Lagarde revives pitch for euro’s international role

Christine Lagarde has said she would like the eurozone to enjoy the same benefits from its currency as the US does from the dollar.

In a speech in Paris on October 7, the president of the European Central Bank said the euro was “somewhere in between” being a safe-haven currency and a “truly international one”.

Countries whose currencies are safe havens, such as Japan and Switzerland, enjoy capital inflows in times of stress, she said. However, these are not usually signs of “sustained investment” and as the currencies lack the market depth of their larger counterparts, they appreciate quicker.

On the other hand, the US – the only country at the moment with a “truly international” currency – enjoys the privilege of foreign investors flocking to its sovereign bonds during times of stress, Lagarde said. This results in long-run yields being compressed by “up to two percentage points”, thereby reducing financing costs and supporting productive investment.

The euro’s foreign exchange markets are deep, the ECB president said. The trade between the single currency and the dollar is 20 times higher than that between the euro and either the Swiss franc or the yen. Lagarde said this “helps contain appreciation pressures on the euro during episodes of accelerated portfolio inflows”.

However, she added that there is still work to be done on market depth, as the eurozone does not have enough of this to fully benefit from capital inflows. The eurozone’s combined top-rated sovereign bond market amounts to just €6.6 trillion, only a fifth of the size of the US Treasury market, she said.

In a speech in May, Lagarde had called for the euro to take on a “global role”.

The eurozone’s equity markets are also underperforming, the ECB president noted, and have generated returns “five times lower” than those of the US.

She added that the single currency area is struggling to channel its own savings into productive investment. A third of all liquid assets, some €11.5 trillion ($13.4 trillion), still sit unused, she said.

Policy prescriptions

The ECB president called on policy-makers to lift the obstacles that were preventing the eurozone from having “truly integrated product and capital markets that can compete with those in the United States”. Fragmented regulations, tax regimes and bankruptcy rules, and incomplete capital markets were all throttling the bloc, Lagarde said.

She added that high energy costs, low productivity and a reluctance to finance common projects are also within policy-makers’ control, and resolving these issues could help to bridge the gap between the eurozone and the US.

“Today, almost three-quarters of EU firms at the forefront of innovation say that fragmentation limits their opportunities,” she said.

Lagarde called for new trade agreements that would allow for invoicing in euros, which would further embed the currency in global markets. She noted that the EU was already the leading trading partner for 72 countries, representing almost 40% of global GDP, and that around 40% of all global trade was invoiced in euros.

She said the ECB was working on enhancing cross-border payments in euros by developing its central bank digital currency, and by exploring links between the Eurosystem’s Target instant payments system and other fast payments systems outside the EU. More linkages, she explained, would make the euro more accessible, affordable and reliable for trade partners.

Lagarde said the ECB is committed to providing a backstop to markets that undergo stress in order to “safeguard against shortages in euro liquidity abroad, support financial stability and protect the smooth transmission of our monetary policy”.

She noted that “trust in the EU” is at its highest since 2007, and that this is in stark contrast to the decline in trust in US institutions that has taken place over the same period. High levels of trust enhance investor confidence in Europe, she added.

“Europe should not shy away from new ways of making decisions together, including extending qualified majority voting where needed,” she said, referencing a previous call to move away from the need for unanimity when it came to making foreign policy.