Investors looking for alternatives to the US dollar.
Greetings. You will have noticed a drumroll of stories in all parts of the FT recently about investors looking for alternatives to the US dollar, ranging from money managers to central banks. It makes for a moment of truth for the EU, which has long harboured ambitions for the euro to take the dollar’s crown.
Policymakers know this. In an opinion article for the FT, European Central Bank president Christine Lagarde declares that this is “Europe’s ‘global euro’ moment”. But will European leaders grasp the huge strategic opportunity that has landed in their laps? If they don’t, others — especially China — are ready to boost alternatives to both the dollar and the euro.
Next week’s European Council summit will discuss the euro’s international role. So today, I address the steps the leaders need to take to make the most of this moment of truth and, in particular, the perennial question of commonly issued debt. If not now, when?
Lagarde writes:
For the euro to reach its full potential, Europe must strengthen three foundational pillars: geopolitical credibility, economic resilience, and legal and institutional integrity.
I will mostly address the second point below, but the first and the third are evidently important. Geopolitical credibility hinges, as Lagarde points out, on the EU’s relevance in trading networks (where it is already a global player) and military alliances (where it is . . . not quite that). On law and institutions, the point here is that the EU’s perhaps maddening legalism and democratic decision-making mean that once a commitment is made, it can be relied on — and reliability is a scarce and valuable commodity in a Trumpian world.
But let’s focus on the economics. On “economic resilience”, Lagarde likewise mentions three ingredients:
. . . economic strength is the backbone of any international currency. Successful issuers typically offer a trio of key features: strong growth, to attract investment; deep and liquid capital markets, to support large transactions; and an ample supply of safe assets. But Europe faces structural challenges. Its growth remains persistently low, its capital markets are still fragmented and . . . the supply of high-quality safe assets is lagging behind.
She continues with the standard laundry list of policies emphasised in the recent reports of Enrico Letta and Mario Draghi, such as completing the single market, lightening regulation and unifying capital markets. But she pulls her punches on several crucial policy questions.
While she mentions the ECB’s euro swap lines for select other central banks, she fails to suggest that these could be expanded to more countries or included as part of the package the EU could offer trade partners interested in closer relations. And she doesn’t mention the digital euro, despite this being the ECB’s prepared defence against stablecoins.
THIS ARTICLE ORIGINALLY APPEARED AT FINANCIAL TIMES.