MEPs debate with Christine LAGARDE, President of the ECB, inflation, efforts to curb it, and possible interest rate cuts. During the annual plenary debate, MEPs concentrate on what happens next once inflation settles at the ECB’s 2% target and pay particular attention to the continuing significant divergences in inflation rates between member states. This is the last debate in the European Parliament for Christine LAGARDE before the 6-9 June European elections. Opening statements by Christine LAGARDE, President of the European Central Bank (ECB), Johan VAN OVERTVELDT, Rapporteur, and by Mairead MCGUINNESS, European Commissioner for Financial Services, Financial Stability, and Capital Markets Union. This transcription is a result of an automatic process. Please check against delivery.

Strasbourg

debate

plenary session

McGUINNESS, Mairead (EPP, IE)

European Central Bank annual report (T)

LAGARDE, Christine (FR)

VAN OVERTVELDT, Johan (ECR, BE)

European Central Bank – annual report 2023: Opening statements by Christine LAGARDE, President of the European Central Bank (ECB), Johan VAN OVERTVELDT, Rapporteur, and by Mairead MCGUINNESS, European Commissioner for Financial Services

https://api.multimedia.europarl.europa.eu/documents/20125/75030773/1708946704364_I253490Chapters%5BSD-EN%5D.srt

SOUNDBITE (Dutch), Johan VAN OVERTVELDT (ECR, BE), Rapporteur, President, Madam President, ladies and gentlemen, we have a difficult situation and the European Central Bank has made every effort to maintain price stability in the Eurozone. You've earned our praise, Ms. Lagarde. Many measures have been taken because of the monetary policy, inflation is almost come down again. On top of this, the predicted recession so far hasn't come about. But the latest decline inflation isn't an endpoint. The general inflation is now going down towards the 2% inflation but core inflation remains very stubborn and high. And important role in these inflation figures is the increased prices in the service sector. That is a point which must be kept an eye on and also wage developments in the zone.

SOUNDBITE (Dutch), Johan VAN OVERTVELDT (ECR, BE), Rapporteur, But I would like to come back to price stability. That is an important topic. You underlined that too, and it's about bringing down interest rates, that's on the list so that inflation can come down to 2% and stay there. Consumers, producers and investments take account of inflation in their decisions in the political recommendations of the ECB. They are short term elements, an element, for example, wage costs, but also longer term considerations.

SOUNDBITE (Dutch), Johan VAN OVERTVELDT (ECR, BE), Rapporteur, 'Of course, we must look at the structural developments that have taken place some years ago. We had a stable geopolitical situation, a technical progress and globalisation. That was a very flexible economy, so it seemed. But there were shocks, but there wasn't much inflation around. But now we've had a major changes, for example, the impact of the pandemic on the so-called international supply chains, and now we can see that the business world has changed. It's become less flexible. And so we can't be so inflexible when it comes to changes in demand. So that's why we have price increases and they are more stubborn. So the task of the ECB hasn't become any easier.

SOUNDBITE (Dutch), Johan VAN OVERTVELDT (ECR, BE), Rapporteur, Nonetheless, we have a need to keep inflation down, that's very important. If we are going to achieve the growth and investments that we need. But there are some considerations I wanted to address. First of all, as regards monetary policy, we must avoid asymmetry. Central banks in the past took action as soon as there were financial upsets, but often they reacted too slowly. And there was a second point that there should be more modesty. They should concentrate on their main task, price stability. Other important societal tasks should be left to other institutions and they shouldn't concentrate on the models. The forecasting power of the models is not very exact all the time. These models themselves, even if they're modified, they are necessary, but they shouldn't be looked at so rigidly.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, 'Thank you very much, Mr. Vice-President, Honourable Vice-President Othmar Karas, Commissioner Mairead McGuinness, Honourable Members of the European Parliament, Mr. rapporteur. As we approach the end of this legislative term, I wish to sincerely thank this Parliament for collaborating in guiding Europe through economic headwinds and geopolitical upheavals, always with the shared vision of bolstering prosperity and fostering resilience. Thank you.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Building on the collaborative spirit, today's debate on your draft resolution on the ECB annual report is a pillar of the ongoing dialogue between the two institutions. And indeed, it is fundamental to the ECB's accountability which ensures the democratic legitimacy of our action. So let me start by outlining the current state of the euro area economy and our monetary policy stance, and I will then focus briefly on the need for a common European response to strengthen euro area resilience and competitiveness.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, 'So the euro area has been facing significant headwinds from a series of sudden and consecutive shocks which pushed inflation very high in the wake of the post-pandemic recovery. Having peaked at 10.6% in October 2022, inflation has since declined significantly, thanks to the unwinding of energy shocks and various supply side disruptions along with determined policy action. After expanding by 3.4% in 2022, euro area economic activity has been weak in 2023 with real GDP growth having stagnated in the final quarter. Subdued demand for euro area exports owing mainly to weaknesses in global trade and earlier losses in competitiveness, as well as tight financing conditions are weighing on growth. Weakness in manufacturing activity has been extending to the services sector since the end of 2023.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, However, there are now increasing signs of a bottoming out and some forward looking indicators point to a slight pickup later this year. Despite the sluggish economy, the labour market has remained resilient and employment stood at a historical low of 6.4% in December amid robust demand for labour which is, however, showing some signs of weakening.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Inflation decreased slightly to 2.8% in January. Energy prices declined by 6.1% and food inflation was still elevated, came down further to 5.6% primarily reflecting a lower inflation rate for processed food. Core inflation that you have mentioned, Monsieur rapporteur, excluding energy and food price developments also decreased further to 3.3% reflecting lower inflation in goods, while service inflation remained more persistent.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Wage pressures, meanwhile, remain strong. Wage growth is expected to become an increasingly important driver of inflation dynamics in the coming months reflecting employees demand for inflation compensation as well as tight labour markets. At the same time, the contribution of profits, which has recently accounted for much of the increase in domestic cost pressures, is declining. Suggesting that, as expected, labour cost increases are partly buffered by profits and are not being fully passed on to consumers.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Regarding your concerns about the risk of second round effects, as mentioned in your draft resolution, let me emphasise that our restrictive monetary policy stance, the ensuing strong decline in the headline inflation and firmly anchored longer term Inflation expectations act has safeguard against a sustained wage price spiral.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Looking forward, we expect inflation to continue slowing down as the impact of past upward shocks fades and tight financing conditions help to push down inflation. And this brings me to our current monetary policy stance. 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. We therefore decided to keep our key policy rates unchanged. This 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 targets in a timely manner.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, 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, 'The shifting economic and geopolitical landscape calls for a strengthening of the euro area resilience. As you note in you draft resolution, high energy prices and increased geopolitical instability are posing a threat to the euro area competitiveness, and they are adding to Europe's existing structural challenges such as ageing, climate change and digitalisation. To maintain monetary sovereignty and economic prosperity in these challenging times, it is essential for Europe to build up resilience to shocks and invest in strategic autonomy. A unified European policy response should strive to unlock Europe's potential, focusing on progress in three dimensions. One-independence, two- investment, three- integration.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, First, we need to make progress on energy independence. Given its proximity to Russia's war of aggression against Ukraine Europe was hit particularly hard by its dependence on energy imports from Russia. To reduce the block's vulnerability to global shocks, improvements in energy security, efficiency and affordability will continue to be vital. European firms ability to compete globally will hinge on being less energy dependent.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, As energy security becomes imperative, Europe will need to boost the roll out of renewables by increasing investment in clean energy and green technologies such as green hydrogen and smart energy grids. But the path to greater energy independence also entails considerable investment needs. And this brings me to my second point, which is to foster investment.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, The European Commission estimates that an extra €620 billion per year will be needed in the next few years to finance Europe's environmental and climate objectives, with an additional €125 billion required for the digital transition, including the digital euro. But making these investments, as well as addressing shortcomings in the functioning of the financial market, requires further progress on deepening our economic and monetary union, something you highlight in your resolution.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Faithfully implementing the EU revised Economic Governance framework will help ensure that fiscal rules reduce high government debt and promote structural reforms and productive public investment, including for the green and digital transitions. I am pleased that EU policymakers, including this Parliament, thank you very much, have recently reached a provisional agreement on the new framework, which should be swiftly and diligently implemented. This will be essential to enhance credibility and anchor expectations about the future course of fiscal policies.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Completing European Capital Markets Union will also be key in financing the twin transition of fully functioning CMU, and maybe it needs to be called another name if CMU is not glamorous enough. It is needed to foster private financing and complement public investment. We are currently underperforming in this area. Our capital markets remain fragmented and as a result lack depth and liquidity, especially when compared with those in the United States.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Let me give you two examples. First, the EU trading landscape is characterised by many small exchanges with three times, three times, as many exchange groups as in the United States and more than ten times as many exchanges for listing. Second, EU venture capital relative to the size of the economy is only a small fraction of the size around one fifth of U.S. venture capital. Measures to promote equity financing would provide an opportunity to broaden European firms financing options for investing in the technologies that are needed for the twin transition. Europe's competitiveness and ability to invest also hinge on further progress being made towards banking union. A complete banking union would support more integrated banking services across the euro area and strengthen the global competitiveness of our banking sector.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, Finally, the third key dimension of a unified European response is the need for deeper integration of our single market to strengthen Europe's overall competitiveness and resist resilience. The single market remains incomplete, but it is essential for Europe's long term competitiveness. A more integrated single market would help unleash Europe's growth potential, would boost our shared prosperity. Measures to strengthen the single market could, for example, focus on reducing red tape and excessive regulation, both at the EU and national levels. This would provide incentives to invest and innovate, as 61% of EU firms consider business regulations to be an obstacle to their investment.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, 'In addition, a more competitive and integrated electricity market is also crucial for completing the single market and supporting the green and digital transitions. Progress in this direction would support cross-border trade, investment and growth. It would also enhance innovation through increased incentives for research and development. The impact of such progress would be considerable. ECB analysis shows that the single market raised the region's GDP per capita by 12%, by 12% to 22% between 1993 and 2008.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, 'A more integrated single market would also strengthen our resilience. We now know that Europe's heavy reliance on external demand and global supply chain can actually be a weakness. We should therefore leverage and further exploit the full scale of our internal markets for goods and services. This will require comprehensive reform, but it does the potential to re-establish the single market as an engine for growth, for innovation, and for competitiveness.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, So by way of conclusion, Europe has demonstrated, and you have been part of that, its ability to navigate turbulent times in the face of the current economic and geopolitical challenges. Policy makers must be bold enough to take the further steps needed to advance European integration. As Simon Veil remarked in her inaugural speech as President of the European Parliament here in a plenary session 45 years ago, I quote: "If the challenges facing Europe are to be met, we need a Europe capable of solidarity, of independence, and of cooperation."Her words resonate strongly today.

SOUNDBITE (English) Christine LAGARDE, President of the European Central Bank, We must seize the opportunity to bolster Europe's unity and resilience. I know I can count on you, Parliament, and the next one of which you will hopefully be part of, to drive the decisive European action needed to strengthen the euro area. The ECB will continue to play its part within its mandate. And let me reiterate our unwavering commitment to delivering on price stability while contributing to the topics I've talked about today and maintaining an ongoing dialogue with you, the elected representatives of the EU citizens. I thank you very much for your attention.

SOUNDBITE (English), Mairead MCGUINNESS, European Commissioner for Financial Services, Danke, Herr President Karas, good evening, President Lagarde, colleagues. I'm very happy that we are discussing this draft report on the work of the ECB in 2023. And I want to particularly thank the rapporteur Johan van Overtveldt, and Members of the ECON Committee for their insightful reflections.

SOUNDBITE (English), Mairead MCGUINNESS, European Commissioner for Financial Services, Parliament's assessment is an important part of the democratic accountability of the ECB, as the President has just referred to, and the Commission shares the general sentiments of the ECON report, including the report's concerns that high inflation is a threat to macroeconomic stability. Inflation has hit our households and our companies hard, bringing economic growth to a halt for a good part of last year.

SOUNDBITE (English), Mairead MCGUINNESS, European Commissioner for Financial Services, So the Commission welcomes the easing of inflationary pressures over the past months. We acknowledge the ECB strong commitment to ensuring price stability and its decisive action. The ECB raised its main policy rate from 0.5% in July 2022 to 4% in September 2023, which is the steepest rate increase in the history of Economic and Monetary Union. This strong monetary policy tightening has worked its way through the economy and ensure that high inflation did not become entrenched in households and firms expectations. In addition, this tightening has been transmitted across the euro area without severe market tensions.

SOUNDBITE (English), Mairead MCGUINNESS, European Commissioner for Financial Services, Now, looking ahead, both the Commission and the ECB expect inflation to come down towards 2% by 2025. And as inflation comes down, economic growth is forecast to gradually pick up over the course of this year. The ECON report points out that expansionary fiscal policies could counteract the ECB's monetary policy tightening, and the commission has repeatedly stressed the need for fiscal policy to be consistent with the efforts of monetary policy to fight inflation. The fiscal stance in the euro area turned restrictive last year. In the 2024 European Semester Autumn Package the Commission recommended a continuing restrictive policy fiscal stance for this year and next. And this is consistent with the need to reduce public debts and deficits, as well as ongoing monetary policy efforts to fight high inflation.

SOUNDBITE (English), Mairead MCGUINNESS, European Commissioner for Financial Services, At the same time, the Commission shares the ECON report conclusion that fiscal efforts should be combined with investments and reforms that support growth. Fiscal adjustment should not come at the expense of public investment. I would add that investment is expected to increase in most Member States, both nationally financed investments and the continued support from the Recovery and Resilience Facility and other EU funds. And this is important as it will support sustainable growth.

SOUNDBITE (English), Mairead MCGUINNESS, European Commissioner for Financial Services, The need to maintain debt, sustainable reality while promoting reforms and investments was a cornerstone of the economic governance reform proposed by the Commission. I welcome the provisional political agreement reached between Parliament and Council on the new fiscal rules. The legislative package is likely to be adopted before this Parliament's recess, and we are now preparing to implement the new framework. This will provide predictability and credibility to the Member States fiscal investment and reform strategies for the years ahead. I will reserve my comments on CMU for my concluding remarks and I look forward to listening to your contributions. Thank you.