Members of the Economic and Monetary Affairs Committee (ECON) discuss with Christine LAGARDE, ECB President, the topic "Euro at 25: what's next for the European Monetary Union (EMU)?". Irene TINAGLI (S&D, IT), Chair of ECON and introductory remark by Christine LAGARDE, President of the European Central Bank (ECB) open the discussion, followed by a question and answers session by MEPs. This transcription is a result of an automatic process. Please check against delivery.

Brussels

meeting

Committee on Economic and Monetary Affairs

economic dialogue (T)

LAGARDE, Christine (FR)

TINAGLI, Irene (S&D, IT)

Economic Dialogue with Christine LAGARDE, ECB President: opening statements by Irene TINAGLI (S&D, IT), Chair of ECON and introductory remark by Christine LAGARDE, President of the European Central Bank (ECB)

SOUNDBITE (English), Irene TINAGLI (S&amp;D, IT), Chair of ECON, Good morning. Good morning, everyone. So we start our meeting today with our monetary dialogue with Christine Lagarde, the President of the European Central Bank. Welcome, President. This is the first monetary dialogue in 2024. And allow me also to mention that this is the last monetary dialogue taking place during this 9th parliamentary term. So let's turn now to inflation, which fell further to 2.4% in November by reaching its lowest level since July 2021, before increasing again to 2.9% in December.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), Chair of ECON, So the most recent increase was mainly due to upward base effects for the cost of energy is as we know, and it should be emphasised that these inflation levels are considerably lower compared to the average annual inflation in 2023, according to the most recent ECB stuff macroeconomic projections in December. And while HICP inflation is expected to slow down further to 2.7% in 2024, after ten rate hikes in a row, the ECB Governing Council left the key interest rate unchanged for the third consecutive time in its last meeting on January 25th. The Governing Council stated it is determined to ensure that inflation returns to its 2% medium term target in a timely manner. The past interest rate increase is being transmitted forcefully into financing conditions.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), Chair of ECON, Tight financing conditions are dampening demand and this is helping to push down inflation. In parallel, the asset purchase program portfolio is declining as the Eurosystem no longer reinvest the principal payments from maturing securities reinvestments under the Pandemic emergency purchase program, the PEPP, are set to continue with a view to countering risks to the monetary policy transmission mechanism related to the pandemic until the end of 2024.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), Chair of ECON, Finally, let's recall that on the 1st of January 2024, we celebrated 25 years of the euro. In this context, taking stock of the euro was chosen as the only topic by the ECON Committee coordinators for today's meeting. Indeed, this week on Monday, we dedicated the whole afternoon session of the European Interparliamentary Week to discuss the outlook of the euro during the conference organised by the ECON Committee. The euro is an indispensable part of our daily life today. The euro area has grown from 11 to 20 countries since its foundation support for the single currency among the euro area citizens, is close to record levels and it remains to be the second most important currency in the world. Yet there have been tremendous challenges over the years. The ECB's monetary policy helped certainly to weather the financial and COVID crisis.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), Chair of ECON, Yet new challenges arise in Europe today and several EMU relevant initiatives are underway or planned in the coming period. The reform of fiscal governance, achieving a more robust banking union and building a genuine capital markets union. Preparing the foundations for a digital euro. Right, yesterday we had Mr. Cipollone updating us on the state of play of the project. And it should be mentioned also that the next monetary policy strategy review is planned for 2025. As usual, all briefing papers prepared by the European Parliament panel of experts are available on the ECON website.

SOUNDBITE (English), Irene TINAGLI (S&D, IT), Chair of ECON, A few practical considerations before starting. The following procedure will be applied. There will be introductory remarks by President Lagarde of 10 minutes, followed by the first round of questions. With longer slots for speakers in  this first round with one and a half minute before the initial question. And I encourage you to have one question so that we have the time to answer, 3 minutes for the answer. But then you will have the possibility of a follow up question of half a minute. And a minute for the answer to the follow up, and then a second round of question with shorter questions of one minute and 3 minutes for the answer. So please keep the time one question at a time. So President Lagarde will have the time to reply and let's get started. President Lagarde, you have the floor.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank 'Thank you very much, Chair, and good morning to you and to all of you in this auditorium. Today is our last hearing before the end of the legislative term. And as I look at you, I would like to just wish you good luck, because I think that over the last five years, we've done some good work and I hope we can continue to do some good work and I would like to thank you for that sincerely. This legislative term has been shaped by a succession of crises from COVID-19 to Russia's invasion of Ukraine, the energy crisis, renewed conflict in the Middle East, to name a few. These challenges have required EU institutions within our respective mandates to take decisive action and to coordinate closely across policy areas to ensure that Europe emerges stronger and better prepared for the future.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank Importantly our two institutions have also used the past term to deepen our accountability relationship, which is essential to the ECB, democratic legitimacy. So in my remarks today, I will update you on our latest assessment of the economic outlook and the ECB most recent monetary policy decision. I will then reflect briefly upon the theme that you have selected, the first 25 years of the euro, and I will give some hope about the future.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank So when we look at the economic outlook after expanding by 3.4% in 2022, which we all seem to have forgotten, by the way, the euro area economic activity has been weak in 2023 with real GDP growth having stagnated in the final quarter. You have, by the way, in the two pages that I have now circulated to you some good indication of what we have experienced. So weakness in activity is broad based across sector, extending from construction and manufacturing all the way to services. Incoming data continue to signal subdued activity in the near term. However, some forward looking survey indicators point to a pick up in the year ahead.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank 'According to the latest flash estimate, inflation, as you indicated, edged down to 2.8% in January 2024 after increasing by half a percentage point in December. This rebound in December from November had been widely expected but was actually weaker than we had anticipated. The increase reflcted base effects in the price in the energy component due to one off gas price support measures in Germany and a sizeable drop in fuel prices in December 22. Food inflation eased further to 5.7% in January due to a low inflation rate for processed food, while energy inflation stood at -6.3%, its the little blue indicators that you see below the line in the box on CPI inflation.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank Core inflation, which excludes energy and food, is declining gradually, but its services component has shown signs of persistence. Wage growth continues to be strong and is expected to become an increasingly important driver of inflation dynamics in the coming quarters. So this is reflecting tight labour markets and workers demand for inflation compensation. The ECB's forward looking wage structure continues to signal strong wage pressures, but agreements in the last quarter of 23 suggest some levelling. Wage pressure for 24 hinged particularly on ongoing and upcoming negotiations that affect a large share of euro area employees. This will happen in the next few months.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank Moreover, the contribution of unit profits to domestic price pressures continued to decline, suggesting that, as we had expected, wage increases are at least in part buffered by profit margins. Overall, the latest data confirm the ongoing disinflation process and is expected to bring us gradually further down over 2024 as the impact of past upward shocks fades and tight financing conditions help to push inflation down.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank At our January Governing Council meeting, we considered that the incoming information was broadly in line with our December assessment of the medium term inflation outlook. As a result, we decided to keep our key policy interest rate unchanged. These interest rates are at a level that maintained for a sufficiently long duration, will make a substantial contribution to ensuring that inflation returns to our 2% medium term target in a timely manner. The current disinflationary process is expected to continue, but the Governing Council needs to be confident that it will lead us sustainably to our 2% target. We will continue to follow a data dependent approach to determining the appropriate level and duration of restriction, taking into account the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank 'So let me now turn to the topics of this hearing. The one that you've selected: the euro at 25, the youngest of the international reserve currencies. While still young, the euro is nonetheless matured and become an indispensable part of our daily lives. Its journey from the dream of a few visionary founders to a currency used by 350 million people across now 20 countries, is testimony to the power and impact of the European project. During its first decade - childhood, if you will - the focus was on establishing the credibility of the ECB as a new Central Bank and of the euro as a new currency.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank 'Its second decade - youth - was characterised by the aftermath of the global financial crisis and the ensuing European sovereign debt crisis, which led to concerted European efforts to strengthen the architecture of Economic and Monetary Union, including the creation of the Single Supervisory Mechanism, the ESM. The third decade, the one we are in, has been shaped by challenges posed by the pandemic, climate change, geopolitical tensions and the need to avoid high inflation becoming entrenched. These shocks have highlighted the necessity for new European tools to accelerate the green and digital transitions and to enhance Europe's energy independence and overall resilience.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank As a constant companion, the euro connects us all and offers three key benefits: simplicity, stability and sovereignty. Simplicity because it can be used by consumers and firms throughout the euro area without having to exchange currency, without having to think about the effects risk, making it easy to live, to travel, to do business there. And this is also reflected in the widespread support for the Euro, you have mentioned that, and I'm sure with 79% of euro area citizens in favour of the single currency. Second, stability because despite recent fluctuations and price shocks, inflation in the euro area has averaged 2.1% since 1999. And more importantly, longer term inflation expectations have remained broadly anchored around the ECB's target. This is testimony to ECB credibility.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank Sovereignty, because the euro is the second most important global currency in the world. It is used in international transactions and therefore protects euro area consumers and firms from currency fluctuations in an increasingly turbulent world. The euro has delivered in all of these areas and repeatedly demonstrated its resilience and reliability in the face of significant challenges. This Parliament, you have played a pivotal role in strengthening the Euro's foundations over the years, not least during this last legislative term. You work to set up next generation EU, reform the economic governance framework, deepen the capital markets union and the Banking Union designed the legal framework for digital euro and address climate change has laid the foundations that will ensure that the euro is fit for the future.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank The ECB has also played its part and demonstrated its commitment to deliver on its mandate in a constantly changing environment. As a reminder, let me highlight three ways we have done so in recent years. First, we have remained unwavering in our commitment to our primary mandate of price stability, responding forcefully to the surging inflation following Russia's invasion of Ukraine and the subsequent energy crisis.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank Second, we have taken steps to incorporate climate change considerations into our monetary policy operations and in so doing, played our part in contributing to meeting the objectives set out in the Paris Agreement within our mandate. Our announcement in January reaffirmed and expanded our work on climate change and nature degradation in both our monetary policy and supervisory activities, placing a particular emphasis on transition, the physical impact of climate change, and the nature related risks for the economy and the financial system.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank Third, we are making progress on developing a digital Euro, which would strengthen our strategic autonomy and support our competitiveness in a digitalised world. You discussed this important matter yesterday with Mr. Cipollone, and I would like to thank you all for the close cooperation that we have had over the course of the last few years on this matter.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank As we look ahead for the next 25 years of the euro, I can assure you that the ECB will continue to engage closely with the European Parliament, respond to new challenges, and constantly review its actions to ensure that it can continue to deliver on its mandate. The first 25 years of the euro have been a success, but the work is not completed. Economic and Monetary Union is not at an end point. Each European generation must write its own chapter of the single currency history. With a new geopolitical landscape emerging, the reasons for strengthening our common currency are stronger than ever. As Goethe once wrote, what does not started today is never finished tomorrow. The upcoming European elections will be a chance to set out a new, ambitious agenda to further deepen our economic and monetary union. It is essential that all policymakers grasp this opportunity to ensure that Europe responds to the common challenges that we are fac...