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.

🔗 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.