Lagarde’s ‘Global Euro Moment’ Falters Amid Europe’s Divisions

As Donald Trump’s trade policies rattled global markets earlier this year and dragged the dollar toward multi-year lows, European Central Bank chief Christine Lagarde sought to seize the moment. Speaking in Berlin in late May, she urged Europe’s leaders to back their rhetoric with action and push forward with a bold ambition: elevating the euro’s global standing.

Lagarde’s pitch, described by a source close to her thinking, was rooted in a belief that Trump’s challenge to the economic status quo presented a rare opportunity. She framed it as Europe’s “global euro moment,” a phrase she coined to underline the urgency of reinforcing the role of the single currency. A former French finance minister, Lagarde reportedly felt let down by the absence of strong political leadership and decided at least one prominent voice needed to step forward.

But four months on, and a year after her predecessor Mario Draghi outlined sweeping reforms to Europe’s financial system, Lagarde’s call has been largely drowned out. Interviews with more than a dozen euro zone policymakers, central bankers, private bankers, and veteran Brussels observers paint a picture of inertia. Many say national divisions, geopolitical strains such as the Ukraine war, the need to contend with Trump, and domestic political battles have sidelined Lagarde’s proposals. The ECB chief herself declined to comment.

Measures that could have boosted the euro’s attractiveness to global investors have slipped away. Proposals for issuing joint debt to finance Europe’s defence ran into resistance from both Berlin and Paris. Smaller states with outsized financial sectors opposed granting stronger supervisory authority to EU institutions. And efforts to create a digital euro remain vague and unresolved. “Fundamentally, the EU struggles to concentrate on many crises at the same time,” former Italian prime minister Enrico Letta told Reuters. “I see a Europe divided.”

For all its achievements, the euro still plays second fiddle globally. It circulates in the pockets of 350 million Europeans, a tangible symbol of integration built over three decades of monetary and banking reforms. Nearly destroyed by a sovereign debt crisis 15 years ago, it has endured, but the dollar remains supreme. Three-fifths of central bank reserves are in dollars, and it dominates transactions in commodities such as oil. Its dominance grants Washington easy access to lenders and unmatched financial leverage. As Trump bluntly declared in July: “Dollar is king and we’re going to keep it that way.”

Even so, the euro holds the second spot. It accounts for around 20 percent of global central bank reserves and trade invoicing, and 60 countries or territories peg their currencies directly or indirectly to it. Bolstered by the U.S. Federal Reserve’s pivot to rate cuts, the euro has surged about 13 percent this year, reaching a four-year high against the dollar. Investors widely expect it to climb further. European leaders argue that reinforcing the euro’s role would shield their export-driven economies from exchange-rate shocks, volatile capital flows, and even sanctions, should tensions escalate further.

But progress requires three politically fraught steps: creating a sufficient supply of safe euro-denominated assets for investors, completing institutional reforms to deepen Europe’s economic and monetary union, and addressing the rise of digital currencies.

The first challenge is particularly sensitive for Germany. At roughly $13 trillion, the euro area’s outstanding government bonds fall far short of the $30 trillion U.S. Treasury market. Of that, only Germany’s $2.3 trillion debt is universally seen as safe, while Italian or French bonds are treated with greater caution. “The EU doesn’t have a deep enough capital market,” said Alfred Kammer, head of the IMF’s European department. “It’s fragmented along national lines and lacks a truly large, liquid safe asset.”

One remedy would be to issue collective euro bonds backed by all member states. As far back as 2010, policymakers floated the idea of pooling up to 60 percent of GDP into jointly guaranteed “blue bonds,” leaving any excess “red” debt to be shouldered by national governments alone. Yet such proposals have consistently hit the same roadblock: northern nations like Germany and the Netherlands refusing to share liabilities with what they see as profligate southern economies.

The pandemic briefly broke that taboo, with leaders agreeing in 2020 to issue 800 billion euros in collective debt through the Next Generation EU recovery fund. Some hoped this would set a precedent. More recently, Trump’s questioning of NATO spurred expectations that Europe’s defence buildup could justify new joint debt issuance. “Defence creates an opportunity for creating another safe asset that could bolster Europe’s financial architecture,” Finnish central bank chief Olli Rehn told Reuters.

But momentum stalled. German Chancellor Friedrich Merz, who took office in February, chose instead to loosen Berlin’s strict “debt brake” to finance higher defence spending—keeping the purse strings firmly under German control. By April, when EU finance ministers convened in Warsaw to discuss joint borrowing for defence procurement, hopes had faded. “There was support from a number of member states but Germany and France were not convinced,” one participant said. Germany, according to then-finance minister Joerg Kukies, was not entirely opposed but insisted on case-by-case financing: “We didn’t say no. We just said there has to be a specific project to be financed. Then we can talk about the financing.” France, too, was lukewarm. Finance Minister Eric Lombard declined to comment, but a ministry source noted: “Right now the important thing is to build up capacity and capability.” By NATO’s June summit, capitals opted to keep defence spending national, with an EU loan programme providing only supplementary support.

Another obstacle lies in Europe’s fragmented capital markets. Since 2014, leaders have talked about a capital markets union to harmonize rules on bankruptcies, taxation, and public offerings, making it easier for investors to buy and sell euro assets. Yet progress has been slow, and resistance from countries such as Luxembourg, Malta, and Ireland has blocked proposals to strengthen EU-level supervision. Lagarde has suggested expanding the remit of the European Securities and Markets Authority into a networked regulator akin to the U.S. SEC. “You could, for example, reassure Luxembourg regional asset managers they will be treated by the Luxembourg office,” said Nicolas Veron of the Bruegel think tank, who has designed a blueprint for such a system. EU leaders reaffirmed their commitment to advancing the euro’s global role at a June summit, but tougher measures—such as centralizing supervision—remain politically fraught. “My impression is that the tougher topic – that of giving more powers to ESMA — will likely be left till further down the line,” Letta observed.

The digital realm presents a third front. With cryptocurrencies and U.S. dollar-backed stablecoins gaining traction, Europe has debated a digital euro. But progress has been sluggish. Despite 14 parliamentary hearings and Lagarde’s repeated calls, legislation has been stalled for over two years. Critics, including Spanish lawmaker Fernando Navarrete, argue it lacks a clear purpose: “The digital euro is presented as a Swiss Army knife, but lacks precision for any specific problem.” Ministers only recently agreed on a roadmap, setting mid-2026 as the earliest date for legislative approval, with another three years needed for technical implementation. According to participants at a Copenhagen meeting, Lagarde expressed frustration that it would not be ready before her term ends in 2027.

Against this backdrop, few believe the euro will dethrone the dollar any time soon. The real question is whether it can consolidate its status as the second global reserve currency. A recent survey by the Official Monetary and Financial Institutions Forum found 16 percent of central banks planning to boost euro holdings in the next two years, though gold remains the preferred hedge. In the long run, China’s yuan looms as a stronger challenger. “We believe that diversification to manage the foreign exchange is very important,” said Enke Enkhjargal Danzanbaljir, a board member of Mongolia’s central bank, who praised Beijing’s offer of standby currency swaps. “The ECB must create tools, swap arrangements for central banks like us in Asia, then it would be easy to invest more in Europe.”

For now, the ECB maintains liquidity lines with 16 central banks, mostly in Western countries. Yet insiders say Lagarde remains committed to her push. In a September speech in Paris, she urged Europe to shore up the “chinks in the armour” of its geo-economic standing, adding pointedly: “Europe is working on this, albeit possibly too laboriously and too slowly.”

By fLEXI tEAM