European Central Bank (ECB) President Christine Lagarde has outlined steps for the euro to become a stronger alternative to the US dollar.

She stressed the need for deeper financial integration and stronger security measures within the eurozone.

Lagarde noted that global investors are reducing their dollar holdings due to concerns about US economic policies.

Many are turning to gold, as the euro currently accounts for 20% of international reserves, compared to the dollar’s 58%.

To enhance the euro’s role globally, Lagarde argued that Europe must develop more liquid capital markets and strengthen legal frameworks.

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🔗 Source: Reuters

🧠 Food for thought

1️⃣ The euro’s international role has been declining despite EU’s economic strength

Despite being the world’s second most important currency, the euro’s international standing has actually been weakening since the mid-2000s, reaching historic lows according to composite measures of its global role 1.

While the dollar accounts for 58% of international reserves, the euro’s share remains at just 20%, reflecting a persistent gap that has existed for decades despite the EU’s comparable economic size to the US 1.

The euro’s weakness stems from fragmented capital markets that lack the depth and liquidity necessary for a strong international currency, with the supply of euro-denominated safe assets having decreased dramatically from 70% to just 10% of GDP since the euro area debt crisis 1.

This decline helps explain why investors seeking alternatives to the dollar have recently turned to gold rather than the euro, as mentioned in the news article.

2️⃣ Currency power increasingly tied to security capabilities

Lagarde’s emphasis on military strength backing the euro aligns with historical patterns of reserve currency dominance, where economic power alone has proven insufficient.

Official reserve managers increasingly seek “geopolitical assurance” when investing, looking beyond pure financial metrics to consider a currency issuer’s ability to maintain alliances and project power 2.

The shifting global governance toward “hard power” considerations has been recognized by European policymakers as a factor in the euro’s international standing since at least 2019 1.

This security-currency nexus explains why the euro’s founders initially focused primarily on economic integration, but now face the reality that currency power in today’s world requires both economic and security foundations.

3️⃣ Joint borrowing remains politically divisive despite potential benefits

The “joint financing” that Lagarde mentions as necessary for creating more euro-denominated safe assets faces significant political resistance, particularly from Germany, which fears its taxpayers would ultimately pay for others’ fiscal irresponsibility 3.

The EU’s €800 billion NextGenerationEU recovery instrument demonstrated the potential for joint borrowing, but has simultaneously deepened political divisions within the bloc 3.

The Bundesbank’s president explicitly opposes expanding joint EU debt issuance beyond the pandemic response, highlighting the persistent ideological divide on fiscal integration 4.

This political obstacle represents perhaps the most significant barrier to enhancing the euro’s global role, as creating a larger pool of truly safe euro assets would require precisely the type of fiscal integration that remains controversial among key eurozone members.

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