ECB President Christine Lagarde argues the US economic policy shifts have created inroads for the euro to the standard currency for future global trade.
The euro could become a viable alternative to the US dollar as the global standard currency for international trade, according to European Central Bank President Christine Lagarde.
In a speech in Berlin, Germany, Lagarde said on Monday that the erratic economic policy of the United States has spooked global investors into limiting their exposure to the dollar in recent months. Many have opted to invest in gold, without seeing a viable alternative.
“The ongoing changes create the opening for a ‘global euro moment’,” she said.
Lagarde said investors seek “geopolitical assurance in another form: they invest in the assets of regions that are reliable security partners and can honour alliances with hard power”.
“The global economy thrived on a foundation of openness and multilateralism underpinned by US leadership … but today it is fracturing.”
The dollar’s role has been on the decline for years and now makes up 58 percent of international reserves, the lowest in decades, but still well above the euro’s 20 percent share.
Any enhanced role for the euro must coincide with greater military strength that can back up partnerships, Lagarde said.
Europe should also make the euro the currency of choice for businesses invoicing international trade, she said. This could be supported by forging new trade agreements, enhanced cross-border payments and liquidity agreements with the ECB.
Looming challenges
The euro’s global role has been stagnant for decades now since the European Union’s financial institutions remain unfinished and governments have shown little appetite to embark on more integration.
For this, Europe needs a deeper, more liquid capital market, must bolster its legal foundations, and needs to underpin its commitment to open trade with security capabilities, Lagarde argued.
Reforming the domestic economy may be more pressing, however, she said. The euro area capital market is still fragmented, inefficient and lacks a truly liquid, widely available safe asset that investors could flock to.
“Economic logic tells us that public goods need to be jointly financed. And this joint financing could provide the basis for Europe to gradually increase its supply of safe assets,” Lagarde said.
Joint borrowing has been taboo for some key eurozone members, particularly Germany, which fears that its taxpayers could end up having to pay for the fiscal irresponsibility of others.
If Europe succeeded, the benefits would be large, Lagarde said. The investment inflow would allow domestic players to borrow at lower cost, insulate the bloc from exchange rate movements and protect it against international sanctions.