Europe’s economy is nearing the end of a malaise that has resulted in more than a year of near stagnation, European Central Bank (ECB) President Christine Lagarde said on Wednesday.
Output in the eurozone is “recovering and we are clearly seeing signs of recovery,” Lagarde told the Council on Foreign Relations in Washington. “We haven’t had a recession, but it’s been very, very slow and meager, [but] you have an employment and a job market which is phenomenal.”
The ECB is almost certain to cut interest rates at its next meeting in June — offering some support for growth — although what happens after that is increasingly uncertain.
Photo: AFP
That is in part because of the US Federal Reserve, whose chair Jerome Powell on Tuesday signaled that officials would wait longer than previously anticipated to reduce borrowing costs following a series of surprisingly high inflation readings.
A prolonged period of monetary easing in Europe with the US not acting to the same extent could dent the euro, with Lagarde saying officials would watch fluctuations “very carefully,” despite not targeting a particular level.
“While we have a single mandate with a primary objective of price stability, obviously we have to take into account the impact that exchange-rate variations will have on our inflation,” she said. “That movement of currencies may have an impact on inflation by way of imported inflation.”
Tensions in the Middle East are another risk factor, she added.
From supply-chain disruptions following the COVID-19 pandemic to an energy crisis after Russia’s invasion of Ukraine, Europe’s economy has faced multiple challenges, but it mignt yet face its biggest — the clean energy and digital transitions that Brussels has made its priority in the coming years would require additional annual investment of nearly 620 billion euros (US$660 billion).
From artificial intelligence to solar panels, from computer chips to batteries, the EU is fast losing ground on innovation to other global powers.
The EU has been put further on the back foot as China and the US have plowed billions of dollars of state aid to prop up their critical industries.
What is needed is “radical change,” former ECB president Mario Draghi said during a speech in Belgium on Tuesday, pointing to “other regions [that] are no longer playing by the rules.”
“Our major competitors are taking advantage of the fact that they are continental-sized economies. We have the same natural size advantage in Europe, but fragmentation is holding us back,” Draghi said.
The former Italian prime minister, increasingly touted as a potential successor to Ursula von der Leyen as European Commission president, is to present a report on the issue in the summer.
Additional reporting by AFP
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