Europe’s Bid for Autonomy: The Euro’s Evolving Global Role

President Christine Lagarde’s recent proposal signals a pivotal shift, aiming to elevate the euro’s international standing and bolster European foreign policy independence.

The shifting landscape of international politics, significantly influenced by the policies of President Donald Trump, is compelling the European Union to forge a more assertive international policy. This represents a departure from the comfortable protection afforded by US foreign policy since the conclusion of the Second World War. An initial stride in this direction was the “ReArmEU” programme, now known as “Readiness 2030”, which extends financial aid to member states to augment their armaments expenditure. While the establishment of a comprehensive European defence force was a logical progression, the European Commission, adopting a cautious approach reminiscent of the monetary union’s genesis, stopped short of formally proposing it. Just as the European Monetary System (EMS) – a coordination of national currencies – preceded the approval of the Economic and Monetary Union (EMU) in Maastricht, the current strategy appears to favour incremental steps.

Now, Christine Lagarde, President of the European Central Bank (ECB), has advocated for “a greater international role” for the euro, specifically its active function as an international reserve currency. This proposal, made at a recent conference in Berlin, is seen as crucial for fostering greater autonomy in European foreign policy.

President Lagarde presented several compelling arguments to justify this new orientation for European monetary policy. The euro currently stands as the world’s second-largest international reserve currency, holding a 20 percent share of global reserves, in contrast to the US dollar’s 58 percent. Other major currencies, such as the Chinese Renminbi, the Japanese yen, and the British pound, possess significantly smaller shares. A further argument in the euro’s favour is the European Union’s extensive trade relationships, encompassing 72 countries and accounting for 40 percent of global trade – more than double its currency reserves.

Lagarde also contextualised her proposal by outlining the historical evolution of the international monetary order. She recounted the nineteenth century’s Gold Standard era, which was centred on the pound sterling and lacked institutional coordination. This monetary order collapsed with the onset of the First World War, as belligerent nations adopted protectionist policies. The post-war period saw its rebuilding, with the US emerging as the dominant economy. Following the severe economic crisis of 1929, President Roosevelt declared the dollar inconvertible into gold in 1933. The Bretton Woods Agreement in 1944 subsequently established a fixed parity between the dollar and gold, setting it at $35 per ounce (a stark contrast to today’s value of over $3,500). In 1971, President Nixon again declared the dollar inconvertible into gold, ushering in the era of floating exchange rates.

The nation that secures the monopoly of the international currency gains substantial advantages, famously dubbed “exorbitant privilege” by Valéry Giscard d’Estaing, then France’s Minister of Finance under General de Gaulle. While countries with non-dominant currencies are compelled to restrict imports when foreign currency reserves dwindle, the same constraint does not apply to the nation holding the reserve currency. Moreover, in times of international financial crisis, capital tends to flow into the strongest and most stable economy, perceived as a safe haven. This phenomenon can lead to an inflationary process within the international monetary and financial system, a process that some economists, such as Jacques de Larosière, have denounced as dangerous and without clear limits.

Lagarde highlighted that the country with a reserve currency benefits from a virtuous circle that fosters greater economic growth. She noted that “with each one percentage point increase in market capitalisation yielding 0.5 percentage points more growth”. Furthermore, she recalled that “since 1970, there have been 34 instances of simultaneous sovereign debt and financial crisis globally, but the US has remained immune to such ‘twin crisis'”. However, Lagarde contended that this situation has begun to change. During the crisis triggered by the threat of high tariff barriers from the US President, “the US dollar and US Treasuries experiencing sell-offs even as equities fell. The same doubts are also cited by investors who are turning to gold: two-fifths say they are doing so as a hedge against rising geopolitical risks.” Conversely, during this particular crisis, the euro appreciated against the dollar.

The Euro and the International Monetary Order – President Lagarde’s proposal to enhance the euro’s international role is seen as a positive step, given its potential to become a leading international reserve currency. However, critics note that Lagarde remains somewhat vague about the future international monetary order that might emerge from this European policy. In this context, she referenced an observation by economist Robert Triffin, a prominent theorist of the international monetary order and the architect of the European Monetary Union (EMU). Triffin is quoted as having argued “that nations’ confidence in the international monetary system depends on the reliability of the reserve currency, which, in his words, is ‘highly dependent on individual countries’ decisions'”.

This particular quote has been described as cryptic and not fully reflective of Triffin’s core theoretical contributions throughout his career. Since the establishment of the European Payments Union (1947-1956), Triffin’s proposals consistently drew upon the Keynes Plan, presented at the Bretton Woods Conference in 1944. In this plan, Keynes advocated for an international reserve currency called “Bancor”, a composite of the dollar and the pound. The United States, however, opted for the White Plan, which designated the dollar as the sole international reserve currency. Nevertheless, Keynes’ plan served as Triffin’s inspiration in the 1960s, when the dollar’s fixed exchange rate with gold became unsustainable. Triffin then proposed a bold reform of the International Monetary Fund (IMF): the creation of Special Drawing Rights (SDRs). Today, SDRs are a basket of five currencies (dollar, euro, Renminbi, yen, pound), designed to function as Keynes’ Bancor – a reserve currency for national central banks. This reform was adopted as the Fund’s first amendment but was never fully implemented due to the US government’s veto. Yet, Triffin’s influence was again evident during the formation of the European Monetary Union, where the European Currency Unit (ECU), a basket of European currencies, served as a precursor to the EMU, as established by the Maastricht Treaty in 1992. For Triffin, ECUs and SDRs were conceptually aligned.

Reflecting on its centuries-long evolution, the history of the international monetary order can be summarised in three phases. Phase one saw the pound establish itself as the reserve instrument during the First Industrial Revolution. Phase two witnessed the dollar’s ascendancy as the reserve currency during the Second Industrial Revolution. Phase three, in the current era of globalisation, raises the question of which national currency will prevail. Triffin consistently cautioned against the pitfalls of basing an international monetary order on a single national currency. This warning resonates today: if the euro were to solidify its position as an international reserve currency, it would not only ignite potentially dangerous competition between the euro and the dollar but also effectively exclude major economies like China, which is actively promoting the Renminbi as an international reserve currency, India, and Brazil are all members of the BRICS group. These nations are already developing independent instruments for international payments, bypassing both the dollar and the euro. Ultimately, the proliferation of competing international reserve currencies could lead to a scenario akin to the 1930s, characterised by destabilising capital movements that exacerbated dangerous tensions between nation states.

A European Federal Government for a European Foreign Policy – The ECB President’s proposal is best viewed as an appropriate response to the potentially disruptive policies emanating from the US. Furthermore, it underscores the increasing urgency and scope of the reforms outlined in the Letta and Draghi reports. More broadly, it is evident that post-war international institutions are in need of reform. For instance, the enduring right of veto held by five countries within the UN Security Council routinely obstructs attempts at meaningful reform, despite ongoing humanitarian crises such as the Israeli-Palestinian conflict, the Russian invasion of Ukraine, and widespread violence across Africa.

The European Union cannot merely lament humanity’s tragedies; it must propose constructive reforms. The European Commission often appears constrained by the resurgent sovereignist sentiments prevalent in many European governments, which manifest within the Council of Ministers and threaten the Union’s cohesion. A European currency and a robust European defence – “the purse and the sword” – represent the fundamental powers of all modern states. The time has come for influential voices within Europe to rekindle the vision of the Schuman Declaration: the European Coal and Steel Community as the foundational step towards a European federation and global peace. The imperative now is to establish a supranational political movement, or a coalition of political parties, dedicated to the creation of the United States of Europe.