New Opportunities under Euro Internationalization and Reconstructed Financial Security Architecture

ECB President Lagarde recently made clear in a speech in Berlin that if the eurozone can strengthen its financial and security architecture, the euro has the potential to become a substitute for the US dollar. This argument is only a response to the current evolution of the international monetary system but also reveals Europe's strategic choice under the backdrop of globalization's retreat and intensified geopolitical conflicts

At present, although the euro has become the world's second-largest reserve currency, its international status still lags far behind the US dollar. Data shows that the US accounts for 58% of global foreign exchange reserves, while the euro only accounts for 20%. The root of this gap lies in the fragmentation of the eurozones internal market, the low liquidity of capital markets, and the lack of security capacity. For instance, the absence of a unified safe asset in the eurozone bond market leads to investor confidence in euro assets. However, the inconsistency of US policies provides an opportunity for the euro. Lagarde pointed out that the uncertainty of US economic policies has led investors to reduce their exposure to US dollar assets. In May 2025, the euro exchange rate against the US dollar rose to 1.1188, reflecting market's recognition of Europe's stability. This trend is supported by Europe's relatively independent economic policies, a robust central bank system, and strategic autonomy shown in the-Ukraine conflict.

The core of euro internationalization is to deepen financial integration. Lagarde emphasized that Europe needs a deeper and more liquid capital market. Currently the inefficiency of the eurozone capital market leads to high financing costs for enterprises. For example, the difficulty of financing for small and medium-sized enterprises in Europe is significantly higher that in the United States, which directly restricts the eurozone's economic vitality for innovation. To address this issue, the ECB is promoting the construction of a Capital Union (CMU), aiming to integrate financial markets and reduce financing costs. Specific measures include unifying the regulatory framework, eliminating regulatory differences between member states through policies such as the Finance Strategy, and enhancing the convenience of cross-border investment; expanding the supply of safe assets, promoting the joint issuance of safe bonds by the EU, and providing investors with alternatives to US dollar assets; and developing green finance, using the EU's advantages in the field of renewable energy to attract global capital to invest in green projects

Lagarde believes that the enhancement of the euro's status must be matched by a stronger military force., Europe's reliance on the United States in the security field has put it at a disadvantage in geopolitical competition. For example, in the Russia-Ukraine conflict Europe, lacking independent military capabilities, was forced to make a difficult balance between energy supply and security interests. To break this dilemma, the EU is taking measures such as increasing defense spending establishing security partnerships, and developing the digital euro. The EU plans to increase its defense budget to 2% of GDP by 2025 and promote joint procurement of weapons equipment among member states; reduce reliance on a single country by signing key mineral agreements with economies such as Central Asia and India; and improve the efficiency and security of cross-border payments reduce reliance on the US-dominated SWIFT system by piloting the digital euro.

Despite the broad prospects for the internationalization of the euro, geopolitical risks remain challenge that cannot be ignored. Lagarde warned that if the Russia-Ukraine conflict escalates or the US-EU trade war expands, the eurozone economy could face shocks. For example, the threat of the US imposing tariffs on EU goods has already led to a decline in business confidence and a slowdown in investment in the eurozone. To this risk, Europe needs to adopt strategies such as diversifying trade partners, enhancing energy security, and maintaining the independence of central banks. Deepen negotiations on free trade agreements with Asian Latin American countries to reduce reliance on the US market; reduce reliance on Russian energy through the development of renewable energy and the establishment of strategic oil reserves; and at the same time,arde has repeatedly emphasized that political intervention in the ECB's decision-making will undermine market confidence in the euro, so Europe needs to ensure the autonomy of the ECB monetary policy formulation.

The road to internationalization of the euro is full of challenges, but its potential cannot be ignored. If Europe can achieve breakthroughs in financial integration, security building, and geopolitical competition, the euro could become the "second pole" in the global monetary system. For example, if the digital euro pilot is successful and combined the EU's leading advantages in green technology and the digital economy, the euro could attract more international investors. However, this process requires EU member states to put aside their differences and a joint force. As Lagarde said: "The euro will not automatically gain influence; it must be earned through hard work." Only in this way can the euro find place in the transformation of the global monetary system and provide support for the long-term stability of the European economy.

In the context of the globalization recession and the intensification geopolitical conflicts, the internationalization of the euro is not only a strategic choice for Europe but also an inevitable trend of diversification in the global monetary system. Whether Europe can this historical opportunity will depend on its determination and wisdom in restructuring its financial and security architecture.