from the EU) is priced in USD. “The dollar is the reference currency of invoicing and commodity pricing. The Euro is the second international currency, but its share is stable and has not been rising,” said Rouzet.
The second question is whether Europe is prepared to do what it takes to have a dominant currency. “It is an exorbitant privilege but also one you have to pay for,” said Rouzet. “It provides political influence, less currency volatility and cheaper borrowing costs but you also have to pay the cost in times of crisis.”
The euro is also missing a number of key characteristics – it is a large market with predictable economic policies and an open capital market. But it is not a unified area militarily or politically or financially, noted Rouzet. “We do not yet have a unified financial market in Europe that is deep or liquid enough to serve as a reserve currency. And that will take time to change.”
According to Fabiana Fedeli, chief investment officer, equities, multi asset and sustainability at M&G Investments, the USD is still the only currency with deep enough liquidity to be the safe haven at a time of crisis. And while there are other safe havens, such as gold and even digital assets, there is no equivalent currency.
“The elephant in the room is the RMB but that is a closed market and that won’t change politically,” said Fedeli.
The digital assets market has been held up as another potential alternative to USD dominance but again Europe looks likely to be following the US in the development of tokenization, stablecoins and other digital assets, said Antonio Cavarero, head of investment at Generali Asset Management, who described tokenisation as a ‘superpower’ and himself as a digital assets ‘convert’.
“I was originally sceptical about cryptocurrencies but now I see it as the beginning of a new ecosystem. It is able to attract new capital and will add money to the US system so every asset manager should be looking at this,” said Cavarero.
Defence spending:
Another geopolitical issue for Europe is the challenge to increase defence spending. Again, the funds industry could have a vital role to play here. But it would require changes to a fragmented supply chain, a lifting of various investment restrictions and a restructuring of the funds’ distribution process.
“The defence industry is not like other industries investors look at,” said Martijn Rozemuller, CEO, Europe at ETF and fund manager VanEck. “It has been a sensitive topic for investors because of ESG concerns but it does need long-term investment. So how do we do that?”
In March 2023, Van Eck launched the Van Eck Defense UCITS ETF which has grown from $1.6 billion in January 2025 to more than $7 billion as of October.
“It was hard to get a defence-related investment fund onboarded with banks and brokers five years ago. But the Ukraine war changed that, it made people realise we need a well-funded defence industry.”
The problem though is the distribution process, which in Europe is controlled by the banks, a larger number of which would until recently not allow the marketing of funds invested in arms.
“By adding a thorough screening on controversial weapons, our Defense ETF became more acceptable for most banks and brokers, which is shown by the fact that today it is our most popular ETF. There’s a big benefit for the included defence companies as well, because being included in an index helps with visibility, funding and changing public opinion.”
The way the defence industry is structured also has to be considered, said Pascal Bouchiat, senior executive vice-president and chief financial officer with France-based aerospace and defence corporation Thales. “It is fragmented, especially in the supply chain, which is populated by a large number of small and medium enterprises.”
These companies need equity more than ever, said Bouchiat. “We have been progressively fixing the ability for banks to able to finance these companies. The direction of travel has changed in the last two years.”
Despite the fragmentation of the supply chain, it remains a very profitable business, said Fabien Roualdes, co-head of aerospace & defence, private equity at alternative asset manager Tikehau Capital.
“It provides 15-20% growth every year but it is a hardcore manufacturing business,” said Roualdes. “It takes work and expertise to exit these assets and you need a fluid market where it is possible to buy and sell assets.
“In the EU, the good news is that we have the solution in our hands. The large pension funds are re-considering investment restrictions to invest in defence and it is providing the fluidity and liquidity that was needed,” said Roualdes.
According to Bouchiat, it is a question of unleashing this power. “The US has done this pretty well. Europe has to do it now.”
