Introduction to the Euro and its Current Standing
Christine Lagarde, President of the European Central Bank (ECB), recently suggested that the euro could become a viable alternative to the US dollar, bringing significant benefits to the 20-nation bloc. This proposal hinges on strengthening the financial and security architecture of the group.
Global Concerns Pushing for Euro’s Role Expansion
With growing unease over the erratic US economic policies, global investors have been reducing their exposure to dollar-based assets. However, many have turned to gold instead, as they don’t see a direct alternative.
The Euro’s Stagnant Global Role
For decades, the euro’s global role has remained stagnant due to incomplete financial institutions within the European Union and limited governmental appetite for deeper integration.
Lagarde’s Vision for Euro’s Ascendancy
In a conference in Berlin, Lagarde stated, “Ongoing changes open the door to a ‘moment of the euro’ globally. The euro won’t gain influence by default; it must earn it.”
- Deeper and More Liquid Capital Market: Europe needs a more profound and liquid capital market.
- Strengthened Legal Foundations: Europe must reinforce its legal foundations.
- Security Commitment Backed by Military Strength: Europe needs to bolster its trade openness commitment with security capabilities.
Decline of the Dollar and Euro’s Potential
The dollar’s prominence has been declining for years, now representing 58% of international reserves—the lowest in decades but still far above the euro’s 20%.
Geopolitical Guarantees and Military Strength
Lagarde emphasized that any improvement in the euro’s role must coincide with increased military strength to support alliances. Investors, especially official ones, seek geopolitical guarantees from reliable security partners capable of enforcing alliances with “hard power,” she said at the Hertie School conference.
Euro as Preferred Currency for International Trade
Lagarde proposed making the euro the preferred currency for international business transactions. This could be achieved through new trade agreements, improved cross-border payments, and liquidity arrangements with the ECB.
National Economic Reform and Euro’s Success
Lagarde acknowledged that national economic reform might be more urgent. The eurozone’s capital market remains fragmented, inefficient, and lacks a genuinely liquid and widely available safe asset for investors to turn to, she noted.
“Economic logic dictates that public goods should be funded collectively. This collective funding could pave the way for Europe to gradually increase its safe asset offerings.”
Joint borrowing has been a taboo for key eurozone members, especially Germany, which fears its taxpayers might end up footing the bill for irresponsible fiscal behavior of others.
Benefits of a Successful Euro Expansion
Lagarde highlighted that if Europe succeeds, the benefits would be substantial. An influx of investments would allow national agents to borrow at lower costs, shield the bloc from currency fluctuations, and protect it from international sanctions.
