Euro could potentially serve as an alternative to the U.S. dollar, according to Lagarde's assertion.
The euro could challenge the dollar's dominance, bringing massive benefits to the 20-nation bloc, if Europe strengthens its financial and security structure, according to ECB President Christine Lagarde. On Monday, she expressed this in a lecture in Berlin, emphasizing that the euro won't gain power by mere default, but it needs to earn it.
Recent months have seen global investors scaling back their investments in dollar assets due to unpredictable U.S. economic policies. Yet, they've turned to gold instead, failing to find an alternative. For decades, the euro's global role has been stagnant, as the European Union's financial institutions remain unfinished, and governments tend to shy away from integration.
Lagarde sees an opportunity for a 'global euro moment,' given the current shifts in the global economy. She highlighted the need for a deeper, more liquid capital market, stronger legal foundations, and underpinning the commitment to open trade with security capabilities.
The dollar's prominence has been waning for years, now making up 58% of international reserves - the lowest in decades. Yet, it still overshadows the euro's 20% share. For a larger role for the euro, it necessitates matching military strength to back up partnerships, as investors, especially official ones, desire certain geopolitical assurances.
Lagarde proposed that the euro should become the primary currency for international trade among businesses. She suggested forging new trade agreements, enhancing cross-border payments, and liquidity agreements with the ECB to make this happen.
However, she acknowledged that reforming the domestic economy may be more pressing. The euro area capital market remains fragmented, inefficient, and lacking a truly secure and widely available safe asset that investors could gravitate towards.
Economic logic dictates shared financing of public goods, which could provide the foundation for Europe to gradually increase its supply of safe assets. Yet, the taboo of joint borrowing remains for some key eurozone members, particularly Germany, which fears its taxpayers may end up shouldering the fiscal indiscretions of others.
If Europe successfully implements these measures, the benefits would be substantial. Lower-cost borrowing for domestic players, insulation from exchange rate fluctuations, and protection against international sanctions are some potential advantages.
Insights:
- To bolster the euro, Europe needs a more extensive, liquid capital market, robust legal foundations, and a security infrastructure to underpin commitment to open trade.
- European defense capabilities should be strengthened to build strategic alliances, increase military spending, and ensure economic and financial stability.
- Joint borrowing remains a contentious issue, especially with Germany; however, if successful, it could lead to significant economic advantages for the eurozone.
- Promoting the euro as a primary currency for international trade can be facilitated through new trade agreements, enhanced cross-border payments, and liquidity agreements with the ECB.
- Enhanced digital and green finance, blended finance, and impact investing can attract private investments in development projects, further solidifying the euro's status in global development financing.
The euro's expansion in global business and finance could be facilitated by strengthening Europe's economic, financial, and security structures, as proposed by ECB President Christine Lagarde. This would require a deeper, more liquid capital market, increased military spending, and more robust legal foundations to ensure open trade and security.
Joint borrowing, a contentious issue for some key eurozone members like Germany, could potentially provide a foundation for Europe to increase its supply of safe assets and attract more investments in development projects through enhanced digital and green finance, blended finance, and impact investing.
If these measures are successfully implemented, the eurozone could reap several benefits, such as lower-cost borrowing, insulation from exchange rate fluctuations, and protection against international sanctions, ultimately securing the euro's position as a primary currency for international trade among businesses.
