ECB President Christine Lagarde speaks at Deutsche Börse’s annual reception in Eschborn
Ashbourne, 2023 January 23
It is a pleasure to speak with you here in Ashbourne as we mark the beginning of the New Year.
New beginnings often bring new challenges, but they also bring us many opportunities. And today I would like to touch on both.
Looking at today’s global economy, I am reminded of the playwright and poet Bertolt Brecht who once observed, “Because things are as they are, things will not remain as they are.”
The world economy has reached a critical turning point. In the past year, we have begun to see the emergence of a “new map of global economic relations,” one in which geopolitics increasingly influence the global economy.
And this, in turn, has important consequences for Europe, which will determine the coming years.
A changing world
This map is defined by three interrelated factors: shocks, supply and security.
First, by supporting an open global trading order, we face new shocks to the global economy. Over the past few decades, open trade has supported global growth by allowing countries to “pivot” demand during downturns. But now it can become a source of volatility.
This is because the rise of international free trade – and the stability that goes with it – has historically depended on the support of a global hegemon. This was evident during the British Empire in the 19th centuryth century, as was the case with American support after the Cold War.
But major economies, led by the US and China, are now increasingly using trade to limit the ambitions of their geopolitical rivals. This could fragment global trade with potentially high costs. The IMF estimates that a major trade split could eventually cost about 7% of global output, an amount comparable to the annual output of Japan and Germany combined.
These geopolitical winds are changing the second feature of this new map: supply. We see strategic considerations becoming increasingly important where suppliers are located.
For example, the US Deflation Act deliberately aims to “shift” manufacturing and reduce the country’s dependence on strategic imports such as batteries. China is also seeking to reduce its dependence on the rest of the world. Some surveys show that even companies in “non-strategic” sectors are increasingly regionalizing their supply chains.
This in turn leads to a third key feature: the increasing importance of security. With the security of supply of critical raw materials no longer guaranteed, we are likely to see a new “battle for resources”.
Russia’s unjustified invasion of Ukraine has brought security of supply back to the top of the agenda for all major economies, especially energy. In the long run, this is likely to accelerate the global transition to clean energy production as a way to increase climate and energy security.
However, such technology requires a lot of resources at the implementation stage. If the world economy reaches the goals of the Paris Agreement, by 2040 the total demand for minerals from clean energy technologies will increase fourfold. This threatens a new era of competition for resources.
Challenges for Europe in 2023
As this new global map takes shape, we enter 2023 facing three major challenges.
The first challenge is to rethink how we can best protect ourselves Europe’s most important interests in a rapidly changing world. As an economy that is highly open to trade and deeply integrated into global supply chains, we are vulnerable to geopolitical headwinds. For example, 35% of European manufacturing output is consumed outside the EU, much more than in the US or China.
So, as we write the next chapter in the history of globalization, we must ensure that Europe is a leader, not just a follower. And as the French president and the German chancellor recently said, we have the capacity to do so.
Already, Europe is the largest trading partner of 80 countries, and the USA is just over 20 countries. This gives us a unique bargaining power to shape openness towards Europe and strengthen ties with key partners, such as those on whom we rely for critical resources.
And where we see our interests being threatened, we can use our economic weight more strategically, as we have already begun to see with the unprecedented sanctions against Russia.
But we must also be prepared for a future in which the world economy may fragment. The best insurance against a more uncertain world is stronger resilience at home. Thus, the second challenge for Europe is to develop its sources of growth more.
This is where a new global map gives Europe a chance.
As energy security becomes imperative, we can place climate-related investment needs, particularly in clean energy, at the center of our growth model by strengthening domestic demand. These investment needs will average almost half a trillion euros per year until 2030.
We can also use the green transition as an incentive to digitize the European economy, as digital technologies could enable reduce global pollution by a fifth. This could boost productivity growth and help ensure that green investment does not put undue pressure on prices.
But realizing the ambitions of this new growth model will require massive funding. And this is where the financial sector can play a crucial role if enabling policies are put in place.
Completing the European Capital Markets Union (CMU) will be crucial to finance the green and digital transition. Equity investors tend to favor high-risk, high-return projects more than banks, and equity financing tends to increase green innovation. However, full and speedy implementation of the Commission’s ambitious CAP action plan will be crucial here.
Some progress is being made. The Commission has recently put forward proposals for public listing to harmonize and simplify national insolvency laws. It also tackles issues that have held back the growth of European capital markets, such as the alignment of equity financing with debt financing. The recent European agreement on the minimum level of corporate taxation will support tax harmonization in the EU, the absence of which has often been seen as an obstacle to capital market integration.
The third major challenge facing Europe is the high inflationary environment. And this, of course, is the challenge that concerns me the most.
Inflation in Europe is too high, partly because of our vulnerability to changing energy geopolitics. Last year, the decoupling of energy from Russia pushed inflation in the Eurozone to extraordinary levels.
But while energy inflation has eased recently, core inflation continues to rise. Therefore, it is very important that the inflation rate above the 2% target set by the ECB does not become established in the economy.
We need to reduce inflation. And we will achieve this goal.
We have raised ECB interest rates by 250 basis points in less than half a year, the fastest increase in our history. And we have made it clear that ECB interest rates will still need to rise sharply at a steady pace to reach a sufficiently restrictive level, and will remain at that level for as long as necessary.
In other words, we will stay on course to ensure that inflation returns to target in time.
Let me conclude.
The transition from one year to the next is traditionally associated with quiet reflection as we take stock of what has happened. But as the poet Rainer Maria Rilke once wrote: the new year is “full of things that never were.”
As 2023 approaches, a changing world brings new challenges, but also opportunities. And let there be no doubt: with more self-confidence, more determination and the right policies for green and digital growth, Europe can adapt and thrive.
But some things never change: namely the ECB’s commitment to price stability. We will play our part in Europe’s next chapter, bringing inflation back to the 2% target.