From Sterling Bloc to Dollar Bloc: Could the U.S. Extend Reserve Dominance by Squeezing Europe’s Periphery?

In the interwar years, Britain was already losing ground. The U.S. dollar had emerged as the new safe asset during World War I, and by the 1930s London’s supremacy in global finance was visibly cracking. Yet sterling survived as a reserve currency far longer than its fundamentals justified.

Why? Because Britain created what became known as the Sterling Area — a network of Commonwealth, colonial, and allied economies locked into clearing their trade and holding their reserves in pounds. This wasn’t a voluntary arrangement; it was a mixture of loyalty, coercion, and institutional plumbing. Countries were pressured to clear trade through London, hold “blocked sterling balances,” and accept that sterling was the only practical medium for cross-border settlement.

Sterling’s role as global money may have been declining, but Britain’s control of its bloc bought it another decade and a half of dominance.

Today’s Parallel: The Dollar Under Strain

Fast forward to 2025. The U.S. dollar still commands nearly 60% of world reserves, but it faces a slower, subtler erosion:

The euro still claims ~20% of global reserves.

The RMB is creeping up, particularly in Asia and commodity trades.

Gold has re-emerged as a diversification asset, especially for emerging markets wary of U.S. sanctions.

At the same time, U.S. deficits require $2–3 trillion of annual Treasury issuance. Domestic buyers have absorbed much of it since 2010, but 5% yields are straining the economy. Washington’s strategic challenge is clear: how to find foreign buyers again without resorting to endless Fed money printing.

The European Periphery as the “New Sterling Area”

This is where Britain’s old playbook meets today’s geopolitics. The non-euro European periphery — Norway, Switzerland, the UK, Denmark, Sweden, even Central and Eastern Europe — holds trillions in sovereign wealth funds, pensions, and reserves.

Norway’s GPFG: ~$2 trillion AUM.

Swiss reserves + pensions: >$1.7 trillion combined.

UK pensions: ~$3 trillion.

Nordic pensions: ~$1 trillion.

Together, that’s close to $8 trillion in long-term capital pools, much of which sits in euros or diversified baskets.

Just as Britain once forced colonies and allies to hold sterling, the U.S. has both carrots and sticks to tilt these pools toward Treasuries:

Security guarantees: NATO membership, bilateral defense ties.

Regulatory nudges: Basel-style rules making Treasuries the “safest” collateral.

Financial plumbing: Swap lines with the Fed available only to cooperative central banks.

Sanctions leverage: Dollar clearing as the price of access to global markets.

A modest 2–5% portfolio tilt from these non-euro Europeans could channel $200–500 billion into Treasuries. Under harder pressure, the figure could approach $1 trillion — nearly half of a year’s U.S. deficit financing.

The Euro as the Collateral Damage

Here’s the kicker: every percentage point of reserves and institutional assets that shift out of euros and into Treasuries weakens the euro’s international role. If the periphery is pulled decisively into a “Dollar Area,” the euro’s global share could fall from ~20% to ~10–12% by the 2030s.

That would downgrade the euro to the same league as the yen and sterling today: relevant regionally, but no longer a true rival reserve. (a move likely catastrophic to Eurozone  political stability from the rapid currency devaluation)

In effect, the U.S. could prolong dollar dominance by cannibalizing the euro, just as Britain prolonged sterling by locking in its bloc at the expense of rival European currencies.

Historical Echo: Britain, 1920–1940

1920s: Britain clung to the gold standard, overvaluing sterling but signaling it was still “the world’s money.”

1931: After leaving gold, it pivoted — creating the Sterling Area, where trade cleared in London and partners held reserves in pounds.

1940s: Colonies and allies were left with “blocked balances,” unable to convert their sterling into dollars, effectively forced to bankroll Britain’s deficits.

It was coercive, but it worked — sterling survived as a reserve currency into the post-war years, even though its underlying economic base was eroding.

2025–2035: A Dollar Replay?

The United States doesn’t have an empire, but it does have:

Military alliances that anchor security dependence.

Financial plumbing that runs through New York.

Regulatory leverage to tilt banks, pensions, and insurers toward Treasuries.

US dropping global military alliances like NATO is the today's equivalence of UK dropping the gold standard in 1931.

If Washington chose to lean on the European periphery — offering carrots (swap lines, defense guarantees) and wielding sticks (sanctions, clearing exclusion) — it could replicate Britain’s sterling strategy. The effect would be to weaken the euro while deepening the dollar bloc, buying the U.S. another decade or more of reserve currency primacy.

The Cost of Coercion

But just as with sterling, coercion has long-run costs. The more Britain locked in its bloc, the more it alienated non-members and accelerated the dollar’s eventual supremacy. For the U.S., overusing financial coercion risks:

Political instability likely leading to radicalization in the eurozone states.

Accelerating RMB- or gold-based alternatives among the Global South.

Creating a world where the dollar survives as a bloc currency, but loses the universal dominance it enjoyed from 1945–2030.

Conclusion

The analogy is clear: the U.S. doesn’t need to “win” against the euro directly. It only needs to hollow out the euro’s periphery, forcing its allies’ capital pools into Treasuries. Just as the Sterling Area kept the pound alive for decades beyond its fundamentals, a “Dollar Bloc” anchored in Europe’s periphery could extend U.S. reserve dominance into the 2030s.

But history offers a warning too: coercion buys time, not immortality. The pound’s survival in the Sterling Area was the last act of an empire already in decline. For the dollar, repeating that playbook might delay the end of its supremacy — but it cannot prevent the eventual rise of rivals forever.