ECB President Lagarde: Euro must make the transition to global status

In a Business France event, Lagarde said that the current situation brings economic disadvantages and must be ended in view of the changing global situation. “This is not a sustainable position. We cannot remain a passive safe haven that absorbs the shocks caused elsewhere. We must be a currency that shapes its own destiny,” she said, according to the published text of the speech.

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The way forward, according to Lagarde, is to strengthen the international role of the euro, moving from an intermediate position to a fully-fledged international currency, with all the benefits that entails.

Lagarde said that after the imposition of higher US import tariffs, international investors turned to the euro as a safe haven, but this led to its appreciation. Although 52 percent of imports are now processed in euros, Europe is not yet as immune to such inflows as the USA is. “If the dollar receives inflows as a safe haven, the unmatched depth of the U.S. limitsFinancial markets both the extent of appreciation and the channeling of these inflows in a way that offsets their contractionary effects,” Lagarde said.

U.S. Treasury yields fell as foreign investors demanded U.S. dollar-denominated fixed-income securities. Research showed that global demand for these safe-haven assets depresses government bond yields by up to 2 percentage points over the long term, known as the infamous “exorbitant privilege.”

Lower yields then reduced financing costs across the economy and supported productive investment. “At the same time, American exporters are largely protected in the short term from exchange rate fluctuations in their foreign inputs and energy costs, since around 95 percent of US imports are invoiced in dollars,” explained Lagarde.

According to her, Europe must first create the conditions for capital to flow into growth within Europe so that it can benefit from the inflows and then attract even more investment in a virtuous circle. “The fundamental task here is to remove the obstacles that prevent us from having truly integrated product and capital markets that can compete with those in the US,” said the ECB President.

The weaker performance compared to the US largely reflects home-made barriers – inconsistent regulations, tax systems, bankruptcy rules and incomplete capital markets. “Structural challenges such as high energy costs, low productivity and reluctance to finance joint projects are also largely in our own hands,” she said.

DOW JONES