By Balazs Koranyi, Jan Strupczewski and Elisa Martinuzzi
FRANKFURT/BRUSSELS/LONDON (Reuters) – -As alarm over Donald Trump’s trade policy was pushing the dollar toward multi-year lows, European Central Bank chief Christine Lagarde in late-May asked Europe’s leaders to put their money – or rather, their currency – where their mouths were.
Her argument, outlined in a speech in Berlin, was simple: alarm over Trump’s assault on the economic status quo was a chance for Europe to advance its goal of boosting the influence of its single currency.
Building on proposals last year by her predecessor Mario Draghi for sweeping reforms to Europe’s financial system, Lagarde coined a phrase to define the opportunity: the “global euro moment”.
Her rationale was simple, a source familiar with her thinking told Reuters. Convinced this could be a defining moment for Europe, Lagarde – a former French finance minister – was disappointed by the lack of political leadership. She thought at least one voice should fill the void.
Four months on – and a year since Draghi’s report – Lagarde’s calls to bolster the foundations of the single currency are being drowned out by national divisions and other priorities such as the Ukraine war, dealing with Trump, and coping with home-grown political turmoil.
A sense of policy inertia is the main takeaway from Reuters’ interviews with more than a dozen euro zone officials and central bankers, senior private bankers and veteran Brussels-watchers with a close view – often in the room – of discussions. Lagarde herself declined to comment.
Measures that would have strengthened the euro’s appeal for investors have fallen by the wayside, the sources said.
Proposals to jointly issue debt in euros to fund Europe’s defence encountered resistance from Berlin and Paris. Smaller nations with big financial sectors opposed centralizing supervisory powers in EU bodies. And plans to create a digital version of the euro have yet to take on a clear shape.
“Fundamentally, the EU struggles to concentrate on many crises at the same time,” Enrico Letta, the Italian ex-prime minister who last year presented his own report on reforms needed for the region’s single market, told Reuters.
“I see a Europe divided”.
“DOLLAR IS KING”
The euro in the pockets of 350 million Europeans from Dublin to Nicosia is among the EU’s most tangible achievements. Nearly wrecked by a sovereign debt crisis 15 years ago, it’s the fruit of a three-decade process of banking and monetary reforms that remains a work in progress.
But the dollar remains dominant globally. It accounts for three-fifths of central bank reserves and is the main transaction currency for commodities such as oil. Its status gives the U.S. government access to a ready pool of lenders, and helps it wield outsized financial clout. As Trump said in July: “Dollar is king and we’re going to keep it that way.”
Yet the euro can claim to be the world’s second-most-favoured currency. It accounts for some 20% of global central bank reserves and a similar amount of trade invoicing. Aside from the 20 euro zone countries, 60 nations or territories have directly or indirectly pegged their money to it.
The euro has risen around 13% against the dollar this year, taking it to a four-year high, with the investor consensus that further gains are likely as the U.S. Federal Reserve embarks on a cycle of cutting its benchmark rate.
With the free trade era giving way to protectionism and growing economic tensions under Trump, European leaders acknowledge that bolstering the euro’s global status would help shield their export-driven economies.
The argument is that a greater presence of the euro in trade and global reserves would help insulate the area from swings in exchange rates and capital flows – even economic sanctions, if tensions worsen.
But European capitals are baulking at three steps that would underpin that goal: creating a big enough stock of safe euro assets for investors; making institutional changes to complete Europe’s economic and monetary union; and responding to the rising challenge of digital currencies.
MORE “SAFE” ASSETS ARE NEEDED
Step one remains among the most contentious – particularly for Europe’s largest economy, Germany.
At the equivalent of $13 trillion, the stock of outstanding euro area bonds issued by governments is dwarfed by the $30 trillion U.S. Treasury market. And while most investors regard the $2.3 trillion of German government paper as a safe bet, fewer would say the same of Italian bonds or politically troubled France’s.
“The EU doesn’t have a deep enough capital market,” Alfred Kammer, head of the International Monetary Fund’s European department, told Reuters. “It’s fragmented along national lines and lacks a truly large, liquid safe asset.”
For some, this is where new types of debt secured by a collective guarantee of the 20 euro-area countries should come in.
As far back as 2010, one proposal to help Europe emerge from its sovereign debt crisis envisaged countries pooling up to 60% GDP of their national debt into synthetic “blue bonds” enjoying joint liability. Any national debt beyond that – dubbed “red” debt – would remain the liability of the EU member state alone.
Such ideas have hit the same roadblock: reluctance by frugal northern nations such as Germany or the Netherlands to share liability with southern European countries they see as spendthrift.
It took the COVID-19 pandemic for capitals in 2020 to agree for the first time to share debt in the shape of the 800-billion-euro Next Generation EU (NGEU) recovery fund: a one-off stimulus package some hoped would set a precedent.
Then, five years later, Trump’s questioning of NATO spurred hope for further action. Europe’s rush to upgrade its military muscle needed huge funding for the shared goal of European security – a move that could generate hundreds of billions in euro-denominated joint debt.
“Defence creates an opportunity for creating another safe asset that could bolster Europe’s financial architecture,” Olli Rehn, Finnish central bank chief and ECB rate-setter, told Reuters.
While defence bonds’ time may yet come, it’s not today.
After winning power in February this year, German Chancellor Friedrich Merz took a different tack: loosening Germany’s sacrosanct “debt brake”. That paves the way for major spending on defence and infrastructure, but all of it will remain firmly under Berlin’s control.
By the time EU finance ministers met in Warsaw in April to discuss a proposal to borrow jointly to fund arms procurement, the writing was on the wall.
“There was support from a number of member states but Germany and France were not convinced,” said one participant, characterising German arguments as being about money and French ones as related to national defence sovereignty.
Asked for comment on his stance at that meeting, Germany’s then-finance minister Joerg Kukies said Berlin was not categorically against joint debt for defence.
“We didn’t say no. We just said there has to be a specific project to be financed,” Kukies, who left office in May, told Reuters. “Then we can talk about the financing.”
French Finance Minister Eric Lombard did not respond to a request for comment. A finance ministry source said France was not against common schemes in principle but did not see them as a priority. “Right now the important thing is to build up capacity and capability,” the source said.
It was no surprise when, at NATO’s June 25 summit, European capitals chose to keep defence fund-raising largely within national budgets that would be loosened to allow higher spending. A new EU loan programme would act as a top-up.
CAPITAL UNION QUALMS
A second stumbling block is the fragmentation of Europe’s capital and banking markets across 20-plus national jurisdictions – which then-European Commission president Jean-Claude Juncker had set as a priority to solve back in 2014.
A capital markets union would align national rules on bankruptcies, public offerings and tax treatment of capital gains, debt and equity, making it easier for investors to put money into assets in the currency zone.
But years of patchy progress on the project, recently rebranded as the Savings and Investments Union, underline how wary EU capitals and many bankers are of any move that would shift decision making to EU agencies.
Take the idea of creating a European version of the U.S. Securities and Exchange Commission(SEC) with a mandate to monitor risks across the EU – something Lagarde suggested could be achieved by extending the powers of the European Securities and Markets Authority (ESMA), an EU body based in Paris.
When European leaders met in April last year to advance such plans, France and Germany pushed for joint financial supervision. But it was smaller states – among them Luxembourg, Malta and Ireland – that blocked.
In a speech later that year, Lagarde suggested a European SEC could “be organised as a network of offices in the member states” – an idea some agree had a better chance of sticking.
“You could, for example, reassure Luxembourg regional asset managers they will be treated by the Luxembourg office,” said Nicolas Veron, senior fellow at EU think tank Bruegel and author of a blueprint on how ESMA could be expanded into a network of national offices.
When EU leaders met in June, they agreed on the need for “advancing decisively” on efforts to raise the euro’s profile as a reserve and transaction currency.
Steps due by year-end include promoting financial literacy among Europeans and making it easier for them to invest in securities markets. But the bigger goal of centralising markets and securities supervision faces headwinds, at least for now.
“My impression is that the tougher topic – that of giving more powers to ESMA — will likely be left till further down the line,” Letta told Reuters.
EURO GOES DIGITAL: BUT WHEN?
The euro’s jostling for global influence has been conducted as a fiat money backed by the might of the ECB. But the rise of crypto and the U.S. foray into stablecoins – digital money pegged to the dollar – is opening up a new front.
Here too, Europe faces obstacles.
A Commission proposal for legislation on a digital euro has sat idle for over two years, despite the ECB holding 14 hearings on the project in the European Parliament and Lagarde pleading for its approval.
Banks and lawmakers worry it will drain bank deposits and involve heavy set-up costs without achieving a clear purpose, arguing it is variously portrayed as a defence against the rise of cryptos or as a new tool for digital finance.
“The digital euro is presented as a Swiss Army knife, but lacks precision for any specific problem,” Fernando Navarrete, the Spanish lawmaker and ex-central banker who is parliament’s rapporteur on the legislation, wrote in a commentary this month.
After EU finance ministers managed last week to agree a roadmap for its launch, the earliest timeline for its approval is mid-2026. And even then, it will need a further two and a half to three years to build the technology.
According to three participants at the Copenhagen meeting where the roadmap was agreed, Lagarde voiced disappointment at how slow the process had been and the fact it would not be in place by the end of her term in 2027.
THE YUAN CHALLENGER
Amid entrenched resistance to the reforms required, no one sees the euro rivalling the dollar’s dominance soon – the question is more whether it can strengthen its claim to be the global number two.
Some suggest Europe need not do anything to enhance the euro’s appeal other than emphasise its respect for the rule of law and the independence of its central bank.
A survey of 75 central banks published in May by the Official Monetary and Financial Institutions Forum (OMFIF) showed 16% saying they plan to increase euro holdings over the next 12-24 months.
But the same survey concluded that the main beneficiary of moves to diversify out of the dollar was not a currency but gold. And, in the long term, China’s yuan was favoured by more central banks.
“We believe that diversification to manage the foreign exchange is very important,” Central bank of Mongolia board member Enke Enkhjargal Danzanbaljir told business and finance chiefs in France in July, praising China’s offer of standby currency swaps to other central banks.
“The ECB must create tools, swap arrangements for central banks like us in Asia, then it would be easy to invest more in Europe,” she said.
The ECB has liquidity lines with 16 central banks in mostly Western countries, in some cases for unlimited funding.
Three sources close to Lagarde’s thinking said she was determined to maintain her push.
In a Sept. 15 speech in Paris, Lagarde urged the region to address “chinks in the armour” of its geo-economic standing, concluding: “Europe is working on this, albeit possibly too laboriously and too slowly.”
(Additional reporting by Maria Martinez and Andreas Rinke in Berlin; Michel Rose and Leigh Thomas in Paris; Francesco Canepa in Frankfurt; Writing and additional reporting by Mark John; Editing by Daniel Flynn)
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