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New challenges in a altering world


Speech by Christine Lagarde, President of the ECB, on the Deutsche Börse Annual Reception in Eschborn

Eschborn, 23 January 2023


It’s a pleasure to talk with you right here in Eschborn, marking the beginning of the New 12 months.

A brand new starting usually brings with it new challenges, but it surely additionally presents us with loads of alternatives. And right now I wish to contact on each.

right now’s international financial system, I’m reminded of the playwright and poet Bertolt Brecht, who as soon as noticed: “As a result of issues are the way in which they’re, issues is not going to keep the way in which they’re.”

The worldwide financial system finds itself at an important turning level. Final yr, we started to see the emergence of a “new international map” of financial relationships – one during which geopolitics is more and more influencing the worldwide financial system.[1]

And that in flip has essential implications for Europe, which can outline the yr forward.

A altering world

This map is outlined by three interrelated components: shocks, provide, and safety.

First, with help for an open international buying and selling order on the wane, we face new varieties of shocks to the worldwide financial system. For the previous few many years, open commerce has supported international progress by permitting international locations to “rotate” demand throughout slumps.[2] However now it might develop into a supply of volatility.

That’s as a result of the rise of worldwide free commerce – and the soundness that comes with it – has traditionally trusted the backing of a worldwide hegemon. This was evident in the course of the British Empire within the 19th century, because it was with American help within the wake of the Chilly Struggle.[3]

Nevertheless, main economies – led by the USA and China – are actually more and more utilizing commerce to restrict the ambitions of geopolitical rivals. That would fragment world commerce with doubtlessly big prices. The IMF estimates that extreme commerce fragmentation might value international output roughly 7% in the long run – an quantity much like the annual output of Japan and Germany mixed.[4]

These geopolitical winds are reshaping the second function of this new map: provide. We’re seeing strategic concerns changing into more and more essential in the place suppliers are situated.

The US Inflation Discount Act, for instance, is intentionally geared toward “reshoring” manufacturing and lowering the nation’s reliance on strategic imports like batteries.[5] China can be searching for to scale back its personal dependency on the remainder of the world. And a few surveys counsel that even corporations in “non-strategic” sectors are more and more prone to regionalize their provide chains.[6]

This in flip is resulting in the third key function: the rising significance of safety. With the safety of provide for essential inputs not assured, we’re prone to see a brand new “scramble for sources”.

Russia’s unjustifiable invasion of Ukraine has introduced provide safety again to the highest of the agenda for all main economies, most saliently for power. And over the long term, it’s prone to speed up the worldwide transition to wash power manufacturing as a solution to improve local weather and power safety.

However such applied sciences are extremely resource-intensive of their set up part. Getting the worldwide financial system on a path to fulfill the Paris Settlement objectives might see complete mineral demand from clear power applied sciences quadrupling by 2040.[7] This threatens a brand new period of competitors for sources.

Challenges for Europe in 2023

As this new international map takes form, we enter 2023 dealing with three large challenges.

The primary problem is to rethink how we will finest shield Europe’s essential pursuits in a fast-changing world. As an financial system that may be very open to commerce and deeply built-in into international provide chains, we’re susceptible to geopolitical headwinds. For instance, 35% of Europe’s manufacturing output is absorbed outdoors the EU, way more than for the USA or China.

So, as the subsequent chapter within the globalization story is being written, we have to make sure that Europe is a frontrunner, not only a follower. And because the French President and German Chancellor have lately argued, we now have the capability to take action.[8]

Already now, Europe is the highest buying and selling associate for 80 international locations, in comparison with simply over 20 international locations for the USA.[9] That provides us distinctive bargaining energy to form openness in a European path and strengthen ties with key companions, equivalent to these on whom we rely for essential sources.

And the place we see our pursuits being threatened, we will use our financial weight extra strategically – one thing we now have already began to see with the unprecedented sanctions positioned upon Russia.

However we should even be ready for a future during which the worldwide financial system might fragment. And one of the best insurance coverage in opposition to a extra unsure world is constructing extra resilience at house. So, the second problem for Europe is to develop extra our personal sources of progress.

Right here, the brand new international map presents Europe with a chance.

As power safety turns into crucial, we will put climate-related funding wants – particularly in clear power – on the heart of our progress mannequin, strengthening home demand. These funding wants will quantity to nearly half a trillion euro on common per yr till 2030.[10]

We will additionally use the inexperienced transition as a spur to digitalize the European financial system, since digital applied sciences might scale back international emissions by one fifth by 2050.[11] That would improve productiveness progress and assist make sure that inexperienced funding doesn’t put extreme strain on costs.

However the ambitions of this new progress mannequin would require an unlimited quantity of financing. And right here the monetary sector can play an important function, if the enabling insurance policies are put in place.

Finishing Europe’s capital markets union (CMU) shall be key to financing the inexperienced and digital transitions. Fairness buyers are inclined to have a larger urge for food than banks for high-risk, high-return initiatives and fairness finance tends to extend inexperienced innovation.[12] However the full and swift implementation of the Fee’s formidable CMU Motion Plan shall be essential right here.

Some progress is being made. The Fee has lately put ahead proposals on harmonizing nationwide insolvency legal guidelines and facilitating public itemizing. Additionally it is tackling points which have held again the expansion of European capital markets, like placing fairness financing on an equal tax-footing with debt financing. And Europe’s current settlement on a minimal stage of taxation for big corporates will help tax harmonization throughout the EU, the absence of which has usually been seen as a barrier to capital market integration.[13]

The third large problem dealing with Europe is the excessive inflation surroundings. And this, in fact, is the problem that issues me probably the most.

Inflation in Europe is way too excessive, partly attributable to our vulnerability to the altering geopolitics of power. Decoupling from Russia final yr pushed up power inflation within the euro space to extraordinary ranges.

However whereas power inflation has lately been coming down, underlying inflation continues to rise. In consequence, it’s important that inflation charges above the ECB’s 2% goal don’t develop into entrenched within the financial system.

We should convey inflation down. And we’ll ship on this objective.

In lower than half a yr, we now have raised the ECB rates of interest by 250 foundation factors, the quickest improve in our historical past. And we now have made it clear that ECB rates of interest will nonetheless need to rise considerably at a gentle tempo to succeed in ranges which can be sufficiently restrictive, and keep at these ranges for so long as essential.

In different phrases, we’ll keep the course to make sure the well timed return of inflation to our goal.


Let me conclude.

The transition from one yr to the subsequent is historically related to quiet reflection, after we take inventory of issues which have come to go. However because the poet Rainer Maria Rilke as soon as wrote: a brand new yr is “stuffed with issues which have by no means been”.

As we head into 2023, a altering world brings with it new challenges, but in addition alternatives. And let there be little doubt: with extra self-confidence, extra assertiveness and the precise insurance policies in place fueling inexperienced and digital progress, Europe can adapt and thrive.

However some issues by no means change: specifically, the ECB’s dedication to cost stability. We’ll play our half in Europe’s subsequent chapter by bringing inflation again to our 2% goal.


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