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- For the euro to reach its full potential, Europe must strengthen three foundational pillars: geopolitical credibility, economic resilience and legal and institutional integrity.
By Christine Lagarde, President of the European Central Bank
We are witnessing a profound shift in the global order; open markets and multilateral rules are fracturing, and even the dominant role of the US dollar, the cornerstone of the system, is no longer certain. Protectionism, zero-sum thinking and bilateral power plays are taking their place. Uncertainty is harming Europe’s economy, which is deeply integrated in the global trading system, with 30 million jobs at stake.
But the shift underway also offers opportunities for Europe to take greater control of its own destiny and for the euro to gain global prominence. At present, the euro is the world’s second most-used currency, accounting for 20 percent of global foreign exchange reserves, compared with 58 percent for the US dollar.
Increasing the euro’s global status would bring tangible benefits: lower borrowing costs, reduced exposure to currency fluctuations and insulation from sanctions and coercive measures.
But such a step towards greater international prominence for our currency will not happen by default: it must be earned. As in previous periods, today’s concerns about the dominant currency are not yet triggering a major shift towards alternatives. Instead, they are reflected in a rising demand for gold.
For the euro to reach its full potential, Europe must strengthen three foundational pillars: geopolitical credibility, economic resilience and legal and institutional integrity.
First, the euro’s global standing rests on Europe’s role in trade. The EU is the world’s largest trader — it is the number one partner for 72 countries, representing almost 40 percent of global GDP. This is reflected in the share of the euro as an invoicing currency, which stands at around 40 percent. The EU must use this position to its advantage by forging new trade agreements.
The “exorbitant privilege” of an international reserve currency, referred to by Valéry Giscard d’Estaing back in the 1960s, comes with responsibilities.
To avert euro liquidity shortages abroad, the ECB extends swap and repo lines to key partners to safeguard the smooth transmission of its monetary policy.
Real confidence, however, rests on hard facts. Investors seek regions that honour their alliances. Such guarantees have been shown to boost a currency’s share in foreign reserves by up to 30 percentage points. Europe is undergoing a major shift towards rebuilding its hard power, which should also help bolster global confidence in the euro.
Second, economic strength is the backbone of any international currency. Successful issuers typically offer a trio of key features: strong growth, to attract investment; deep and liquid capital markets, to support large transactions; and an ample supply of safe assets.
But Europe faces structural challenges. Its growth remains persistently low, its capital markets are still fragmented and — despite a strong aggregate fiscal position, with a debt-to-GDP ratio of 89 percent compared with 124 percent in the US — the supply of high-quality safe assets is lagging behind. Recent estimates suggest outstanding sovereign bonds with at least a AA rating amount to just under 50 percent of GDP in the EU, versus over 100 percent in the US.
For the euro to gain in status, Europe must take decisive steps by completing the single market, reducing regulatory burdens and building a robust capital markets union. Strategic industries, such as green technologies and defence, should be supported through co-ordinated EU-wide policies. Joint financing of public goods, like defence, could create more safe assets.
Third, investor confidence in a currency is ultimately tied to the strength of the institutions backing it. Admittedly, the EU is not easy to understand from the outside. But its structured and inclusive decision-making guarantees checks and balances, stability and policy certainty. Respect for the rule of law and the independence of key institutions, like the ECB, are critical comparative advantages the EU should leverage.
To further drive home these advantages, we must reform Europe’s institutional structure. A single veto must no longer be allowed to stand in the way of the collective interests of the other 26 member states. More qualified majority voting in critical areas would enable Europe to speak with one voice.
History teaches us that regimes seem enduring — until they no longer are. Shifts in global currency dominance have happened before. This moment of change is an opportunity for Europe: it is a “global euro” moment. To seize it and enhance the euro’s role in the international monetary system, we must act decisively as a united Europe taking greater control of its own destiny.
This post was also published as an opinion piece in the Financial Times.
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