Could the euro eclipse the dollar? Lagarde’s vision meets Trump’s economic nationalism

In a bold lecture at Berlin’s Hertie School on 26 May, European Central Bank (ECB) President Christine Lagarde declared that the euro could challenge the U.S. dollar as a global reserve currency, provided the 20-nation eurozone strengthens its financial and security architecture.

Unsettled by erratic U.S. economic policies under President Donald Trump, global investors have been diversifying away from dollar assets, often turning to gold rather than the euro due to Europe’s fragmented financial systems and limited geopolitical clout. Lagarde’s call for a “global euro moment” highlights both the opportunity and the steep challenges facing the EU, particularly in the context of Trump’s “America First” agenda, which has heightened global economic uncertainty and strained transatlantic relations.

Lagarde’s vision: a stronger euro through integration

Lagarde argued that the euro’s stagnant global role – holding just 20% of international reserves compared to the dollar’s 58% – stems from the EU’s incomplete financial architecture and reluctance to deepen integration. To elevate the euro, she proposed a three-pronged strategy: creating a deeper, more liquid capital market; bolstering legal foundations for economic stability; and reinforcing open trade policies with enhanced military capabilities. A unified capital market, she noted, would require overcoming national divisions to produce a widely accepted “safe asset” for investors, potentially through joint borrowing – a politically contentious idea, especially in Germany, where fears of footing the bill for less fiscally disciplined nations persist.

Geopolitically, Lagarde emphasised that a stronger euro demands military heft to assure investors of the EU’s reliability as a security partner.

“Investors seek geopolitical assurance,” she said, underscoring the need for Europe to back its trade alliances with “hard power.”

She also advocated making the euro the currency of choice for international trade invoicing, supported by new trade agreements, improved cross-border payment systems, and ECB liquidity arrangements. These reforms, if realised, could lower borrowing costs for European firms, shield the eurozone from exchange rate volatility, and reduce vulnerability to international sanctions – a growing concern in an era of weaponized finance.

Trump’s policies: a catalyst for changer?

The backdrop to Lagarde’s remarks is the economic turbulence driven by Trump’s trade policies since his return to office in January 2025. Trump’s economic nationalism presents both an opportunity and a challenge for Lagarde’s vision.

On one hand, his policies have accelerated the dollar’s decline as a global reserve currency, creating an opening for the euro to gain ground. The dollar’s share of international reserves, already at a decades-low 58%, could erode further if Trump’s trade wars persist.

On the other hand, his hostility toward the EU complicates Lagarde’s call for deeper integration. Trump’s preference for bilateralism undermines the EU’s collective bargaining power, as he seeks to exploit divisions among member states. For instance, his rapport with nationalist leaders like Meloni could weaken EU unity, making it harder to achieve the consensus needed for joint borrowing or a unified capital market.

The EU’s internal hurdles

Lagarde’s ambitious roadmap faces significant domestic obstacles. The eurozone’s capital market remains fragmented, with no single, liquid safe asset to rival U.S. Treasury bonds. Joint borrowing, a potential solution, is a political lightning rod, particularly in Germany and other fiscally conservative nations wary of mutualising debt. Moreover, the EU’s military capabilities lag far behind those of the U.S., limiting its ability to project the “hard power” Lagarde deems essential for investor confidence. The EU’s reliance on NATO, heavily influenced by Washington, further complicates its quest for geopolitical autonomy, especially under a Trump administration sceptical of alliance commitments.

The broader geopolitical context adds urgency. Russia’s ongoing war in Ukraine, coupled with Trump’s wavering commitment to NATO, has pushed the EU and NATO to bolster military capabilities. A stronger euro backed by a more assertive EU could reshape global finance and geopolitics, but failure to act risks ceding ground to rival powers like China, whose yuan is also vying for global influence.

For now, the euro’s ascent depends on Europe’s ability to turn Trump’s disruptions into an opportunity – before the dollar’s dominance, or another contender, fills the void.

Sources: Reuters, BGNES, edited by g.g.

Caption: European Central Bank (ECB) President Christine Lagarde addresses a press conference following the meeting of the ECB Governing Council in Frankfurt am Main, Germany, 17 April 2025. [EPA-EFE/RONALD WITTEK]