Public debt as a percentage of GDP in the European Union stands at 89%, thanks to the favorable impact of countries with fiscal orthodoxy compensating for deviations in others like Spain, where debt exceeds 100% of GDP. Although it is a "solid" fiscal position, only half of that public debt in circulation is considered of high quality, a concern for the European Central Bank (ECB).
"Europe faces structural challenges. Its growth remains persistently low, its capital markets remain fragmented, and despite a solid aggregate fiscal position, with a debt-to-GDP ratio of 89%, compared to 124% in the US, the supply of high-quality safe assets is lagging behind. Recent estimates suggest that sovereign bonds in circulation with at least an AA rating represent just under 50% of GDP in the EU, compared to over 100% in the US," warns its President, Christine Lagarde, in an article published on her blog.
The credit rating of government bonds is crucial for future interest costs, as the higher the bond rating, the more reliable the investor's expectation of principal repayment, leading to lower returns and interest savings for the issuer.
This is one of the elements highlighted by the ECB when analyzing what Europe can do to strengthen its currency, an objective it believes should be supported by three pillars: "geopolitical credibility, economic resilience, and legal and institutional integrity."
Firstly, it believes that the euro's global position is based on Europe's role in trade: the EU is the world's largest trader, the main partner of 72 countries, and holds a 40% share of global GDP, which should be leveraged to sign new trade agreements and promote transactions in euros.
Furthermore, since "economic strength is the backbone of any international currency," it recommends improving the quality of public debt and taking other measures such as "completing the single market, reducing regulatory burdens, and building a strong capital market union."
Finally, it directly addresses governments: "Investor confidence in a currency is ultimately linked to the strength of the institutions backing it," advocating for respect for the rule of law and institutional independence.
It also calls for a change in the EU's voting system, so that a single vote does not obstruct the collective interests of 26 member states: "History teaches us that regimes seem enduring until they are not. Changes in global monetary dominance have already occurred. This moment of change is an opportunity for Europe: it is a 'global euro' moment. To seize it and strengthen the euro's role in the international monetary system, we must decisively act as a united Europe that takes greater control of its own destiny."