Christine Lagarde: Hearing of the Committee on Economic and
Monetary Affairs of the European Parliament
Speech by Ms Christine Lagarde, President of the European Central Bank, at the
Hearing of the Committee on Economic and Monetary Affairs of the European
Parliament, Brussels, 4 December 2024.
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Charts accompanying the speech
I am pleased to return to this Committee to discuss the ECB's monetary policy at such a
critical juncture for Europe.
We are witnessing a rapidly shifting geopolitical landscape, but also enduring major
structural challenges to our economic model.
Europe's response must be swift. It should focus on spurring investment, fostering
innovation and raising productivity. This will require bold policy action and, together with
the new European Commission and the Council, this Parliament will have an important
role to play.
In my remarks today, I will discuss an important element of this response - the new
economic governance framework - which you have chosen as one of the topics of this
hearing. But I would like to start by updating you on the ECB's assessment of the euro
area economy and our monetary policy stance.
The economic outlook and the ECB's monetary policy stance
The euro area saw moderate growth in the first half of this year, following five quarters
of stagnation. Real GDP growth was largely driven by exports and government
consumption. Domestic private demand remained weak amid high economic policy
uncertainty and the effects of past monetary policy tightening. More recently, in the third
quarter, real GDP rose by 0.4%, driven in part by temporary factors such as the Paris
Olympics. However, survey-based data suggest that growth will be weaker in the short
term, on the back of slowing growth in the services sector and a continued contraction
in manufacturing. Further ahead, the euro area's economic recovery should start to
gather some steam. Consumer spending is expected to pick up as real incomes rise,
and investment is expected to recover as the impact of past monetary policy tightening
fades.
The euro area labour market has so far proven resilient. The unemployment rate
remained historically low at 6.3% in October, while employment expanded by 300,000
jobs in the third quarter. At the same time, surveys point to slowing employment growth
and further moderation in the demand for labour.
The medium-term economic outlook is uncertain, however, and dominated by downside
risks. Geopolitical risks are elevated, with growing threats to international trade. High
degrees of trade openness and integration into global supply chains make the euro
area vulnerable to foreign shocks, with potential trade barriers posing threats to
manufacturing and investment.
Turning to inflation, headline inflation increased further to 2.3% in November from 2.0%
in October, according to Eurostat's flash estimate. The increase in the last two months
- following a deceleration in previous months - was driven mainly by a moderation in
the fall in energy prices and an increase in food inflation.
Core inflation - excluding energy and food - remained unchanged at 2.7% in November
and is expected to hover around current levels until early 2025. Services inflation
remains the biggest contributor to inflation and stood at 3.9% in November, driven in
part by recent high wage growth. Overall, growth in labour costs has been moderating
in recent quarters - notwithstanding the volatility of negotiated wage growth over the
summer - and is set to continue easing. Domestic inflationary pressures are also
receding as profits have been buffering still elevated labour cost developments.
Looking ahead, inflation is expected to temporarily increase in the fourth quarter of this
year, as previous sharp falls in energy prices drop out of the annual rates, before
declining to target in the course of next year.
Let me now turn to our monetary policy stance.
In October the ECB lowered its key interest rates by 25 basis points, following the
previous rate cuts in June and September. The information available at our October
meeting confirmed that the disinflationary process was well on track. Our deposit facility
rate, the rate through which we steer the monetary policy stance, now stands at 3.25%.
We will review our stance again next week, following our data-dependent and
meetingby-meeting approach. We are therefore not pre-committing to a particular rate path.
The new economic governance framework
Let me turn now to the second topic you have chosen for our hearing today - the EU's
new economic governance framework.
Fiscal policy is essential to address the multiple challenges Europe is currently facing,
ranging from the green and digital transitions to economic security and defence. But for
fiscal policy to be credible and powerful, it also needs to rest on strong foundations.
The EU's new economic governance framework strikes a balance between ensuring
medium-term fiscal sustainability and fostering strategic investments and
growthenhancing reforms.
If implemented effectively, it will provide three major benefits.
First, it can help address the challenges related to elevated debt levels, which have
partly arisen from policies designed to buffer the impact of recent crises across the
economy. The framework focuses on debt sustainability, thereby also supporting
monetary policy transmission.
Second, the framework strives to balance gradual and sustained fiscal consolidation
with incentives for much-needed investment and structural reforms. It introduces the
possibility of extending fiscal adjustment paths from four to seven years. Such
extensions are contingent on growth-enhancing investments and reforms being
implemented, which would in turn further strengthen debt sustainability by raising
potential growth. Reducing high debt levels also increases the space for strategic
investments at the national and European levels.
Third, the new framework can help to make the fiscal stance more countercyclical,
smoothing out economic fluctuations and thereby supporting long-term growth in
conditions of price stability.
Implementing the revised economic governance framework fully and transparently is
thus key to safeguarding Member States' capacity to invest now and in the future.
The challenges we face also require us to rethink the EU's role in addressing strategic
investment needs. As Enrico Letta and Mario Draghi observed in their reports, Europe
is currently falling short of its potential.
A key idea running through the reports is that Europe is bigger than its constituent
parts. Well-defined joint EU investments would boost potential growth and contribute to
macroeconomic stability. They would allow us to harness economies of scale and
address cross-border challenges, to the benefit of all Europeans, adding value beyond
what national investments could achieve alone. They would also send a strong signal of
unity to private investors within and outside the EU.
Such investments must be accompanied by coordinated and ambitious reform efforts.
At the EU level, completing the capital markets union, which we discussed in my
previous hearing before this committee, and deepening the Single Market are essential.
Member States also play a crucial role in reducing obstacles to entrepreneurship,
helping firms to innovate and grow and aiding the efficient allocation of capital and
labour. Progress towards closer European integration paired with national reform efforts
is essential for a more dynamic and competitive economy - one that supports citizens'
standards of living and enables businesses to thrive.
Conclusion
Let me now conclude.
Europe's geopolitical and structural challenges require coordinated and determined
action from policymakers. As the Greek storyteller Aesop wisely said, "In union there is
strength", and citizens' trust in the European Union is at its highest level in over 15
1
years. The Commission has set an ambitious policy agenda to tackle these
challenges, which you have endorsed. It is now up to you to make it happen. The ECB
will play its role in supporting Europe's longer-term sustainable growth by fulfilling its
mandate of price stability.
Thank you for your attention. I now look forward to your questions.
European Commission (2024), Standard Eurobarometer 102 - Autumn 2024.