Will the euro overtake the dollar? Lagarde lays out 3 key conditions
Photo: Christine Lagarde, President of the European Central Bank (Getty Images)
The dollar remains the world's primary reserve currency. For the euro to take over that role, three key conditions must be met, says European Central Bank (ECB) President Christine Lagarde at a conference in Kyiv.
Lagarde noted that currently, the euro accounts for about 20% of global central bank reserves.
"It is the second-largest reserve currency in the world," she said.
She also emphasized the importance of gold, which has significantly increased in value and share amid current global uncertainty.
"The prime reserve currency is the dollar. Its role as a reserve currency for central banks has slightly diminished over the course of time. It is now about 58% of central bank reserves. The future will tell, but I am not suggesting that this is going to change overnight," the ECB president added.
Three prerequisites
Lagarde referred to her recent speech in Berlin, where she outlined three prerequisites for the euro to become the leading reserve currency.
"There are three of them. The first one is geopolitical, the second is economic, and the third is legal," she said.
On the geopolitical front, she explained that a country aspiring to such a role must demonstrate its value as a trade partner. Europe currently has 72 trade agreements covering 40% of global trade.
"Is that enough? Should it be more? Is there a clear desire and strategy?" she asked.
She added that reliability and self-defense capability are also crucial in this area, and countries like Germany are making progress in this regard.
"The second element that is necessary is the economic strength. For that, you need to be a territory that is attractive to investors. You need to have a reliable fiscal policy, but you also need to bring capital to the table,” the ECB President explained.
Lagarde called for reforms in the EU financial sector to increase its ability to attract investment.
"The third component is the legal trust, the confidence that economic actors have in Europe," she said. According to her, it is essential to uphold international monetary order rules. "When we sign a contract, that contract is honored and adjudicated properly in front of our courts," she added.
Background
ECB President Christine Lagarde recently said the world is approaching a "global moment for the euro" - a potential opportunity for the single European currency to strengthen its role as an alternative reserve asset amid geopolitical and economic shifts.
However, ECB Vice President Luis de Guindos pointed out that the eurozone's financial architecture is still far behind that of the US, meaning the euro is unlikely to replace the dollar as the world's primary reserve currency anytime soon.
