SPEECH

The 25th anniversary of the Euro50 Group:
looking ahead to the 50th anniversary

Remarks by Philip R. Lane, Member of the Executive Board of the
ECB, at the 25th Anniversary of the Euro50 Group event at the
Banque de France

Paris, 28 November 2024

Let me start by congratulating the Euro50 Group on its 25th anniversary: since the start of the euro,
the Euro50 Group has convened many important discussions about the development of the euro area
as a monetary union and the euro as a single currency.

Looking back at the first quarter of a century of the Euro50 Group naturally invites speculation about
the next 25 years: what will we be discussing at the 50th anniversary of the Euro50 Group?

Let me list four major structural factors that look set to shape the next 25 years:] (a) the next wave of
technological change (digitalisation, artificial intelligence, automation, robotification);!2! (b) climate
change, nature degradation and the green transition; (c) the shifting configuration of geo-economics
and geo-politics;!4] and (d) demographic trends (increasing longevity, low fertility, migration patterns)./®]
Of course, these structural factors interact with each other in many ways, such that it is essential to
adopt a holistic approach in assessing their implications for societies, economies, political systems,

governments, institutions - including central banks - and policymakers.

Before turning to how a central bank should respond to these structural changes, I want first to
emphasise that the common nature of these structural trends means that international coordination
and collective action is the best approach to navigating these challenges. At the European level, there
is considerable scope to work together as a European Union. In terms of economic and financial
policy, the recent Draghi and Letta reports show how further integration can improve both the
dynamism and the resilience of Europe, which would make it much easier to deal with the challenges I

have just mentioned. This includes the high potential gains in stepping up progress in relation the
capital markets union and the banking union.

First, a basic task is to analyse these developments: strong analytical foundations are a precondition
for good policymaking. Of course, the primary focus of the analytical work should be to assess the
implications of these structural trends for the central bank. This spans not only the implications for
inflation dynamics but also the role of money in the economy and the financial system and the
modalities of monetary policy implementation. The full arsenal of analytical firepower needs to be
deployed: research projects to uncover evidence about structural change in the incoming data; a
greater use of surveys to find out how households, firms and financial intermediaries are coping with

structural change; and the tracing-out of various scenarios in the "laboratories" provided by
macroeconomic models.!2]

Second, a forward-looking central bank should update and modify the tools and modalities of how it
underpins the monetary system and implements monetary policy.

In relation to the former, the digital euro project is devoted to ensuring that the euro area can benefit
from the full potential of a digitised financial system while preserving, even in the new digital world, the

security and freedom provided by central bank money." The gains from a digital euro extend far
beyond the personal benefits that will be reaped by individual European citizens from a digital currency
that can be used wherever digital payments are accepted, throughout the euro area. The digital euro
will also introduce an alternative to the currently-dominant international payment solutions, both
reducing our external dependencies and lowering costs for merchants. And it will provide the
underlying infrastructural platform and acceptance network that can level the playing field for euro area
banks, payment providers and payment schemes in offering a wide range of financial services across
the euro area.

In relation to the latter, the ECB is working to ensure that its policy toolkit and implementation

framework are aligned with the EU policy commitments to the green transition." It goes without
saying that we closely assess the various elements of this work programme to make sure these do not

compromise our commitment to delivering our primary mandate of price stability.42]

Third, a central bank should work through the implications of structural change for price stability.
Structural changes can affect not only inflation dynamics, but also the natural rate of interest, and

therefore can have important consequences for the central bank's price stability mandate.45] At a
heuristic level, it is important to differentiate between different pathways. Without trying to be
comprehensive, let's consider a few scenarios:

Scenario A: This may have little impact on inflation: loosely speaking, if demand and supply adapt at
the same speed, the net impact on inflation is limited.

Scenario B: news arrives about a future structural shift. If the news is good - future supply capacity
improves - this can stimulate investment and raise consumption today, in line with the permanent
income hypothesis. Since demand improves but short-run supply is limited, this may create a burst of
short-run inflation. In the other direction, if the news is bad - future supply capacity declines - this
constitutes a negative demand shock today, which is disinflationary. In either case, whether monetary
policy should respond will depend on the expected size and duration of the inflation shock, together
with an assessment of the fragility of the inflation anchor to the shock.

Scenario C: a disruptive event occurs today. This could be an adverse disruptive event (a pandemic, a
trade war, an actual war) that generates an unexpected contraction in supply capacity. In the other
direction, it could also take the form of a faster-than-expected roll-out of a general purpose technology,
such as the 1990s internet boom in the United States). In the case of an adverse shock, supply falling
more quickly than demand creates inflationary pressure; in the case of a positive shock, supply
increasing more quickly than demand eases inflationary pressure. Of course, both types of disruptive

event may also have implications for financial stability, in view of the associated implications for asset
pricing.

In essence, the challenge for central bankers will be to calculate and re-calculate the appropriate
monetary policy stance that is robust to the emergence of these various scenarios or combinations of
scenarios: at any given time, there may be elements of scenarios A, B and C operating in different

sectors and in different countries, given the wide variety of structural changes that are underway.!"4

1.
For more on how monetary transmission will be affected by structural shifts and how to adjust the

analytical frameworks to these shifts, see Lagarde, C. (2024), "Setbacks and strides forward: structural

shifts and monetary policy in the twenties", speech at the 2024 Michel Camdessus Central Banking
Lecture organised by the IMF, Washington, DC, 20 September.

2.

Dedola, L. et al. (2023), "Digitalisation and the economy", Working Paper Series, No 2809, ECB, 25

April; Baldwin, R. (2022), "Globotics and macroeconomics: Globalisation and automation of the service
sector", paper presented at the ECB Forum on Central Banking, Sintra, June; Jaumotte, F. et al.
(2023), "Digitalization During the COVID-19 Crisis: Implications for Productivity and Labor Markets in
Advanced Economies", Staff Discussion Notes, No 2023/003, IMF, 13 March; and Albanesi, S. et al.
(2023), "New technologies and jobs in Europe", Working Paper Series, No 2831, ECB, 14 July.

3.
Breckenfelder, J. et al. (2023), "The climate and the economy", Working Paper Series, No. 2793, ECB,
7 March; Christine, L. (2024) "Mind the gap: what it takes to finance a greener future", The ECB

of the effects of climate change on the macroeconomy", Working Paper Series, No 2608, ECB, 14

October; and Ciccarelli, M., Kuik, F. and Martinez Hernandez, C. (2024), "The asymmetric effects of
temperature shocks on inflation in the largest euro area countries", European Economic Review, Vol.

168, September.

4.

Attinasi, M. G., Mancini, C. et al. (2024, forthcoming), "Navigating a fragmenting global trading system:
Some lessons for central banks", Occasional Paper Series, ECB; Georgieva, K. (2023), "Confronting
Fragmentation Where It Matters Most: Trade, Debt, and Climate Action", IMF Blog, 16 January; and

Attinasi, M.-G., Boeckelmann, L. and Meunier, B. (2023), "The economic costs of supply chain

decoupling", Working Paper Series, No 2839, ECB, 3 August.

5.

Freier, M., Lichtenauer, B. and Schroth, J. (2023), "EUROPOP2023 demographic trends and their euro

area economic implications", Economic Bulletin, Ilssue 3, ECB
6.
For recent discussions of the challenges presented by technological change, shifting geopolitical

trends and climate change, see speeches by President Lagarde on "The economic and human

challenges of a transforming era', "Setbacks and strides forward: structural shifts and monetary policy

in the twenties", "Policymaking_in a new risk environment" and "Central banks in a changing world: the

role of the ECB in the face of climate and environmental risks".

7.

Letta, E. (2024), "Much more than a market", April; and Draghi, M. (2024), "The future of European
competitiveness", September.

8.

For speeches on the capital markets union, see Lagarde, C. (2024), "Follow the money: channelling

savings into investment and innovation in Europe", speech at the 34th European Banking Congress:

"Out of the Comfort Zone: Europe and the New World Order", Frankfurt am Main, 22 November. For
speeches on the banking union, see Lagarde, C. (2024), "Welcome address at the tenth anniversary

of the Single Supervisory Mechanism", Frankfurt am Main, 6 November.

9.
For recent discussions on how the ECB incorporates analyses coming from macroeconomic models

for policymaking, see Lane, P.R. (2024), "Monetary policy under uncertainty", speech at the Bank of

England Watchers' Conference 2024, King's College London, 25 November; and Lane, P.R. (2024),

"The 2021-2022 inflation surges and the monetary policy response through the lens of macroeconomic

models", speech at the SUERF Marjolin Lecture hosted by the Banca d'Italia, Rome, 18 November.

10.

For an overview of the digital euro project, see Cipollone, P. (2024), "Monetary sovereignty in the

digital age: the case for a digital euro", speech at the Economics of Payments XIII Conference

organised by the Oesterreichische Nationalbank, Vienna, 27 September; and Cipollone, P. (2024),

"From dependency to autonomy: the role of a digital euro in the European payment landscape",

speech at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 23
September.
11.

For more information on climate change work at the ECB, see the dedicated section of the ECB

website.

12.

See Elderson, F. (2024), "Taking account of nature, naturally", speech at the tenth Green Finance

Forum "Innovate in Nature", Frankfurt am Main, 19 November and recent research by Ferdinandusse,

M., Kuik, F. and Priftis, R. (2024), "Assessing the macroeconomic effects of climate change transition

policies", Economic Bulletin, lssue 1, European Central Bank, Frankfurt am Main; and Ferdinandusse,

M., Lis, E., Kuik, F. and Sun, Y. (2023), "Climate-related policies in the Eurosystem/ECB staff

measures", Economic Bulletin, Issue 1, European Central Bank, Frankfurt am Main.

13.

For a discussion of changes in neutral rates and their policy implications see Brand, C., Lisack, N. and
Mazelis, F. (2024), "Estimates of the natural interest rate for the euro area: an update", Economic

Bulletin, Ilssue 1, ECB and Lane, P.R. (2019) "Determinants of the real interest rate" Remarks at the

National Treasury Management Agency, Dublin, 28 November 2019.

14.

Recent studies that emphasise the importance of general equilibrium analysis in assessing the policy
implications of structural changes include: Fornaro, L., Guerrieri, V. and Reichlin, L. (2024), "Monetary
Policy for the Green Transition', report prepared for the BIS Green Swan conference 2024 and
Tenreyro, S., Ambrosino, L. and Chan, J. (2024), "Trade fragmentation, inflationary pressures, and
monetary policy," B/S working paper, No 1225. For monetary policy actions taken by the ECB in
response to the inflation shock in 2021-22, see Lane, P.R. (2024), "The 2021-2022 inflation surges and

monetary policy in the euro area", The ECB Blog, 11 March.

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