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, 30 September 2024.
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Charts accompanying the speech
Transcript of the hearing
It is a great pleasure to return to this Committee for the first time since the European
elections. I very much look forward to my exchanges with all of you, new and
not-sonew members, over the course of this parliamentary term.
First, let me congratulate each of you on your election to this Parliament. Europe faces
significant challenges, and critical decisions will need to be taken over the next five
years. Your work will be crucial in guiding us forward.
As Members of the European Parliament, you play an essential role in channelling
citizens' questions and concerns about the ECB's policies. I am committed to
maintaining an open dialogue with you, building on the positive and constructive
relationship between our two institutions. By working together, we can fulfil our joint
accountability obligations under the Treaty and build trust in the ECB.
In my remarks today, I will start by providing an update on the euro area's economic
outlook and the ECB's monetary policy stance, the first topic you have selected for
today's hearing. I will then discuss the need to advance the capital markets union - the
second topic you have chosen.
The outlook for the euro area economy
Economic activity has recovered slowly since the end of the pandemic. The
postpandemic reopening allowed the euro area economy to grow during the first nine
months of 2022, but economic activity broadly stagnated thereafter. This was due,
among other factors, to the energy price shock following Russia's invasion of Ukraine
and the increased geopolitical uncertainty, but also to the tightening of our monetary
policy.
Growth resumed in early 2024. The euro area economy grew by 0.2% in the second
quarter, after 0.3% in the first quarter. However, growth in the second quarter stemmed
mainly from exports and government consumption. Domestic demand remained weak
as households consumed less, firms cut business investment and housing investment
dropped. The services sector is holding up, with signs of deceleration, while activity in
the manufacturing and construction sectors remains subdued.
Looking ahead, the suppressed level of some survey indicators suggests that the
recovery is facing headwinds. We expect the recovery to strengthen over time, as rising
real incomes should allow households to consume more. The latest ECB staff
projections foresee the economy growing by 0.8% in 2024, 1.3% in 2025 and 1.5% in
2026.
The labour market remains resilient, with the unemployment rate standing at 6.4% in
July - broadly unchanged over the past year. At the same time, employment growth
slowed to just 0.2% in the second quarter, and recent indicators point to a further
deceleration in the coming quarters. According to ECB staff, the unemployment rate is
projected to remain around its current low level.
Turning to price developments, disinflation has been accelerating over the last two
months. Headline inflation fell to 2.2% in August 2024 and is expected to drop further in
September, mainly on account of falling energy costs. Core inflation - excluding energy
and food - edged down to 2.8% in August driven by a decline in goods inflation that
outweighed an increase in services inflation.
The indicator of domestic inflation, which only includes items with a low import intensity,
remained high in August as wages continued to grow at an elevated pace. At the same
time, the overall growth in labour costs has been moderating in recent quarters, and
profits have been buffering the impact of higher wages on inflation.
Looking ahead, inflation might temporarily increase in the fourth quarter of this year as
previous sharp falls in energy prices drop out of the annual rates, but the latest
developments strengthen our confidence that inflation will return to target in a timely
manner. We will take that into account in our next monetary policy meeting in October.
The ECB staff projections from September foresee inflation to average 2.5% in 2024,
2.2% in 2025 and 1.9% in 2026.
The ECB's monetary policy stance
Let me now turn to our monetary policy stance - the first topic chosen for today's
hearing.
We have come a long way in the fight against inflation. In October 2022 inflation peaked
at 10.6%. By September 2023, the last time we raised interest rates, it had dropped by
more than half, to 5.2%. The decline in inflation and the anchoring of longer-term
inflation expectations showed that our strong response was bearing fruit. Then, after
nine months of holding rates steady, we saw inflation halve again to 2.6% in June when
we started lowering interest rates.
The new data available at the time of the September Governing Council meeting
reinforced our confidence in the timely return of inflation to our 2% target. We therefore
lowered the rate on the deposit facility, which is the rate through which we steer the
monetary policy stance, by another 25 basis points to 3.5%.
We are determined to ensure that inflation returns to our 2% medium-term target in a
timely manner. We will continue to follow a data-dependent approach to determining the
appropriate level and duration of restriction, focusing on the inflation outlook, the
dynamics of underlying inflation and the strength of monetary policy transmission.
Policy rates will be kept sufficiently restrictive for as long as necessary to achieve our
aim. We are not pre-committing to a particular rate path.
Moreover, as we announced on 13 March 2024, some changes to the operational
1
framework for implementing monetary policy took effect from 18 September. In
particular, the spread between the interest rate on the main refinancing operations and
the deposit facility rate was set at 15 basis points. The aim is to steer short-term money
market rates more closely in line with monetary policy decisions.
In parallel to our policy deliberations, we have also launched an assessment of our
monetary policy strategy. This assessment will be more limited in scope than our last
review, which we completed in July 2021, and will include two work streams. One work
stream will focus on the changed inflation environment and the other on the implications
for our monetary policy strategy, including what we can learn from the periods of both
low and high inflation.
We expect to conclude the assessment in the second half of 2025 and I intend to keep
you informed in our regular hearings and interactions.
Advancing capital markets union
Let me now turn to the second topic of this hearing - the capital markets union.
The ECB has long emphasised the need for progress in this area to integrate our
fragmented markets and thus foster risk diversification and shock absorption across the
EU. Doing so would support financial stability and facilitate the transmission of
monetary policy.
But a deep and integrated single market for capital is also essential for achieving some
of the EU's other key goals, from financing the green and digital transitions to enabling
savers to earn higher returns. Additionally, young and innovative firms need to grow
and become more productive, which will ultimately benefit all Europeans. For the time
being, however, a lack of access to equity financing is a key factor holding these firms
back.
Advancing the capital markets union must therefore be a cornerstone of the EU's
competitiveness strategy.
Significant efforts have been made over the past decade to move forwards, and I want
to pay tribute to the role the European Parliament has played in promoting an
ambitious, European approach. But vested interests and competing national priorities
have hampered progress.
Now, at the beginning of a new legislative term, we are at a crossroads. The current
political momentum needs to be converted into a concrete agenda with clear priorities.
And this agenda must be swiftly followed up with genuine actions.
The ECB's Governing Council laid out its priorities for European capital markets in a
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statement in March. Let me highlight three key areas where progress is essential.
First, we must improve the way we save in Europe. In 2022, European household
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savings exceeded EUR 1.1 trillion. However, around a third of these savings are held
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in deposits - significantly more than in the United States. Mobilizing even a small
portion of these funds and investing them in European capital markets could greatly
contribute to the more than EUR 700 billion needed annually to achieve the EU's key
strategic objectives. This is also likely to provide better long-term returns for our citizens
while improving European companies' access to equity finance.
Second, we need a single regulatory and supervisory ecosystem that promotes market
integration.
And third, for EU capital markets to be more attractive to investors and issuers, they
need to achieve greater scale and depth. This can only happen through integration -
especially in our trading and post-trading infrastructure.
Conclusion
To conclude - the world is changing rapidly, and Europe is falling behind.
The diagnosis and the remedy are clear - the EU must come together and address its
structural challenges to increase its competitiveness.
Advancing the capital markets union is an important part of this agenda, but not the only
one. Significant efforts to boost Europe's economic resilience and decarbonise the
economy will also be needed. This will require substantial investment in the coming
years, which needs to come from both private and public sources.
Progress in these areas will not only enhance Europe's ability to withstand future
economic shocks, but also help the ECB to maintain price stability.
As Jacques Chirac once observed, "The construction of Europe is an art. It is the art of
the possible."
This Parliament has found ways to push Europe forwards before, and I trust you will do
so again. The future of Europe is in your hands.
Thank you for your attention - I look forward to your questions and to engaging with you
throughout what will be a decisive period for Europe.
1
ECB (2024), "Changes to the operational framework for implementing monetary policy
", ECB, press release , 13 March.
2
ECB (2024), "Statement by the ECB Governing Council on advancing the Capital
Markets Union", 7 March.
Eurostat and European Commission (2024), "The future of European
competitiveness: A competitiveness strategy for Europe ".
4
Approximation based on Eurostat, ECB, and OECD data.