Lagarde Calls for Bold EU Reforms to Make Euro a Rival to U.S. Dollar

European Central Bank President Christine Lagarde believes the euro has the potential to become a credible alternative to the U.S. dollar, delivering major economic and strategic benefits to the 20-nation bloc. However, this would require significant reforms in the EU’s financial and security systems. Despite a global shift away from dollar assets due to unpredictable U.S. policies, investors have largely turned to gold rather than embracing the euro, signaling a lack of confidence in the bloc’s financial cohesion and integration.

Addressing Financial Gaps and Security Needs to Boost the Euro’s Global Influence

Lagarde emphasized that the euro’s stagnant global role is largely due to incomplete financial institutions and limited political will for deeper integration within the European Union. While the dollar’s share in global reserves has declined to 58%—the lowest in decades—it still significantly outweighs the euro’s 20%. To capitalize on emerging opportunities, Europe must develop deeper capital markets, strengthen legal frameworks, and support open trade with adequate security capabilities.

For the euro to expand its international influence, Europe must pair economic stability with military credibility, Lagarde argued. Investors, especially official ones like central banks, look for geopolitical reliability in addition to financial returns. This means that being a trusted security partner, capable of enforcing alliances, plays a critical role in making the euro a desirable reserve currency.

Strengthening the Euro’s Role in Trade Requires Domestic Reform and Strategic Partnerships

Lagarde also advocated for making the euro the preferred currency in global trade invoicing. To achieve this, new trade agreements, more efficient cross-border payment systems, and liquidity partnerships with the ECB would be necessary. These steps would increase the euro’s prominence and usefulness in international commerce, but they must be supported by a coherent and efficient domestic economic framework.

The biggest hurdle to realizing these ambitions lies within the EU itself. Fragmented capital markets and a lack of safe, liquid investment assets hinder progress. Lagarde suggested that jointly financed public goods and common borrowing could solve this, but such proposals face resistance, particularly from Germany, due to concerns over fiscal responsibility. If overcome, these reforms could attract global investment, reduce borrowing costs, and shield the eurozone from external shocks and sanctions.