The Rise and Fall of the Dollar. Part IV: Europe's Stockholm Syndrome

The placement of European capital in the New World was a logical consequence of the discovery and development of overseas territories by the white race. The slave trade, gold rush, industrialization, and endless wars in the Old World created long-term preconditions for the flow of European capital to the North American continent.

At the end of 2024, Europe's share in the total volume of direct foreign investments in the US was 64% – 3.6 out of 5.7 trillion dollars. Similarly, Europe accounted for 58% of the total accumulated volume of US direct investments abroad – 4.0 out of 6.8 trillion dollars (Fig. 1). Taking into account these multi-trillion accumulations, both Europe and the US are equally uninterested in either the weakening or the strengthening of the dollar's exchange rate against the euro. The former would affect the decline in the value of European assets in the US. The latter – the decrease in the value of American assets in Europe. Such a circular guarantee.

Figure 1 – Interconnectedness of Europe and the US through direct capital investments (shares of world regions in the accumulated volume of incoming and outgoing direct foreign investments of the US as of the end of 2024).

Source: U.S. Bureau of Economic Analysis.

In fact, the euro exchange rate is outside the zone of European influence. The main trading of the euro against other currencies, primarily the dollar, takes place predominantly on the over-the-counter markets of London and New York, which account for over 70% of global forex trading volume—whose daily size in April 2025 exceeded $9.6 trillion (Fig. 2). At the same time, the primary market makers (large banks that set exchange rates) on the OTC segment of the forex market are American financial institutions.

Figure 2 – Shares of the UK, USA, Eurozone, and other countries in global forex trading, 2001–2025, %.

Source: calculated based on BIS data.

To ensure relative stability of the euro-to-dollar exchange rate, Europe was placed in chronic dependence on financial inflows from the United States. Thus, the massive devaluation of the dollar against the euro during 2002–2008 created significant adaptation problems for the structurally heterogeneous economies of the Mediterranean periphery countries to the new conditions of foreign trade, which initially triggered a balance-of-payments crisis and subsequently a deep debt crisis in the Eurozone.

To exit the crisis, Europe was forced to turn to the US Federal Reserve System (Fed), which provided financial assistance to the Eurozone in the form of dollar loans to help European banks recover from the recession. For example, under the Term Auction Facility program during 2007–2010, the Fed issued short-term loans totaling $3.818 trillion, of which 23% were received by branches and subsidiaries of German and French corporations. Additionally, under the Commercial Paper Funding Facility program amounting to $0.738 trillion, the share of French, German, and Belgian banks as recipients of assistance was 24%.

In addition, during 2007–2010, the Fed provided emergency loans to central banks of foreign countries in the form of dollar swap lines totaling over $10 trillion, of which nearly 80% of the funds were received by the European Central Bank (ECB). Since 2013, swap lines between the Fed and the ECB have become permanent to provide the Eurozone with dollar loans on a regular basis.

It should be recalled that the debt crisis in the Eurozone began after the US agency Standard & Poor’s downgraded the rating of Greek sovereign bonds from investment grade to speculative level in 2010. This triggered a cascade of credit rating downgrades for other Eurozone member countries and a sharp increase in the cost of servicing their debt obligations. It should be emphasized that European countries refinance their external debt primarily on the international private capital market, which is traditionally dominated by US financial institutions.

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Thus, modern depression in Europe is a consequence of being in a state of a peculiar Stockholm syndrome—as a hostage to the White House's global agenda. Not least, the EU's support for US foreign policy is driven by the risks of losing its transatlantic multi-trillion assets in the event of real de-dollarization of the world economy. Moreover, the monopolization by American banks and investment companies of the global currency and debt markets significantly limits Europe's ability to influence the euro exchange rate and create international liquidity in it. This deprives the Eurozone, as the issuer of the second most important reserve currency, of the main privilege of the US—servicing its external debt obligations in its own national currency. If the euro gained real influence on the global currency and debt markets, it would deal an irreparable blow to the two main "pillars" on which the world's dollar dominance rests (see Part II of the article series). This is precisely why the US keeps Europe in a dependent position. We will discuss the causal relationships of the dollarization of the world economy in the next article.

Author: Doctor of Economic Sciences, Professor of the Department of World Economy and World Finance at the Financial University under the Government of the Russian Federation Alexey Vladimirovich Kuznetsov.