April 17, 2023 - 7:30pm

Christine Lagarde today warned that the world “may be becoming more multipolar”. The ECB President claimed during a speech to the Council of Foreign Relations in New York that “the tectonic plates of geopolitics are shifting faster”.

“We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values,” Lagarde said. “And this fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world.”

Citing several causes for these changes — the pandemic, the Ukraine war, the “weaponisation” of energy, inflation and the China-US rivalry — Lagarde argued that there would be “more multipolarity” as geopolitical tensions mount. As one of two twin challenges, this new “global map” would have “first-order implications” for central banks, Lagarde continued.

Due to new trade patterns and the increasing use of “alternatives to major traditional currencies for international trade”, China has become a challenger to US dominance. The former IMF chief noted that Beijing has already increased over 130-fold its bilateral trade in goods with developing economies, making the country the world’s top exporter in the process. “All this could create an opportunity for certain countries seeking to reduce their dependency on Western payment systems and currency frameworks,” she added.

Lagarde stressed that these changes did not amount to an “imminent loss of dominance for the US dollar or the euro”, but they do “suggest that international currency status should no longer be taken for granted”. 

Despite the ECB President’s gloomy prognostication, Lagarde added that multipolarity could present Europe with a silver lining. Arguing that it “raises the stakes for internal policy cohesion,” Lagarde claimed that “the multiplier effect of common action” in areas such as industrial policy, defence and investing in green and digital technologies would be “much higher” for member states. She also added that “long-delayed projects” such as capital market integration could be pursued.

Lagarde’s comments follow on from similar remarks made by former Treasury Secretary Larry Summers this weekend, who told Bloomberg that the US was “getting lonely” on the world stage. “There’s a growing acceptance of fragmentation, and — maybe even more troubling — I think there’s a growing sense that ours may not be the best fragment to be associated with,” he said. A day later, current Treasury Secretary Yellen warned that “there is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar.”

Striking an ominous tone, Lagarde concluded that the EU had to prepare for “the new reality”. “If I may paraphrase Ernest Hemingway,” she said. “fragmentation can happen in two ways: gradually, and then suddenly.”

is UnHerd’s Newsroom editor.