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. * * * 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

term nominal interest rates which have been declining ; longterm real interest rates have also fallen. factors beyond monetary policy have played a role in driving real rates lower, which are less benign. there has been a secular decline in productivity growth rates in advanced countries, and increased pessimism about future growth. with lower expected return on capital, firms are more reluctant to invest. there has also been a savings - investment imbalance beyond that explained by the fall in productivity growth, often referred to as a “ global savings glut ”. in part, this is explained by the ageing populations of advanced countries, driving up the demand for safe assets at a time when they have become increasingly scarce. this falling real rate is bad news for savers since it means lower future returns in terms of consumption of additional goods and services. and in the long run it is the concept of the natural rate that determines the return to saving, not short - term movements in monetary policy. 1 / 5 bis central bankers'speeches this concept of a natural rate of interest represents the real rate consistent with saving and investment being in balance, output being at its potential and neither upward nor downward pressure on inflation. while the natural rate may change over time, it is unobserved and can only be estimated. such estimation is relatively imprecise, with different models giving a range of estimates making it uncertain as to the true level of the natural rate. 1 nonetheless, the natural rate does appear to be lower than in the past. 2 why unconventional measures have been necessary developments in the natural rate matter for the conduct of monetary policy in the euro area. to stimulate the economy, central banks steer short - term real interest rates below the natural rate to encourage the public to bring forward spending, be it in the form of consumption or investment. as the natural rate falls, so does the rate that stimulates the economy. with the natural rate now lower in the euro area, and the significant downward shock to output and inflation from the crisis, negative rates, and our other policy measures, have been necessary to stimulate demand and drive inflation towards our objective. there is a limit to how low short - term rates can go. since the return on cash is zero, at some point the public will switch to using cash and disintermediate the banking sector. of course, there are costs involved in holding large quantities in cash, so the crossover point lies a little way below zero. given that there is a limit to