European central bank president discusses fiscal policy and growth strategies

Christine Lagarde, President of the European Central Bank, delivered a keynote speech at the European Meeting of the Trilateral Commission in Vienna, Austria, discussing fiscal policy and growth in Europe.

She highlighted the evolution of the relationship between central banks and governments, noting that historically, central banks were created to finance governments but that excessive government influence can lead to inflation.

Lagarde emphasized that recent years in the euro area show no signs of fiscal dominance, as monetary policy remained independent during the pandemic and inflation shocks. The ECB carried out large-scale bond purchases, and monetary policy tightening was swift in response to inflation, with balance sheets reduced by over €1.1 trillion.

She pointed out that public debt levels remain high and that the main challenge is not fiscal rule violations but the need for greater emphasis on productive spending to support potential growth. Only seven of 20 euro area countries have extended fiscal adjustment periods under new EU rules.

Lagarde warned that low productivity growth could trap the economy in a low-growth equilibrium, making monetary policy less effective. Conversely, higher productivity growth could ease the central bank’s job and support aging societies.

She proposed three ways for Europe to enhance growth: using fiscal flexibility, pooling resources for strategic investments, and leveraging EU budget instruments to mobilize private capital. Examples include increased research and development, joint defense procurement initiatives, and EU funds generating private investment.

Lagarde concluded by encouraging Europe to turn these opportunities into sustained growth, emphasizing that these ideas are within reach and can help preserve the social model while reducing future fiscal risks.