Christine Lagarde: European Parliament plenary debate on the ECB
Annual Report
Speech by Ms Christine Lagarde, President of the European Central Bank, at the
plenary session of the European Parliament, Strasbourg, 15 February 2023.
* * *
I am very pleased to be back here in this plenary room - the heart of European
democracy - to participate in today's important debate.
The ECB was granted a democratic mandate to ensure price stability in the euro area.
In other words, we safeguard one of the fundamental conditions for stable economic
growth.
To achieve this mandate, the ECB was also granted a high level of independence. And
as you acknowledge in the draft resolution we are discussing today, the ECB's ability to
take all necessary measures - free from political interference - is essential for it to
deliver on its mandate.
This is particularly important in the current environment. High inflation continues to have
a large impact on all areas of our economy and on people's everyday lives - especially
on low-income households, as you also note.
This is why the Governing Council started a process of policy normalisation in
December 2021 and raised the ECB interest rates by 300 basis points since July 2022.
At its February meeting, the Governing Council emphasised its determination to stay
the course in raising interest rates significantly at a steady pace and in keeping them at
levels that are sufficiently restrictive to ensure a timely return of inflation to our 2%
medium-term target.
But independence also comes with a great deal of responsibility - the choices we make
as central bankers have a significant influence on society. So being accountable for our
decisions is the necessary counterweight to our independence.
This means that we need to explain our policies, and the analysis that underpins them,
to ensure that people understand how our decisions are taken. But it also means that
we must be attentive to the concerns of the public and carefully evaluate whether and
how we can respond to these concerns within our mandate. After all, reinforcing trust in
our institution also supports our monetary policy, for example by anchoring inflation
expectations.
Today's debate on your draft resolution is crucial in both these aspects. I am here today
to explain our policies, but also to listen to your views as elected representatives of
European citizens, and to further reflect on how the ECB can act for the benefit of all
Europeans.
The euro area economy
Let me start by briefly outlining our assessment of the euro area economy, as
discussed by the Governing Council earlier this month.
Euro area growth slowed in the fourth quarter of 2022. The outcome was better than we
had initially expected, as the adverse economic effects from Russia's unjustified war
were partly buffered by improving supply conditions and fiscal support related to the
energy crisis. While confidence is rising and energy prices have fallen, we expect
activity to remain weak in the near term.
According to Eurostat's flash estimate - calculated using Eurostat estimates for
1
Germany -, inflation was 8.5% in January. The decrease compared with December
was mainly due to a sharp drop in energy prices. At the same time, the prior surge in
energy prices and other input costs is still feeding through to consumer prices. Overall,
price pressures remain strong and underlying inflation is still high - excluding energy
and food, it remained at 5.2% in January.
Looking at the labour market, wages are growing faster, supported by robust
employment dynamics, with the main theme in wage negotiations becoming how wages
can to some extent catch up with high inflation. And even though most measures of
longer-term inflation expectations currently stand at around 2%, these measures
warrant continued monitoring.
The risks to the growth outlook are now more balanced than they were in December.
Russia's war against Ukraine and its people continues to be a significant downside risk,
but a faster resolution of the energy shock would support growth. The risks to the
inflation outlook have also become more balanced, especially in the near term.
The ECB's monetary policy
Against this backdrop, at our latest meeting on 2 February we decided to raise the key
ECB interest rates by 50 basis points and we expect to raise them further. In view of the
underlying inflation pressures we intend to raise interest rates by another 50 basis
points at our next meeting in March, and we will then evaluate the subsequent path of
our monetary policy.
Keeping interest rates at restrictive levels will over time reduce inflation by dampening
demand and will also guard against the risk of a persistent upward shift in inflation
expectations. Our future policy rate decisions will continue to be data-dependent and
follow a meeting-by-meeting approach.
At our February meeting, we also decided on the modalities for reducing the size of the
Eurosystem's balance sheet under the asset purchase programmes (APP). As
communicated in December, the APP portfolio will decline at a measured and
predictable pace, with the decline amounting to €15 billion per month on average from
the beginning of March to the end of June 2023 and its subsequent pace to be
determined over time.
In the interest of simplicity and neutrality, the parameters for reducing the APP portfolio
will be closely in line with what we have done previously. This will preserve consistency
with our monetary policy stance being set primarily by our interest rates. For the
Eurosystem's corporate bond purchases, reinvestments will be tilted more strongly
towards issuers with a better climate performance, supporting the gradual
decarbonisation of our corporate bond holdings in line with the goals of the Paris
Agreement - without prejudice to our price stability objective.
The euro area - an attractive club
Let me now turn to other important matters you have raised in your draft resolution: the
expansion of the euro area and the work we must do to complete our Economic and
Monetary Union.
On 1 January, we welcomed Croatia to the euro area - expanding our club from 19
countries to 20. Croatia's accession is an impressive achievement, not only for Croatia
itself, but also for the euro. It shows that the euro is still an attractive currency and once
again reminds us that in Europe we are stronger together.
Adopting the euro will bring tangible benefits to Croatia's four million citizens, building
on the broader positive impact the euro has had over the last two decades. As an
anchor of stability, the euro has advanced European integration and strengthened the
Single Market's role in driving growth. This, in turn, has elevated the EU's standing as
the world's largest trading bloc and enhanced our autonomy on the global stage.
The euro has also become a binding symbol and integral part of our shared European
identity, as its popularity shows. Support for the euro and for Economic and Monetary
Union has now reached an all-time high of 80%.2
3
But with rising geopolitical tensions in the global economy , a stable euro will become
even more important in ensuring that Europe continues to thrive. And for that to
happen, we need to double down on the work that remains to complete our Economic
and Monetary Union.
Here, every European policymaker needs to contribute. Let me mention three areas
where progress can be made in the next 12 months before the EU elections in 2024.
First, work on strengthening euro area financial integration needs to proceed.
The ECB is playing its part, notably by ensuring European banking supervision is
effective and consistent. And we promote financial integration through our central bank
services, for example by supporting EU debt securities issuance to fund the Next
Generation EU programme.4
However, the future of EU capital markets hinges on the broader regulatory
environment which is in your hands. Deeper, more integrated EU capital markets are
essential for enhancing risk-sharing and mobilising the private financing needed for the
green and digital transitions.
By the same token, we must not overlook the crucial work remaining for the completion
of the banking union - an issue highlighted in your draft resolution and on which this
Parliament has been vocal in pushing for progress.
Second, the reform of the EU economic governance framework needs to move forward.
The ECB has highlighted the importance of a simpler and more predictable framework,
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stronger national ownership and sustained implementation. I encourage EU
policymakers, including this Parliament, to rapidly reach a viable and broadly shared
agreement that strengthens the foundations of our Economic and Monetary Union.
Third, an appropriate regulatory framework for the digital euro needs to be laid down.
The digital euro project is a truly European initiative which is moving ahead at a steady
pace. In the autumn, the ECB's investigation phase will come to an end and the
Governing Council will decide on the next steps. But let me be clear: that does not
mean that we will then issue a digital euro. That would only happen at a later stage,
based on a dedicated decision, and only after the Parliament and the Council of the EU
have adopted the legislative act. All EU policymakers should continue playing their part,
and I am counting on this Parliament to swiftly start working on the legislative proposal
which the European Commission intends to publish in a few months.
Conclusion
Let me now conclude.
We are committed to bringing inflation back to our 2% medium-term target, in line with
our mandate, and we will take the necessary measures to do so.
But as Thomas Jefferson once wrote, "The price of freedom is eternal vigilance".
In a democratic society, central bank independence can only be legitimate if it is
founded on a clear mandate and balanced with accountability to ensure that the central
bank follows its mandate. This also means that forceful efforts to ensure price stability
need to be accompanied by equally forceful democratic scrutiny.
In this spirit, we will continue our ongoing dialogue with you as the representatives of
EU citizens. As also advocated in your draft resolution, the ECB stands ready to agree
on a formalisation, in writing, of the current accountability practices between the ECB
and the European Parliament. The ECB has made a proposal to the European
Parliament and looks forward to finalising an agreement between our two institutions.
Thank you for your attention. I am now looking forward to listening to your views during
today's debate.
1
The final outcome could be slightly higher than the flash estimate when the official
data for Germany are included.
2
Standard Eurobarometer 97 .
3
Lagarde, C. (2022), " A new global map: European resilience in a changing world ",
keynote speech at the Peterson Institute for International Economics, 22 April.
ECB (2022), " ECB supports EU issuance service ", press release, 12 July.
5
ECB (2021) "Eurosystem reply to the Communication from the European Commission
"The EU economy after COVID-19: implications for economic governance" of 19
October 2021", 1 December.