Can the Euro Truly Challenge the Dollar?
The ECB’s Reticence in a New Study by Manuela Moschella and Palma Polyak in New Politica Economy
Published on 05 May 2026 | News
Can the Euro challenge the dominance of the U.S. dollar, or is Europe bound to occupy a secondary position in the international financial system? An answer emerges from new research published in New Political Economy (1–22) by Manuela Moschella, Coordinator of EUFutures, and Palma Polyak, Senior Researcher at the Max Planck Institute for the Study of Societies in Cologne. The study, titled “Interpreting spillovers: the ECB, fed interest rate hikes, and the persistence of dollar dominance,” analyzes the reasons behind the European Central Bank’s (ECB) profound reticence in promoting the Euro as a global alternative, focusing on how the institution interpreted the Federal Reserve’s aggressive interest rate hikes between 2022 and 2024.
The article argues that the ECB’s response to U.S. monetary tightening reflects deeper ambiguities in how spillovers are interpreted within the institution. Focusing on the Federal Reserve’s aggressive rate hikes between 2022 and 2024, Moschella and Polyak examine whether ECB officials converge on a coherent understanding of the vulnerabilities these spillovers create.
The study identifies two competing interpretations. One emphasizes trade and exchange rate channels, in line with a traditional Mundell–Fleming view of monetary interdependence, where spillovers are treated as standard open-economy disturbances and policy attention focuses on short-term interest rate adjustments. The other highlights financial channels, pointing to Europe’s structural dependence on dollar-centered finance, as emphasized in the literature on the Global Financial Cycle.
Drawing on ECB speeches, parliamentary hearings, and financial press coverage, the authors find that the ECB’s technocratic core increasingly recognizes financial channels as a key source of vulnerability. However, this perspective remains contested within the institution and is largely absent from public debates, where concerns about imported inflation and euro depreciation dominate.
As a result, the ECB does not articulate a fully coherent problem definition. According to the authors, sidelining the financial channel risks obscuring the broader costs of monetary spillovers and may reduce the perceived urgency of reforms addressing the international role of the dollar.