Christine Lagarde: Central banks in a fragmenting world

Christine Lagarde, the President of the ECB, held a speech entitled „Central banks in a fragmenting world“ at the Council on Foreign Relations in New York on 17 April 2023.
We would like to present they key takeaways of this important speech:
The global economy is undergoing a period of transformative change, with geopolitical tectonic plates shifting faster. The world is 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. This fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world. This could have far-reaching implications across many domains of policymaking, including for central banks.
The changing global economy has led to a period of lasting instability resulting in lower growth, higher costs, and more uncertain trade partnerships. Instead of more elastic global supply, there is now a risk of repeated supply shocks. Recent events have laid bare the extent to which critical supplies depend on stable global conditions. This has been most visible in the European energy crisis, but it extends to other critical supplies as well.
New trade patterns may also lead to new alliances, which could create an opportunity for certain countries seeking to reduce their dependency on Western payment systems and currency frameworks. Anecdotal evidence suggests that some countries intend to increase their use of alternatives to major traditional currencies for invoicing international trade, such as the Chinese renminbi or the Indian rupee. We are also seeing increased accumulation of gold as an alternative reserve asset, possibly driven by countries with closer geopolitical ties to China and Russia.
Central banks must provide for stability in an age that is anything but stable. The time to think about how to respond to changing geopolitics is not when fragmentation is upon us, but before. Central banks must measure up to the challenge of providing stability in a world that is becoming more multipolar. The manner in which swap lines are used could influence the dynamics of major international currencies. Central banks must also navigate the digital era, such as innovating their payment systems and issuing digital currencies, which will be critical for which currencies ultimately rise and fall. The ECB is exploring in-depth how a digital euro could best work if launched.