European Central Bank (ECB) President Christine Lagarde yesterday said the global economic order backed by the US dollar was “fracturing” and made a pitch for the euro as a global reserve currency.
“The global economy thrived on a foundation of openness and multilateralism underpinned by US leadership,” Lagarde said in a speech at the Hertie School in Berlin.
Washington’s support for a rules-based international system and the US dollar as a reserve currency had “set the stage for trade to flourish and finance to expand.”
Photo: AP
The persistence of that US-led economic order over the past 80 years had “proved immensely beneficial to the European Union.”
“But today it is fracturing,” she said in an apparent reference to global trade tensions fuelled by US President Donald Trump’s threat to impose sweeping tariffs on key partners.
“Multilateral cooperation is being replaced by zero-sum thinking and bilateral power plays. Openness is giving way to protectionism.”
The recent upheaval was also threatening “the dominant role of the US dollar,” she said.
The disintegration of the global economic order would “pose risks for Europe,” Lagarde said. “Any change in the international order that leads to lower world trade or fragmentation into economic blocs will be detrimental to our economy,” she said.
But the retreat of the US dollar could also “open the door for the euro to play a greater international role.” Increasing the international role of the euro would lower borrowing costs for EU member states, insulate the bloc from exchange rate fluctuations and would “allow Europe to better control its own destiny,” Lagarde said.
For that to happen, the European Union would need a “steadfast commitment to open trade” and to underpin its position with sufficient security capabilities.
It would also need to strengthen its economy and defend the rule of law, she said.
“This is not a privilege that will simply be given to us. We have to earn it.”
Lagarde’s comments show how policymakers in the region are seeking to turn Trump’s attacks on global trade and US institutions to their advantage. Such aspirations have received encouragement from investors, who have sold the US dollar on the tariff mess. That’s boosting the euro in a move Lagarde has previously called “counterintuitive” but justified.
In yesterday’s speech, Lagarde highlighted three areas that are critical to enhance euro’s global status.
First, she urged “a solid and credible geopolitical foundation by maintaining a steadfast commitment to open trade and underpinning it with security capabilities.”
Second, she repeated calls to complete the single market, help start-ups, trim regulation and build the savings and investment union, toward which progress has been slow.
Lagarde also reiterated that there should be more joint financing on the European level for measures including defense — another politically contentious idea. Progress on that front would mean investors would have a deeper pool of securities to tap into, she said.
“Economic logic tells us that public goods need to be jointly financed,” Lagarde said. “And this joint financing could provide the basis for Europe to gradually increase its supply of safe assets.”
That echoes recent remarks by Executive Board member Isabel Schnabel that a large European bond market is a prerequisite for a greater role for the euro.
Finally, Lagarde said Europe must show its ability to uphold a robust legal and institutional foundation to safeguard investor confidence in their long-term value.
Additional reporting by Bloomberg
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