Christine Lagarde, the president of the European Central Bank (ECB), perceives the euro as a legitimate alternative to the US dollar. Speaking at a conference in Berlin, she emphasized that for the euro to gain global recognition, European governments must enhance the continent’s financial architecture and security. She asserted that “the euro will not rise in influence by default; it must be earned.” To facilitate this, the EU must develop a more robust and liquid capital market, reinforce its legal foundations, and strengthen its trade security commitments, she noted, drawing upon her experience as the former head of the International Monetary Fund (IMF).
The quest for a viable alternative to the US dollar as the world’s primary reserve currency has been ongoing for decades, especially amid rising economic and geopolitical tensions. Nevertheless, investors have tended to favor assets like gold rather than exploring any substantial currency alternatives. The euro’s standing, despite a waning dominance of the dollar—which currently constitutes approximately 58% of global reserves—remains stagnant. The euro accounts for around 20% of international reserves, underscoring the need for the European institutions to hasten the long-advocated capital integration process. This sluggishness has left the dollar’s advantageous position largely intact.
The Role of Geopolitical Strength and Joint Debt in Euro’s Rise
Lagarde highlighted the significance of geopolitical factors in bolstering the euro’s status. She argued that reinforcing the euro must parallel the building of military strength that underpins trade relations. “Investors seek geopolitical guarantees; they are more inclined to invest in assets from regions that have reliable security partnerships and can uphold alliances with hard power,” she explained.
Moreover, Brussels has the potential to position the euro as the preferred currency for global trade among businesses. This ambition could be supported through new trade agreements, enhanced cross-border payment systems, and liquidity measures from the ECB. However, Lagarde warned that urgent economic reforms are necessary since the capital market within the eurozone remains fragmented, inefficient, and lacking a truly liquid and secure asset for investors.
An essential point raised by Lagarde was the collective financing of public goods, which she believes could provide Europe with the foundation to gradually increase its supply of secure assets. However, this strategy is contentious, particularly among key member states like Germany that are wary of shared debt, fearing their taxpayers could ultimately bear the burden of less responsible fiscal practices from others. If the EU can overcome this hurdle, Lagarde believes “the benefits would be significant.” An influx of investments would allow national players to borrow at lower costs, insulate the bloc from exchange rate fluctuations, and shield it from international sanctions.
