Speaking at the Jacques Delors Centre in Berlin, Lagarde argued that the euro could evolve into a credible alternative to the US dollar—but only if the European Union makes deliberate and sustained policy efforts.
Addressing the event entitled “Europe’s Role in a Fragmented World”, Lagarde stated that the international system which benefited Europe for decades is now under pressure. Multilateralism is giving way to protectionism and bilateral power politics, while the global dominance of the US dollar is increasingly being questioned.
“The global order that underpinned European prosperity is fracturing,” she said. “But with the right policy responses, this change could also open the door for the euro to assume a greater international role.”
Dollar Decline and the Case for the Euro
Lagarde referenced historical precedents to illustrate that dominant currencies can lose ground. She noted that the US dollar’s share of global foreign exchange reserves—currently around 58%—has fallen to its lowest level since 1994, while central banks are rapidly increasing their gold holdings.
“In previous periods of uncertainty, such as the 1930s and 1970s, confidence in the dollar declined when the US unilaterally altered the global monetary system,” Lagarde said, referencing President Roosevelt’s suspension of gold convertibility and the Nixon-era collapse of the Bretton Woods system. “Yet in both instances, there was no viable alternative at scale.”
Today, the euro is the world’s second most-used currency, accounting for about 20% of global reserves. However, Lagarde stressed that this position is insufficient to automatically elevate the euro to reserve currency status on par with the dollar.
“We must not assume this shift will happen on its own. We must earn it.”
Three Pillars for Currency Influence
Lagarde outlined three core requirements for increasing the euro’s global role: a credible geopolitical foundation, a strong economic base, and a robust legal framework. Europe, she argued, has key assets in each area but must bring them together more effectively.
1. Geopolitical credibility:
A currency’s international role depends partly on the economic and military alliances behind it. Europe is already the world’s largest trading bloc and top trading partner for 72 countries, representing nearly 40% of global GDP. However, investors—particularly sovereign ones—also seek geopolitical assurances.
“The US dollar’s dominance is underpinned not only by economic fundamentals but also by its security guarantees,” she said. “Europe must complement trade integration with credible defence capability.”
Recent EU initiatives to enhance strategic autonomy and defence coordination, including joint procurement and funding mechanisms, were cited as positive steps. Lagarde noted that moving from rhetoric to implementation is essential if Europe is to be seen as a dependable geopolitical actor.
2. Economic integration and investment scale:
Lagarde pointed to the gap between Europe’s market potential and its performance. Although the euro area has a large internal market and high savings, it lags behind the United States in terms of productivity growth and investment returns. US equity markets have delivered returns five times greater than those in Europe since 2000.
Despite a comparatively favourable fiscal position—euro area debt-to-GDP stands at 89% versus 124% in the US—Europe offers relatively few high-grade safe assets for global investors.
“The euro will not gain wider use without integrated, liquid capital markets,” Lagarde stated. She called for the completion of the Capital Markets Union and a European approach to funding strategic industries, arguing that disjointed national strategies risk undermining collective competitiveness.
3. Legal and institutional integrity:
Lagarde emphasised that currencies retain reserve status when supported by stable legal and institutional frameworks. The ECB’s own independence, enshrined in EU law, provides credibility. But she warned that Europe must remain politically united to defend this stability under external pressure.
“Checks and balances in the EU are robust by design, but slow processes are not sufficient. We must be able to speak with one voice when needed.”
In particular, she suggested that reforms such as expanding qualified majority voting in key areas could improve the EU’s capacity to act decisively and reinforce confidence in the euro’s long-term stability.
A Turning Point
Lagarde concluded that the shift in the international monetary system presents both risk and opportunity for Europe. Citing economist Robert Triffin, she noted that trust in a reserve currency ultimately depends on national decisions. The current geopolitical fragmentation may represent a “global euro moment”—but only if Europe acts.
“This is a prime opportunity for Europe to take greater control of its own destiny. But this is not a privilege that will simply be given to us. We have to earn it.”
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