In a powerful speech at the Hertie School in Berlin of Mei 27/2025, European Central Bank (ECB) President Christine Lagarde warned that the global order built on openness and the dominance of the US dollar is fracturing-and that Europe must act decisively if it wants to shape its own destiny.
Lagarde stressed that the euro will not rise as a global currency by default-it must earn its role. While the euro is the world’s second most-used currency, its share in foreign exchange reserves remains far below that of the US dollar. Central banks worldwide are instead turning to gold in record volumes, exposing Europe’s lost opportunity.
To close this gap, Lagarde outlined three pillars Europe must strengthen: Geopolitical Credibility – including strong trade ties and serious defense capabilities. Economic Foundations – deeper capital markets, more innovation, safe assets, and integrated public investment. Legal and Institutional Stability – rule of law, independent institutions, and political unity.
She called for completing the EU’s Single Market, harmonizing industrial policies, and jointly financing European public goods like defense and green tech. Lagarde emphasized that without collective action-particularly joint investment in security and strategic industries-Europe risks remaining fragmented and economically vulnerable.
Referencing past historical shifts in global currencies, she reminded the audience that despite drops in dollar dominance in the 1930s and 1970s, no alternative currency was ready to take its place. Today, however, the euro could be that alternative-if Europe acts.
Her closing message was clear: “This is a prime opportunity for Europe to take greater control of its own destiny. But this is not a privilege that will simply be given to us. We have to earn it.”
Christine Lagarde : the story of reserve currencies and I will look at that with in mind what could happen in the future and what the conditions could be of some possible change. Over the past 80 years the global economy thrived on a foundation of openness and multilateralism underpinned by US leadership, by championing a rules-based international system and anchoring the dollar as the world’s reserve currency the United States set the stage to flourish for for trade to flourish and for finance to expand
The global order proved extremely beneficial for Europe whose funding liberal principles aligned seamlessly with it. But today as you hinted this is fracturing Multilateral cooperation is being replaced by zero sum thinking and bilateral power plays Openness is giving way to protectionism. And there is even uncertainty about the cornerstone of the system the dominant role of the US dollar All else equal this fracturing can pose risks for Europe.
Our economy is deeply integrated into the global trading system with exports accounting for close to 15th of our value added and it supports 30 million jobs in Europe. Any change in the international order that leads to lower world trade or fragmentation into economic blocks will be detrimental to our economy sad.
But with the right policy responses there could also be opportunities The changing landscape could open the door for the euro to play a greater international role So what is the situation today? Today the euro is the second global currency accounting for around 20% of foreign exchange reserves compared with 58% in the case of the US dollar. So 20% euro 58% US dollar increasing the international role of the euro can have positive implications for the euro area. Let me mention three of them.
First it would allow EU governments and businesses to borrow at a lower cost helping boost our internal demand at a time when external demand is becoming less certain. Second it would insulate us from exchange rate fluctuations as more trade would be denominated in Europe protecting Europe from more volatile capital flows. And third it would protect Europe from sanctions or other coercive measures.
So in short it would allowEurope to better control its own destiny giving us some of what Valeris Kardistan some 60 years ago called the exorbitant privilege. He was referring to the dollar at the time. So how is this change likely to happen history suggests that it is far from guaranteed.
The euro will not gain influence by default. We will have to earn it, for the euro to increase its global status. History tells us that we need to build on three foundations each of which critical to its success. First foundation Europe must ensure that it has a solid and credible geopolitical foundation by maintaining steadfast commitment to open trade and underpinning it with security capabilities.
Second foundation Europe must reinforce its economic foundation to make it a top destination for global capital enabled by deeper and more liquid capital markets. Third foundation we must bolster our legal foundation by defending the rule of law and by uniting politically so that we can resist external pressure
So before I explore each of those three foundations that I have described I would like to take us back into a little bit of recent history and what that history can teach us. Shifts in the global currency landscape are not unprecedented in monetary history. There have been previous episodes where the world’s leading currency issuer has actually taken step steps that have called that leadership its own leadership into questions yet without ultimately geopodizing it.
Let me give you three circumstances. The US dollar took over from the pound sterling as the world’s leading reserve currency in the mid20s with its share in foreign exchange reserves rising to 64% in 1931. But this leading position which it had acquired did not stop the United States from taking measures to unilaterally change the international monetary order. And I’m not here talking about 1944 and the Bretonwoods Institution. I’m talking about 1933 when President Roosevelt suspended gold convertability to fight the deflationary forces of the Great Depression.
He dismissed European demands for fixed exchange rates with the argument that and I quote him the sound internal economic system of a nation is a greater factor in its well-being than the price of its currency. Move forward 1970s early 70s President Nixon ended the Bretonwood system by unilaterally suspending dollar convertability to gold and imposing a 10% import tariff
Faced with growing imbalances between US current account deficits and the surpluses of Western Europe and Japan. Treasury Secretary John Connelly remember famous for saying the dollar is our currency but it’s your problem declared also and I quote him
“No longer can considerations of friendship or need or capacity justify the United States carrying so heavy a share of the common burdens. On both occasions 1933 – 1970s there was a decline in the standing of the US dollar as a foreign reserve currency. In the 30s it fell from remember 64 in 31 to around 20% of global foreign exchange reserves in a matter of a few years. In the 70s it fell from about 70% to 50% two decades later.
But on neither of those two occasions there was a robust alternative currency that could take over on short notice. In the 30s the pound sterling was already declining while in the 70s the Dutch mark and the yen were backed by markets that were too small. So what did investors do they had no alternative currency. They flocked to gold.
The share of gold in foreign reserves increased by about 20 percentage points in the 30s to almost double to 60% in the 70s. So they all flocked to gold. Today today I think there is a key difference compared with previous eras. With the euro as the world’s second largest currency there is an other international currency alongside the dollar.
Well yes but some of you have looked at the price of gold and I’ve seen movements. So we have not yet convinced investors work to do over the recent years. The dollar’s share in global foreign exchange reserves has indeed fallen with its current level of 58% being the lowest since 1994.
In parallel central banks have been accumulating gold at a record pace almost matching the levels seen during the Bretonwoods era. The share of gold in global foreign reserves has reached around 20% which is almost on a par with the euro a little over. So let’s now go back to those three foundations that I have mentioned earlier three foundations indispensable for a currency to reach that global status of international reserve currency.
And in each of the three cases geopolitical economic legal we will see that Europe has many of the key ingredients for success but they need to be brought together in order to reinforce the foundations. So action is in order.
Let me start with the first one The geopolitical foundation the starting point is indeed a credible geopolitical foundation which rests on both a country’s role in global trade but also on the strength of its military alliances. A currency’s exposure to trade is especially important as it provides the initial pathway to wider international use. In the mid20s for instance the dollar overtook the pound sterling as the leading form of trade credit before it became the leading reserve currency.
Once a currency captures a larger share of trade invoicing its role in international banking and finance and ultimately as a reserve assets becomes self-reinforcing. Higher demand for the currency enhances its role as a store of value and further encourages investors to hold it. So as a major actor in global trade Europe already has a key ingredient of a strong geopolitical foundation creating the potential for a virtuous circle of euro internal internationalization to unfold.
Why is that well you know it all The EU has the largest network of trade agreements in the world, Europe is the number one trading partner for 72 countries out of about 199 which together those 72 countries with which we are the first trading partners represent almost 40% of global GDP. And this status is reflected in the share of the euro as an invoicing currency which stands at around 40% more than double its share as a reserve currency. So 20% as a of the reserves 40% of the invoicing. Europe can press home this advantage by continuing to forge new trade agreements. And we should make clear that we support a win-win approach to trade ensuring that we are the most attractive partner to make deals with. We can do deals too.
lines to key partners and by doing that we safeguards against euro liquidity shortages abroad disrupting the smooth transmission of our monetary policy which in turn encourages those partners to transact more in euro But there is a limit to how much a currency can grow simply by virtue of being open to trade. In fact the euro’s share of global export invoicing is already today as large as that of the US dollar.
But we are not closing the gap in reserve currency status. And this is probably because investors and especially official investors also seek geopolitical assurance in another form they invest in the assets of regions that are reliable security partners and can honor alliances with hard power So a credible geopolitical foundation must also rest on robust military partnerships.
This dual strength trade and security is essential is essentially what we can learn from the US dollar’s dominance. It is not just a product of economic fundamentals but it is also powerfully reinforced by US securityguarantees. These guarantees not only deepen trade ties but have been shown to boost a currency’s share in foreign reserves by up to 30 percentage points.
There is great literature in that respect. But what are we seeing now we are seeing a major shift in Europe towards rebuilding our hard power with important initiatives underway at the national including in Germany and at the EU levels and we should be clear that following through with this effort is a precondition for the euro to become more widely used. That’s quickly brushed the geopolitical foundation.
Let’s look now at the economic foundation. To satisfy the demand for an international currency investors need appropriate assets to invest in. And this is why a strong economic foundation one that provides opportunities for growth and opportunities to invest in growth is equally essential. There is a virtuous circle between growth capital markets and international currency usage.
Growth generates robust rates of return which makes investors want to hold assets in a particular currency and capital markets provide investment opportunities and channel funds back into growth virtual circle. At the same time if capital markets provide a sufficient supply of safe assets investors can hedge their exposures efficiently When a shock hits and riskier investments lose value safer assets rise in value and that provides a complete ecosystem for investment in the currency.
The US dollar’s rise to dominance in the inter war period was certainly driven by this virtuous circle. The development of US capital markets boosted growth with each 1 percentage point increase in market cap yielding 0.5 percentage point more growth while simultaneously establishing the foundation for dollar dominance. The depth and liquidity of the US Treasury market in turn provided an efficient hedge for investors so far Europe I contend has all the elements it needs to produce a similar cycle. But so far we have not been able to put all the pieces together.
Despite our large single market we have fallen behind the United States in terms of growth performance and market returns. Since 2000 US labor productivity per hour has grown twice as much as that in the Euro area mainly driven by the tech sector. And US markets have delivered returns that are around five times as high as those in European markets. Despite our large savings we have made little progress in integrating our capital markets to channel more of our funds into growth. Think of it 60% of household equity investment and there is not that much of it because a lot of it is into savings and and term deposit but 60% of household equity investment goes into home country markets even though there might be greater opportunities somewhere else in Europe and despite our strong aggregate fiscal position our debt to GDP I’ll remind you is only 89 well shouldn’t say 80 is 89% to GDP but it compares with 124% for the United States.
So we provide despite these circumstances relatively few safe assets Currently the supply of sovereign bonds with double A or higher credit ratings amounts to just 37% of GDP in the EU compared with 89% of GDP in the United States So the conclusion for Europe is clear If we truly want to see the global status of the euro grow we must first reform our domestic economy
That means moving towards with the priorities identified in recent reports completing the single market enabling startups reducing regulation and building the saving and investment union which includes the capital market. And it also means avoiding a peacemeal approach where we make progress where it is easy but we hesitate where it is hard or else we will never kickstart the positive virtuous circle that I described earlier.
And I think that in the current economic circumstances and geopolitical landscape the case for acting in a European way has never been stronger now of course each individual country needs to make sure that its national policies support growth. But we also need to be mindful of self defeating implementation where we shoot ourselves in the foot. For example we all agree that Europe needs to build up its strategic industries to avoid excessive dependencies as Henry Kleta and Mario Draghi emphasized in their recent reports.
But we will not succeed if each and every individual member state defines and goes with its own industrial policy. We will not have the scale nowadays. There are also more policy goals that qualify as European public goods. We talked about the military strength and the security earlier on Well strengthening European defense I contend is a public good But due to the free rider problem defense is a good that is likely to be under supplied In addition joining forces to procure equipment and develop new technologies leading to economies of scale and more interoperability will result in greater operational effectiveness than if each and every of the 27 member states go it alone
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. That’s an even larger virtuous circle. Let me now move to my third foundation the legal one Geopolitical strength and faster growth can go a long way towards strengthening the euro’s international role. But maintaining demand for the currency will also depend on our ability to uphold a robust legal and institutional foundation.
Ultimately currencies achieve and maintain their reserve status if the institutions and the policies backing them consistently safeguard investors confidence in their longerterm value. For example historically the US dollar preminence has rested on the strength and stability of US fiscal and monetary institutions. The Federal Reserve systems credible commitment to controlling inflation combined with the unparalleled liquidity of the US Treasury market created a perception of minimal sovereign risk. This made the dollar a safe heaven during global economic turbulences and recessions
Since 1970 there have been 34 instances 34 of simultaneous sovereign debt and financial crisis globally I did not work on every 34 only a few. But you know what the US has always remained immune But when doubt emerges about the stability of the legal and institutional framework the impact on currency use is undeniable and fast. These doubts have materialized in the form of highly unusual cross asset correlations since April 2nd this year with the US dollar and the US treasuries experiencing sell-offs even as equities fail. Very unusual movement The same doubts are also mentioned by investors who are turning to gold two-fifths say they are doing so as a hedge against rising geopolitical risk. Given this context the EU has a legitimate reason to turn its commitment to predictable policym and the rule of law into a comparative advantage.
This commitment is baked into how the the EU works The positive side of our often slow and complicated decision-making processes yes is that checks and balances are always respected We have also been enshrined into law. We have also enshrined into law the independence of our key institutions like the ECB in ways that are hard for politicians to threaten. But relying on the fact that our bureaucratic systems are hard to change is not enough In the current geopolitical environment we are facing increasing external pressures to take action that geopodize the rule of law
And we will only be able to resist these pressures if we are more politically united and able to speak with a single voice As we potentially enter a renewed era of great power rivalry with country be countries being asked to take side we are likely to find ourselves under pressure to make decisions that are not necessarily in our own interest. But if we take this opportunity to unite and preferably to reform our institutional structure by enabling more qualified majority voting in areas where a single vote has often held back the collective interest of the 26 other countries that would enable us to act decisively as a united Europe we would then be in a much stronger position to defend and uphold our values and as a result to defend and uphold the global confidence that is associated with an international reserve currency. So I’ve described for you those three foundations the current situation a bit of the history and what the US has had the benefit of and I have flashed for you what it would take for those three foundations to be strengthened brought together in order to strengthen our currency and earn the confidence of investors In the history of the international monetary system there are moments when the foundations that once seemed unshakable suddenly begin to shake The Belgian American economist Robert Triffin described this with great clarity.
He observed that nations confidence in the international monetary system depends on the reliability of the reserve currency which to use his own words is highly dependent on individualcountries decisions But moments of change can also be moments of opportunity The ongoing changes create the opening for a global euro moment And this is a prime opportunity for Europe to take greater control of its own destiny But let’s not fool oursel It is not a privilege that will be bestowed upon us because of who we are what we stand for and the values we uphold It will have to be earned together. Thank you
Posted by gandatmadi46@yahoo.com