Before we get into the meat of this piece, a brief word of caution from our host on the inherent dangers of discussing de-dollarisation (taken from Yves’ preamble to a 2023 interview with Michael Hudson on the topic):

It seems most commentators are adopting one of two positions, either defending the dollar or eagerly predicting a quick demise.

This is not how this kind of transition happens. As we stressed, it took two world wars and the Great Depression to dethrone sterling. The fact that countries are succeeding in reducing their attack surface to US sanctions by engaging in more bilateral trade does reduce the perception of US power (keep in mind sanctions never worked as well as the PR would have you believe).

The fact is that trade-related foreign exchange flows are a tiny fraction of investment-related foreign exchange trading. The level ebbs and flows, but a Bank of International Settlements study put it at 60x the level of trade flows. I have not seem more current work.

On top of that, the effort to promote more bilateral trade is already exhibiting the sort of issues your humble blogger predicted. Unless the two countries engage in close to balanced trade (not likely) one country will wind up accumulating the currency of another country…

On top of that, the effort to promote more bilateral trade is already exhibiting the sort of issues your humble blogger predicted. Unless the two countries engage in close to balanced trade (not likely) one country will wind up accumulating the currency of anther country. From Outlook India in Russia Has Accumulated Billions Of Rupees In Indian Banks: Russian FM Sergei Lavrov:

Russian Foreign Minister Sergei Lavrov has said that Russia has accumulated billions of rupees in Indian banks which it can’t use.

According to the report in NDTV, Lavrov Foreign pointed to a ballooning trade surplus with India.

“This is a problem,” the report quoted Lavrov as having said in Goa on the sidelines of the Shanghai Cooperation Organization meeting.

Why is winding up with rupees different than winding up with the dollar? The US has the most liquid and deep capital markets, so countries that wind up holding them can park them in financial assets. As the Asian crisis showed, central banks lacking foreign exchange reserves were unable to defend themselves from currency crises, which put them at the mercy of the IMF. After that episode, the Asian Tigers managed their affairs so as to influence currency pricing so that among other things, they’d run trade surpluses and accumulate foreign currencies, mainly the dollar.

By contrast, India does not have a lot in the way of investible assets, so it’s not as if Russia could readily sell much of its holdings to investors. The only other sort of part that would want rupees would be a country that was running a trade deficit with India. But are there remotely enough takers of that sort?

This illustrates a wee problem. Having a more finanicialized economy is an advantage in the “desirable financial asset” category, even though, as we have seen, financialization beyond a certain models level is sub-optimal for growth (this per the IMF).

In recent years there has been a lot of chatter about a BRICS-based currency or basket of currencies emerging to fill the growing gap left over by a declining dollar, but there’s still little to show for it — at least publicly. India has repeatedly declared a lack of interest in the idea, with its foreign minister warning last year that the legal structure would entail a reduction, rather than an enhancement, of sovereignty (BRICS rulings would have to supercede national courts). Brazil has also poured cold water on the idea in recent months.

Which brings us to the point of this post. Given there is presently no other realistic alternative to the dollar, at least in the form of a national currency, perhaps this is “Europe’s global euro moment.” That is the thrust of a recent Financial Times op-ed by European Central Bank President Christine Lagarde.

Bear in mind that Lagarde is not a Brussels-based apparatchik that is prone to making sweeping, ill-considered public statements; she is the Euro Area’s most senior central banker, albeit one with a background in international law and politics rather than finance. And central bankers tend to weigh their words in public a lot more carefully than most politicians, especially regarding something as important as the future of the world’s reserve currency system.

Lagarde has also proven herself to be a faithful servant of the Transatlantic business and financial elite, to the point of being convicted of negligence for her approval of a €404 million award to billionaire businessman Bernard Tapie for the disputed sale of a firm, for which she faced no punishment. She is also hotly tipped to replace Klaus Schwab in the top job at the World Economic Forum in Switzerland.

As such, the fact that Lagarde is talking openly about Europe’s need to seize the opportunity presented by the US’ economic decline, the weakness of the US dollar, down over 10% against the euro, the pound and the Swiss franc since Trump’s inauguration, and rising economic and geopolitical uncertainty, in order to boost the global standing of the euro currency should not be dismissed out of hand, no matter how deluded it may sound (more on that later).

One thing we can rest assured is that she is not just speaking for herself. Here are the first three paragraphs of the op-ed:

We are witnessing a profound shift in the global order: open markets and multilateral rules are fracturing, and even the dominant role of the US dollar, the cornerstone of the system, is no longer certain. Protectionism, zero-sum thinking and bilateral power plays are taking their place. Uncertainty is harming Europe’s economy, which is deeply integrated in the global trading system, with 30mn jobs at stake.

But the shift under way also offers opportunities for Europe to take greater control of its own destiny and for the euro to gain global prominence. At present, the euro is the world’s second most-used currency, accounting for 20 per cent of global foreign exchange reserves, compared with 58 per cent for the US dollar.

Increasing the euro’s global status would bring tangible benefits: lower borrowing costs, reduced exposure to currency fluctuations and insulation from sanctions and coercive measures.

This is not so much a delusion as it is an outright lie. How would increasing the euro’s global status insulate countries from sanctions and coercive measures when the EU itself is one of the world’s biggest users of sanctions and coercive measures globally. The 27-nation bloc just imposed its 17th round of sanctions against Russia. Lagarde herself was just in Ukraine where, according to Ukraine’s finance minister, she discussed “possible steps toward confiscating frozen Russian assets” — something the EU has been talking about doing for a long time:

I was pleased to welcome @ecb President Christine @Lagarde in Kyiv today. We discussed possible steps toward confiscating frozen russian assets. Ukraine remains committed to making russia pay for the destruction it has caused. Grateful for the ECB’s strong and unwavering support! pic.twitter.com/LisYX72dOa

— Sergii Marchenko (@SergiiMarchenk3) June 19, 2025

The EU has also built the world’s largest online censorship regime. It also frequently resorts to coercive measures — or the threat thereof — against its own members. For example, it has threatened Spain with legal action if its government tries to prevent a hostile bank takeover from taking place on its own territory. It also cancelled the first round of elections in Romania last year after a majority of Romanians voted for the wrong sort of candidate.

As even Lagarde herself concedes, the EU has not benefitted from the US dollar’s decline, from over 70% of global foreign exchange reserves to under 60%. As Thomas Fazi points out in an article for Unherd, “the euro’s global footprint has barely exceeded the aggregate use of the national currencies it replaced — roughly 20% of global foreign exchange reserves… Instead, currencies including the Swiss franc, British pound, and Japanese yen have picked up the slack. There’s little reason to believe the euro’s status will now improve.”

In fact, global investors, including many central banks, are increasingly turning to gold as a safe haven. In fact, as the European Central Bank itself pointed out in a recent study, gold surpassed the euro last year to become the world’s second-largest reserve asset among global central banks, following a record buying spree.

As the FT reported in its article, “How Gold Became the World’s Refuge from Uncertainty”, Trump’s trade war against the world, “combined with rising geopolitical tensions and questions about the long-term role of the US dollar, have all contributed to a blistering gold rally — one that has taken even gold boosters by surprise.” And it is central banks, including some in Eastern Europe, that are doing much of the buying.

Indeed, one of the central banks that has bought the most gold over recent years is the Narodowy Bank Polski (NBP). In the second and third quarters of last year, Poland’s central bank was the world’s largest buyer of gold. Following its purchases in Q1-2025, NBP now has more gold reserves (509 tonnes) than the European Central Bank itself (507 tonnes), which are worth over $1 trillion at the current gold price.

Other eastern European central banks, including Hungary, Czechia’s and Serbia’s have stepped up their gold purchases in recent years, particularly after the sanctions imposed on Russia following the launch of its Special Military Operation in Ukraine, in February 2022. Arguably the most important driver of exploding demand for gold, which the FT piece studiously ignores, is collapsing trust in the Western financial order as a result of the seizure of Russian assets, including its gold, by the US, EU and UK.

According to Lagarde, the Euro Area can still take advantage of the dollar’s decline — by strengthening “three foundational pillars: geopolitical credibility, economic resilience, and legal and institutional integrity”:

First, the euro’s global standing rests on Europe’s role in trade. The EU is the world’s largest trader — it is the number one partner for 72 countries, representing almost 40 per cent of global GDP. This is reflected in the share of the euro as an invoicing currency, which stands at around 40 per cent. The EU must use this position to its advantage by forging new trade agreements.

The first claim is also a flat out lie: it is China that is the world’s largest trader, representing the number one trade partner for around 120 countries, according to the Wilson Center. Also, Lagarde’s insistence on forging more trade agreements, as if that is all the EU needs to do to enhance its “geopolitical credibility”, shows just how wedded Lagarde and her handlers remain to long-discredited neoliberal ideas.

If she had learnt anything from China’s progress in recent decades, she would be talking about seeking win-win deals, engaging with governments in the “Global South” on a more equal basis and abandoning the militarist, interventionist way of thinking. In fact, there is not a single mention of China, the BRICS or the Global South in the article, which perhaps doesn’t come us a surprise. It’s just one more example of Western arrogance, hubris and self-absorption.

Which brings us to this delightful paragraph (emphasis my own):

Real confidence, however, rests on hard facts. Investors seek regions that honour their alliances. Such guarantees have been shown to boost a currency’s share in foreign reserves by up to 30 percentage points.

So, because the EU is remilitarising while dismantling Europe’s welfare state model, and will soon be a global military power (ha!), Brussels will soon be in a position to command respect and confidence from the rest of the world, as the US has done for the past 80 years. And that is apparently what Lagarde means by gaining “geopolitical credibility”. There’s not a single mention, of course, of the EU’s vassal-like submission to US foreign policy interests.

Now for the second pillar:

Second, economic strength is the backbone of any international currency. Successful issuers typically offer a trio of key features: strong growth, to attract investment; deep and liquid capital markets, to support large transactions; and an ample supply of safe assets.

None of which the EU has in any great abundance. The region has essentially been in structural stagnation since the Global Financial Crisis, in large part due to the Troika’s own disastrous response to the crisis. Economic and industrial activity have stagnated even further in the past three years due to the self-harming sanctions Brussels has imposed on its largest and cheapest energy provider, Russia. The resulting soaring energy costs have tipped much of Western Europe into recession and even deindustrialisation.

According to Lagarde, the solution to all these problems is, predictably enough, MORE Europe:

For the euro to gain in status, Europe must take decisive steps by completing the single market, reducing regulatory burdens and building a robust capital markets union. Strategic industries, such as green technologies and defence, should be supported through co-ordinated EU-wide policies.

Lagarde then mentions the ultimate cherry on top, the holy grail of all hardcore eurocrats: joint issuance of EU bonds. According to Lagarde, the “joint financing of public goods, like defence” could end up “creating more safe assets.”

As Fazi notes, the EU elite has continuously “presented further centralisation as the cure-all for Europe’s problems. Yet after years of deeper integration, outcomes have only worsened:

The real problem isn’t too little integration: it’s integration itself. The euro has stripped member states of the ability to respond flexibly to crises based on their domestic needs. It has diminished national democratic control, while centralising power in opaque and unaccountable institutions such as the European Commission and Lagarde’s own ECB.

These institutions have repeatedly championed policies which benefit a narrow elite: austerity at home, alignment with Nato abroad, and aggressive sanctions that have boomeranged on the European economy. Giving more power to this apparatus, as Lagarde proposes, would only entrench failure.

Which brings us to Lagarde’s third and final pillar, investor confidence, which, she claims, is “ultimately tied to the strength of the institutions backing [the issuer]” (emphasis my own):

Admittedly, the EU is not easy to understand from the outside. But its structured and inclusive decision-making guarantees checks and balances, stability and policy certainty. and the independence of key institutions, like the ECB, are critical comparative advantages the EU should leverage.

To further drive home these advantages, we must reform Europe’s institutional structure. A single veto must no longer be allowed to stand in the way of the collective interests of the other 26 member states. More qualified majority voting in critical areas would enable Europe to speak with one voice.

It’s always interesting to hear a convicted (though unpunished) criminal talk of respect for the rule of law. Of course, Lagarde isn’t the only person heading an EU institution to have been caught breaking a law or two. As Varoufakis noted in his recent blistering critique of Ursula von der Leyen, the sitting EU Commission president has shown a “remarkable determination to break the law both in her own country, Germany, and in the European Union”:

Mrs von der Leyen succeeded in being sanctioned in both jurisdictions for treating the public with contempt in pursuit of her own interests. As Germany’s defence minister, she desperately tried to conceal her involvement in shady defence contracts by sabotaging the Bundestag’s investigation in the matter through the “illegal and deliberate” deletion of her phone contents. As European Commission President, the EU top court found her culpable of repeating the unlawful practice of deleting her phone records of illicit personal exchanges with heads of global corporations – on this occasion with the CEO of Pfizer with whom she negotiated, on Europe’s behalf, lucrative COVID-19 vaccine deals.

And lastly, of course, we have the veto in the EU Council, which allows just one government to block the collective interests of the other member states, and which Brussels is determined to do away with. That way, it can finally impose the will of the majority — which is often decided in Washington anyway — on minority dissenters like Hungary’s Viktor Orban and Slovakia’s Robert Fico. If it gets its way on this, which it probably will, Brussels’ democratic deficit will soon widen even further.

Ultimately, arguably the biggest delusion contained within Lagarde’s wish-list is a structural one. As well-versed readers on this site are well aware, in order for a world reserve currency to meet global demand, the issuer is generally required to run large current account deficits — something the US has been doing for decades, though Trump is trying his best to reverse this trend. However, as Thomas Fazi writes “Brussels has built its economic model around trade surpluses. There’s no sign EU leaders are prepared to flip that model on its head.”

If Lagarde’s list of delusions serves any purpose, it is as a reminder that there is currently no realistic alternative for the US dollar. As Yves noted in the preamble to the Hudson interview, “the US will inevitably lose its dominant position due to the continued fall in the relative importance of the US economy. But a lot of people cheering its demise are way too optimistic as to how quickly that will take place.”