The euro has the potential to become a strong alternative to the US dollar, thus providing great benefits to the 20-nation bloc, if European governments manage to strengthen their regional financial and security structures, European Central Bank (ECB) President Christine Lagarde said on Monday.
In recent months, global investors have begun to reduce their exposure to dollar assets in the wake of uncertain US economic policy. However, most of them have chosen to turn to gold rather than the euro, as they do not see the currency as a direct alternative.
The euro's global role has remained static for decades because the EU's financial institutions are still incomplete and member governments are less interested in implementing deeper integration. "The changes that are taking place are opening up space for the euro on the global stage," Lagarde said in a lecture in Berlin. "The euro will not automatically gain influence, it needs to be worked on."
Lagarde stressed that Europe needs deeper and more liquid capital markets, a solid legal basis, and security capabilities that can support its commitment to free trade.
She added that any greater role for the euro must be accompanied by a geopolitically supportive force that can support alliances and reassure investors. The euro also needs to be made the currency of choice in international trade settlements, supported by new trade agreements, improved cross-border payments systems, and a liquidity agreement with the ECB.
However, Lagarde stressed that internal economic reforms were more urgent, as the eurozone's capital markets remained fragmented and did not offer investors a truly liquid and widespread safe haven.
