Source: European Central Bank
Interview with Christine Lagarde, President of the ECB, conducted by Eric Albert, Philippe Escande and Béatrice Madeline on 28 October 2024
31 October 2024
In September, former ECB President Mario Draghi published an alarming report on how the European economy is falling behind. Do you agree with this assessment?
Europe is falling behind. It’s true. And so is France. Mario Draghi’s report highlights the productivity gap, which is largely due to the tech sector. Tech players in Europe and the United States believe that the gap first emerged during the digital revolution that began in the mid-1990s.
The question now is whether the boost that the United States got from the mid-1990s will continue with artificial intelligence, the accumulation of data centres and the exploitation of these data. This is the key issue. In Europe we need to roll up our sleeves and make an effort to keep those companies that start out here and then develop themselves elsewhere. We need to try to make them stay.
So what is the solution? Do you think the gap will remain?
We need to look at why Europe is falling behind. The energy component is key, especially as regards data centres. Labour is also important, with mobility being much greater in the United States. And regulation is a crucial issue, too. In overly simple terms, the United States is developing AI very quickly, and already has a number of major players. In the meantime, not only is Europe lacking such big players, but it has also become a pioneer in AI regulation. This causes players in this sector to say “OK, let’s do this elsewhere. It’ll be easier and we’ll have fewer obstacles and fewer restrictions”.
What about the public funding provided to businesses in the United States?
The fourth factor that is contributing to Europe falling behind is the “light” industrial policy pursued by the United States. It’s not light in terms of money because the Inflation Reduction Act of August 2022 is very large, but there are relatively few criteria to qualify for funding to start a company on US soil. When I ask manufacturers, they pretty much all agree that in Europe, the process is complicated and unwieldy. And on top of the multi-layered European system, you then have those of the Member States.
The final factor is private funding. In the United States there are pension fund plans and other financial instruments that make it possible to channel savings and get savers (employees or retirees) interested in the future of the economy or the evolution of the stock market. In many European countries, these plans are still a long way off of those mechanisms, especially share participation and company profit sharing. Hence the need to develop a capital markets union.
But we have been talking about this project for the past 15 years. And when Mario Draghi’s report was published, Germany immediately opposed common borrowing. Is Europe really capable of reacting?
You’re right. We have been talking about a capital markets union since the time of Jean-Claude Juncker (President of the European Commission from 2014 to 2019), and little progress has been made. The Letta and Draghi reports are a wake-up call for Europeans, a warning. The assessment is severe but fair and provides specific recommendations. It suggests that all Europeans should gear up and be ready to give up a bit of sovereignty to ‘combine the best,’ to paraphrase what Paul Valéry once said. But what gives me hope is the engagement of all European institutions on the capital markets union. The ECB’s Governing Council is firmly engaged as well. We must use this momentum.
In 2020, the plan for a collective European loan of €750 billion was a major step forward. Four years later, less than half of the loan has been allocated. Should we see this as another example of European slowness?
We had exactly the same problem during the Greek crisis. The administrations of the different countries are not always able to quickly manage the incoming funds. The finance ministers of countries receiving a lot of funds tell you that they have of course identified what bridge or railway line should be constructed, but that they need to obtain local authorisations as well as permissions to expropriate property, and that environmental organisations are taking court actions. All of this takes a lot of time.
In this context, what consequences could the US elections on Tuesday 5 November have for Europe?
I do not want to give an opinion on any particular candidate. But US international trade policy will of course have an impact on economic activity in the rest of the world, and primarily on China. Whoever wins, if trade fragmentation worsens, the effect on global GDP will be negative, with losses reaching 9% in a severe scenario of full decoupling according to ECB simulations. But remember: when Joe Biden was elected, everyone thought that he would remove the customs barriers erected by his predecessor (Donald Trump). Nothing came of that.
Between China, which is withdrawing towards Asia, and the United States, which is closing up again, isn’t Europe, as a partner to both powers, the big loser?
That’s why we need to act and roll up our sleeves. Will Europe need to undergo another crisis for it to bring about reforms? It’s always in times of crisis that we are able to make things happen. That may be why Mario Draghi speaks of “agony”, it’s a way of saying “the crisis is here, now, do something!”.
There is talk of a European decoupling. But isn’t there a French decoupling within Europe?
If you compare today’s GDP figures with those of 2019, the United States has grown by 10.7%, the European average by 4.8% and France by 3.7%. France is lagging behind the European average.
What is your view of the surge in the French deficit?
The prospect of returning in line with European standards by applying European fiscal rules should serve as a binding guideline.
And are the French promises to restore public finances credible?
As I said, applying European fiscal rules should serve as a binding guideline.
Will we be heading towards a recession in Europe in 2025?
Based on the information now available and our current assessment, we don’t see a recession in 2024, nor in 2025, nor in 2026.
What will drive this growth, given the weakness in demand?
The two levers are exports and domestic demand, which is set to pick up. Today, with wages rising and inflation falling, disposable income is increasing. For the moment, this benefits savings more than consumption. But we are convinced, and economic history shows us, that this additional disposable income will ultimately flow towards consumption.
How do you explain the fact that it is proving so difficult for consumption to recover?
We can indeed ask why households are choosing to save their money instead of spending it. It could be that people are reluctant to make major purchases owing to geopolitical uncertainty. A second explanation could be related to the return on their savings, which is still fairly high in the euro area. A third could be that people are deciding it’s better to save rather than spend when they expect their taxes or other contributions to go up.
Euro area inflation was at 1.7% in September, below your 2% target. Is it now under control?
The target is in sight but I’m not going to tell you that inflation is defeated yet. Inflation stood at 1.7% in September. Excluding energy and food, it was still at 2.7%. We are pleased about the 1.7% figure, but we also know that inflation is going to rise again in the coming months simply because of base effects. In September energy prices were 6.1% lower than a year earlier, bringing down the cost of the consumption basket. Besides, inflation in the services sector – which is highly dependent on wages – is still at 3.9%. So, prudence is warranted.
How do you respond to those who say the ECB was too late in reacting to the rise in inflation?
I tell them we should look at the facts. Don’t forget that inflation was at 10.6% two years ago. It has fallen back to 1.7%. Perhaps we could have started a few months earlier. But we raised rates at the fastest pace ever and we managed to bring down inflation considerably in a short period of time. I now want to see inflation reach the 2% target on a sustained and durable basis. Unless there is a major shock, this will happen during the course of 2025.
And what do you say to those who now accuse you of cutting rates too late and not quickly enough?
The pace at which interest rates are cut will be determined by the economic data we receive in the coming weeks and months – based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. And to revitalise growth, urgent action is needed in the area of structural reforms.
The spread between France and Germany has increased from 0.5% to 0.8% since the French National Assembly was dissolved. The ECB has an instrument that it can use to intervene and calm the markets. Are you ready to use it?
We have clearly outlined the conditions under which we will use this instrument. And that is not an issue today.
A number of emerging countries brought together by the BRICS (Brazil, Russia, India, China and South Africa) are thinking about a payments system to circumvent the dollar. Is dedollarisation happening?
That would require another country to be able to take on the role of reserve currency. China is preparing for that, but it isn’t ready yet. I won’t see the renminbi take the place of the dollar in my lifetime.