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, 26 February 2024.
* * *
As we approach the end of this legislative term, I wish to sincerely thank this Parliament
for collaborating in guiding Europe through economic headwinds and geopolitical
upheavals, always with the shared vision of bolstering prosperity and fortifying our
resilience.
Building on this collaborative spirit, today's debate on your draft resolution on the ECB
Annual Report is a pillar of the ongoing dialogue between our two institutions; indeed, it
is fundamental to the ECB's accountability which ensures the democratic legitimacy of
our actions.
Let me start by outlining the current state of the euro area economy and our monetary
policy stance. I will then focus on the need for a common European response to
strengthen euro area resilience and competitiveness.
Bringing inflation back to target in a challenging economic and
geopolitical environment
The euro area has been facing significant headwinds from a series of sudden and
consecutive shocks which pushed inflation very high in the wake of the post-pandemic
recovery. Having peaked at 10.6% in October 2022, inflation has since declined
significantly thanks to the unwinding of energy shocks and various supply-side
disruptions along with determined policy action.
After expanding by 3.4% in 2022, euro area economic activity has been weak in 2023,
with real GDP growth having stagnated in the final quarter. Subdued demand for euro
area exports - owing mainly to weaknesses in global trade and earlier losses in
competitiveness - and tight financing conditions are weighing on growth. Weakness in
manufacturing activity has been extending to the services sector since the end of 2023.
However, there are increasing signs of a bottoming-out and some forward-looking
indicators point to a pick-up later this year.
Despite the sluggish economy, the labour market has remained resilient.
Unemployment stood at a historical low of 6.4% in December amid robust demand for
labour, which is, however, showing some signs of weakening.
Inflation decreased slightly to 2.8% in January. Energy prices declined by 6.1%, and
food inflation, while still elevated, came down further to 5.6%, primarily reflecting a
lower inflation rate for processed food.
Core inflation - excluding energy and food price developments - also decreased further
to 3.3%, reflecting lower inflation in goods, while services inflation remained more
persistent.
Wage pressures, meanwhile, remain strong. Wage growth is expected to become an
increasingly important driver of inflation dynamics in the coming quarters, reflecting
employee demand for inflation compensation and tight labour markets. At the same
time, the contribution of profits - which has recently accounted for much of the increase
in domestic cost pressures - is declining, suggesting that, as expected, labour cost
increases are partly buffered by profits and are not being fully passed on to consumers.
Regarding your concerns about the risks of second-round effects, as mentioned in your
draft resolution, let me emphasise that our restrictive monetary policy stance, the
ensuing strong decline in headline inflation and firmly anchored longer-term inflation
expectations act as a safeguard against a sustained wage-price spiral.
Looking forward, we expect inflation to continue slowing down, as the impact of past
upward shocks fades and tight financing conditions help to push down inflation.
This brings me to our current monetary policy stance.
At our January Governing Council meeting, we considered that the incoming
information was broadly in line with our December assessment of the medium-term
inflation outlook. We therefore decided to keep our key policy interest rates unchanged.
These interest rates are at levels that, maintained for a sufficiently long duration, will
make a substantial contribution to ensuring that inflation returns to our two per cent
medium-term target in a timely manner. The current disinflationary process is expected
to continue, but the Governing Council needs to be confident that it will lead us
sustainably to our 2% target. We will continue to follow a data-dependent approach to
determining the appropriate level and duration of restriction, taking into account the
inflation outlook, the dynamics of underlying inflation and the strength of monetary
policy transmission.
Building euro area resilience in turbulent times
The shifting economic and geopolitical landscape calls for strengthening the euro area's
resilience.
As you note in your draft resolution, high energy prices and increased geopolitical
instability are posing a threat to euro area competitiveness. And they are adding to
Europe's existing structural challenges such as ageing, climate change and
digitalisation.
To maintain monetary sovereignty and economic prosperity in these challenging times,
it is essential for Europe to build up resilience to shocks and invest in its strategic
autonomy.
A unified European policy response should strive to unlock Europe's potential, focusing
on progress in three key dimensions: independence , investment and integration .
First, we need to make progress on energy independence .
Given its proximity to Russia's war of aggression against Ukraine, Europe was hit
particularly hard by its dependence on energy imports from Russia. To reduce the
bloc's vulnerability to global shocks, improvements in energy security, efficiency and
affordability will be vital. European firms' ability to compete globally will hinge on being
less energy dependent.
As energy security becomes imperative, Europe will need to boost the roll-out of
renewables by increasing investment in clean energy and green technologies, such as
green hydrogen and smart energy grids.
But the path to greater energy independence also entails considerable investment
needs.
investment
This brings me to my second point: we need to foster .
The European Commission estimates that an extra €620 billion per year will be needed
to finance Europe's environmental and climate objectives, while an additional €125
1
billion will be required for the digital transition. But making these investments, as well
as addressing shortcomings in the functioning of the financial system, requires further
progress on deepening our Economic and Monetary Union, something you highlight in
your draft resolution.
Faithfully implementing the EU's revised economic governance framework will help
ensure that fiscal rules reduce high government debt and promote structural reforms
and productive public investment, including for the green and digital transitions. I am
pleased that EU policymakers, including this Parliament, have recently reached a
provisional agreement on the new framework, which should be swiftly and diligently
implemented. This will be essential to enhance credibility and anchor expectations
about the future course of fiscal policies.
Completing Europe's capital markets union (CMU) will also be key in financing the twin
transition. A fully functioning CMU is needed to foster private financing and complement
public investment. We are currently underperforming in this area. Our capital markets
remain fragmented and, as a result, lack depth and liquidity, especially when compared
with those of the United States. Let me give two examples. First, the EU trading
landscape is characterised by many small exchanges, with three times as many
exchange groups as in the United States and more than ten times as many exchanges
2
for listings. Second, EU venture capital, relative to the size of the economy, is only a
3
small fraction of the size - around one-fifth - of US venture capital. Measures to
promote equity financing would provide an opportunity to broaden European firms'
financing options for investing in the technologies needed for the twin transition.
Europe's competitiveness and ability to invest also hinge on further progress being
made towards banking union. A complete banking union would support more integrated
banking services across the euro area and strengthen the global competitiveness of our
banking sector.
Finally, the third key dimension of a unified European response is the need for deeper
integration of our Single Market to strengthen Europe's overall competitiveness and
resilience.
The Single Market remains incomplete. But it is essential for Europe's long-term
competitiveness.4
A more integrated Single Market would help unleash Europe's growth potential,
boosting our shared prosperity. Measures to strengthen the Single Market could, for
example, focus on reducing red tape and excessive regulation, both at EU and national
levels. This would provide incentives to invest and innovate, as 61% of EU firms
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consider business regulations to be an obstacle to investment. In addition, a more
competitive and integrated electricity market is also crucial for completing the Single
Market and supporting the green and digital transitions. The digital transition would also
be further supported by a digital euro.
Progress in this direction would support cross-border trade, investment, and growth. It
would also enhance innovation through increased incentives for research and
development. The impact of such progress would be considerable - ECB analysis
shows that the Single Market raised the region's GDP per capita by 12% to 22%
between 1993 and 2008.6
A more integrated Single Market would also strengthen our resilience. We now know
that Europe's heavy reliance on external demand and global supply chains can be a
weakness. We should therefore leverage and further exploit the full scale of our internal
market for goods and services. This will require comprehensive reform, but it has the
potential to re-establish the Single Market as an engine of growth, innovation and
competitiveness.
Conclusion
Let me conclude.
Europe has demonstrated its ability to navigate turbulent times. In the face of the
current economic and geopolitical challenges, policymakers must be bold enough to
take the further steps needed to advance European integration.
As Simone Veil remarked in her inaugural speech as President of the European
Parliament here in a plenary session 45 years ago: "If the challenges facing Europe are
to be met, we need a Europe capable of solidarity, of independence, and of
cooperation." Her words resonate strongly today. We must seize the opportunity to
bolster Europe's unity and resilience.
I count on this Parliament - and the next one - to drive the decisive European action
needed to strengthen the euro area.
The ECB will continue to play its part, within its mandate. Let me reiterate our
unwavering commitment to delivering on price stability, while contributing to the topics I
have talked about today and maintaining an ongoing dialogue with you, the elected
representatives of EU citizens.
Thank you for your attention. I now look forward to listening to your views during today's
debate.
1
2023 Strategic Foresight Report - Sustainability and
European Commission (2023),
people's wellbeing at the heart of Europe's Open Strategic Autonomy.
Wright, W. and Hamre, E.F. (2021), "Report: the problem with European stock markets
",2 The future of EU capital markets , New Financial, March.
3
International Relations Committee Work stream on Open Strategic Autonomy (2023), "
The EU's Open Strategic Autonomy from a central banking perspective - challenges to
the monetary policy landscape from a changing geopolitical environment ", Occasional
Paper Series , No 311, ECB, March.
4
European Commission (2023), Long-term competitiveness in the EU: looking beyond
2030 .
5
European Investment Bank (2022), EIB Investment Survey - EU overview .
6
Lehtimäki, J. and Sondermann, D. (2020), "Baldwin vs Cecchini revisited: the growth
impact of the European Single Market ", Working Paper Series, No 2392, ECB, April.