Europe’s economic prosperity is “geared towards a world that is gradually disappearing”, Christine Lagarde said on Friday, imploring the bloc’s policymakers to finally overcome “years of inaction”.
In a scathing speech, the president of the European Central Bank (ECB) warned that Europe’s “old growth model” had become outdated, as its dependence on exports had become a “vulnerability”.
Making the keynote address at the European Banking Congress in Frankfurt, Lagarde pointed to a two-year-old ECB forecast that predicted that euro area exports would grow by about 8 per cent by mid-2025.
“In reality, they have not grown at all,” she said.
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Without directly mentioning Germany, she said that “countries with large manufacturing sectors” had faced “a prolonged slump in industrial production”.
In Germany, the bloc’s largest economy, manufacturing output fell to 2005 levels over the summer, with carmakers and the wider engineering sector falling into crisis.
Bundesbank president Joachim Nagel painted a less negative picture in a speech later on Friday at the same conference. While Europe had fallen behind the US in terms of productivity growth and “could and should do better”, Mr Nagel stressed that “a closer look suggests that Europe’s standard of living compared to the US has developed less badly”. He insisted that Europe’s position “may not be as dire as it is often portrayed to be”.
Ms Lagarde urged European Union (EU) policymakers to respond by strengthening the domestic economy, which she said was already showing “latent strengths”. “Our experience this year has shown that a resilient domestic economy can shield Europe against global turbulence,” she said.
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Across the euro area, growth this year has been slightly stronger than central bankers and most analysts had expected. In the third quarter, GDP grew at twice the expected pace, as French output expanded at its fastest rate since 2023.
After a series of eight cuts in interest rates since mid-2024, which halved borrowing costs to 2 per cent, the ECB has kept monetary policy unchanged since June.
Ms Lagarde called on policymakers to double down on existing domestic strengths by removing internal barriers to trade, pointing to a forthcoming ECB analysis showing that current hurdles were equivalent to a 100 per cent tariff on services and a 65 per cent tariff on goods.
Ms Lagarde accused policymakers of squandering the past six years, during which “our internal market has stood still”, and warned of a slide into slow but steady decline. “Another six years of inaction – and lost growth – would not just be disappointing. It would be irresponsible,” she said.
Europe’s economic weaknesses “do not trigger dramatic crises” but “erode growth quietly, as each new shock nudges us on to a slightly lower trajectory”, Lagarde said. Over time, she said, this added up to a “material” setback to growth and productivity. – Copyright The Financial Times Limited 2025
