Transcription
Good afternoon everyone. We will start today's meeting with the adoption of the ana. If there are no objections, the ajada is deemed adopted. Interpretation will be available today in 12 languages.
Um, now, point three of the Angela report on ongoing inter-institutional negotiation.
Second and last trialogue on midcaps omnibus. During the second and final dialogue on the midcaps omnibus held on June the 9th, 2026, the negotiation team of the Parliament and Council reached a provisional agreement on the proposal which extends certain mitigating measures available for SMEs to small midcap enterprises and introduces further simplification measures. In line with the EP position, small midcap enterprises are defined in principle as companies with fewer than 1,000 employees and either up to 200 million in turnover or up to 172 million in total assets, where the Commission proposed 750 employees and 100 million 50 in turnover. The new category will be introduced in various laws ranging from data protection, batteries, stock exchange listing of companies, etc., with existing theme exemptions extending to the new category. The issue of consistency of the small midcap company definition across different omnibus files was addressed through a review clause in the provisional agreement. The consultation vote is scheduled on July 2nd in a joint committee meeting, subject to the communication of the letter from Koreer with the agreed text.
Second and last dialogue on the economic governance simplification package. On June the 8th, Parliament and Council reached a provisional political agreement on the two amending regulations of the economic governance simplification package, dealing with the enhanced and post-program surveillance of Euro Area member states on one hand, and draft budgetary plans and sanctions on the other. The provisional agreement preserves the scrutiny role of the Parliament in the implementation of the regulation while aligning the provisions with the revamped preventive arm regulation and in particular with the provision concerning EU priorities and the role of independent fiscal institutions.
First trialogue on securitization package. The first dialogue on the securitization package, which covers amendments to the Capital Requirement Regulation and the Securitization Regulation, was held last week, Wednesday the 17th. It focused on an exchange of views on the main political issues, and there was no agreement yet on specific topics. The next dialogue is scheduled to take place on Tuesday, July 7th.
Dialogue Monitor, Presidential Monitor, Democratic Department. Politic. Monitor. Politic. Monitor. Politic. Monitor. Global Director, Director Frank Multiplication. Shock. Prep dialogue as a dialogue. Commission.
So when we last met in February, inflation had remained close to our ECB 2% target for over a year, and Euro Area economic activity was showing solid growth momentum. Only a few days later, war broke out in the Middle East, reminding us how quickly external shocks can reshape the economic outlook. The topic you have chosen for today's exchange, "How monetary policy should be conducted in an environment of heightened geopolitical tensions and frequent supply shocks," that you just alluded to, Madame President, is particularly timely. In my remarks today, I will review what the incoming data tell us about the Euro Area economy and outline our latest monetary policy decision. I will then explain in more detail how our monetary policy strategy is guiding us in responding to shocks such as the one that we are facing today.
So the Euro Area economy was gaining some traction when the war in the Middle East broke out. Real GDP rose by 0.3% quarter-on-quarter in the first quarter of 2026. You might say, "What?" Well, yes, once adjusted for exceptional volatility in Ireland. You must have received this two-page documentation that we have always promised as part of our dialogue, and you will see for yourself how this Irish peculiarity has impacted the real GDP outcome. But the war is now weighing on activity, and incoming information points to a slowdown, especially in services. Manufacturing, in the meantime, has held up. This partly reflects inventory building in response to supply chain pressures, but also stronger defense spending.
Looking ahead, the June 2026 Eurosystem staff projections see real GDP growth at 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. Staff now expect domestic demand to be weaker than they projected in March, as the war has dented confidence and higher energy costs are weighing on real incomes. At the same time, household balance sheets remain solid overall, and consumption should continue to be the main driver of growth. Investment should also be supported by firms spending on new digital technologies and governments spending more on defense and infrastructure.
The war is likewise pushing up inflation, which rose to 3.2% in May from 3% in April. The main driver of inflation since February has been rising energy inflation, which was above 10% in both April and May. In May, inflation excluding energy and food also increased to 2.6%, partly reflecting the initial indirect effects of higher energy prices. And you have that pretty well established in the inflation documentation that you have in your two pages. If you have had a look at it, reflecting this energy spike, inflation expectations over shorter horizons have risen well above the levels seen before the outbreak of the war in the Middle East. But the public does not currently expect high inflation to be lasting. Most measures of longer-term inflation expectations stand at around 2%, supporting the stabilization of inflation around target in the medium term. And that's the third graph that you have on the first page of the two documents that we have sent you. We are confident that with appropriate monetary policy action, inflation will return to target. The June Eurosystem staff projections foresee headline inflation at 3% in 2026, 2.3% in 2027, and 2% in 2028.
But the outlook remains uncertain, with upside risks to inflation and downside risks to economic growth. The peace agreement in the Middle East is welcome, but the situation remains fragile, with risks of setback or possibly re-escalation. The full implications of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects. This uncertainty is reflected in the broad range of outcomes for inflation and growth in the alternative scenarios prepared by staff in the context of their projections and published on our website, and that include a milder scenario, an adverse scenario, and a severe scenario.
So, in line with our commitment to ensuring that inflation stabilizes at our 2% target in the medium term, as you indicated, Madame President, we decided to raise the three key ECB interest rates by 25 basis points at our last June meeting. The decision to raise rates, fully considered and discussed, is robust across the scenarios prepared by staff: the milder, the adverse, and the severe, meaning that in all scenarios, a rate hike was warranted. Recent developments have remained within the range of scenarios considered. With this decision, we remain well-positioned to navigate the uncertainty caused by the war, and we will, of course, closely monitor developments and follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. And we are not pre-committed to any particular rate path.
Let me now explain in more detail how our monetary policy strategy guides us in an environment shaped by frequent supply shocks and how it supported us in the decision that we took in June. The latest shock emerged suddenly and developed rapidly, but it did not find us without a compass. Our 2025 strategy assessment focused precisely on how monetary policy should respond in an environment characterized by higher uncertainty and more frequent supply shocks, as you indicated, President, in the last four years in particular. Our strategy is designed to ensure that we can continue to deliver price stability under such conditions, and it rests on three principles, and those principles have guided our reflections and our decision-making.
First, we must carefully assess the nature of the supply shock, its size, persistence, and propagation. Monetary policy cannot lower energy prices directly. The central bank cannot reopen the Strait of Hormuz. Let's be clear. But it must assess the extent to which higher energy costs spill over into other prices, what we call the indirect effects, and risk triggering second-round effects through wages and price setting. Both the size and persistence of the shock are critical. Small and short-lived shocks typically have limited effects beyond the energy component. But as shocks become larger and more persistent, their impact can increase in a non-linear way, with stronger and more widespread effects on prices and on wages. The macroeconomic environment also plays a key role in how the shock propagates. When demand is strong, remember 2022, for instance, firms may find it easier to raise prices. When labor markets are tight, workers may be in a better position to bargain for higher wages. These dynamics are more likely to become relevant when inflation is already elevated compared with previous inflation episodes. However, at this stage, the current shock appears to be smaller in magnitude and occurring in a different context. During the previous episode, the economy was emerging from the pandemic, which had created significant macroeconomic imbalances, including supply chain disruptions and highly accommodative monetary and fiscal policies to support recovery. In contrast, at the onset of the current shock, inflation was closer to target, if not at target, and monetary and fiscal policy were no longer highly accommodative. This suggests a need to find my line because I want to make my point clear that the pass-through may be more limited thus far. Thus far, the risks remain if the shock intensifies or persists. But this does not mean that we can be complacent. After the high inflation period of 2022 and 2023, price and wage formation may – we don't know yet, we're not seeing it – may be more sensitive to new shocks. The memory muscle is better trained.
Second, we do not only focus on the baseline; we also focus on the risks around it. In an uncertain environment like this one, policy cannot rely solely on the most likely path for the economy. As a result, we place strong emphasis on the risks surrounding the baseline, and where appropriate, we use alternative scenarios to assess how different shock configurations could affect the outlook. And you have a clear description of those shocks, which is the last graph on the second page, where you have all three scenarios: the milder, the adverse, and the severe, both in terms of GDP and inflation. The non-linear effect of supply shocks also makes this essential. When they become larger, more persistent, we can see disproportionately greater deviations from our inflation target. The scenarios that we have been using since March to assess the current shock are a key tool for capturing these risks and guiding policy decisions at a time of high uncertainty.
Third, our policy response must be tailored and graduated in line with the medium-term orientation of our strategy. The appropriate response to a deviation of inflation from target is context-specific, taking into account its source, size, and persistence. So there are three broad cases that we should consider. If the shock is small and temporary, short-lived, it can, in principle, be looked through. I've heard that many times: "Why didn't you look through?" Well, if the shock gives rise to a sizable but not too persistent overshoot of our target, a measured adjustment of policy is warranted. If, however, inflation is expected to deviate significantly and persistently from target, our response must be appropriately forceful or persistent to prevent self-reinforcing dynamics arising and the risk of inflation expectations de-anchoring. This is the framework which guided the decision that we took in June. For now, we are in the second case. The shock is too large to look through without jeopardizing our target. But we see no evidence yet of de-anchoring of inflation expectations or second-round effects that would warrant a more forceful policy response at this stage. This graduated approach requires us to remain agile, and by proceeding meeting by meeting and staying data-dependent, without pre-committing to a particular rate path, we can adjust our response as the shock evolves and ensure that it remains proportionate.
So, to conclude, supply shocks are becoming more frequent. The ECB is well-equipped to meet this challenge. Our updated strategy provides a clear framework to assess shocks, manage risks, and calibrate our response. It allows us to respond proportionately to the shock we face and to remain anchored to our medium-term objective of price stability. But monetary policy cannot fully offset the impact of such shocks. Strengthening structural resilience, especially in the energy sector, will be essential to reduce the Euro Area's vulnerability to external supply shocks.
Finally, before taking your questions, I would like to very specifically thank all of you, but in particular the rapporteur and this committee, Madame President, for the progress made on the single currency package. This is an important milestone in moving the digital euro project forward and anchoring it firmly in the democratic debate. This is a matter that I have personally been engaged in for the last six and a half years, soon seven, and I'm delighted to see that it's coming to fruition in this so important arena of democratic debate. Thank you very much.
Thank you, President Lagarde. Um, thank you for all those explanations that were needed, and I will now open the Q&A session, and we will start with Marcos Sber for EP. You have 1 minute and a half for the question, and then there is a follow-up that is possible if you want, of one minute. The floor is yours, Marcos.
Transmission Protection Instrument. This is instrument, instrument. Thank you very much for your encouragement on the monetary policy decision that we took last week, and you are right in saying that it's a signal, but it's also, in my view, the right analysis of the data that we received, the projections that we have for the inflation outlook, the risks surrounding our projections, as well as the inflation outlook, the underlying inflation, as well, which is a good indication of where we're heading. And in view of all that, I think, and I agree with you, that that decision was warranted and, as I said, is robust across all scenarios that we have produced.
You've mentioned our revision of both GDP and inflation, and you're right that we revised downward, in particular for, well, downward for GDP and upward for inflation. 0.8 for GDP, which is, you know, it's not trivial. I would not call it stagnation. And I think that because it's a Eurosystem decision, we got the best brains of all the NCBs when it comes to projecting the economic result and the expected output to have a good proposal that canvases the entire Eurosystem. But we did revise downward a little bit. We were at 0.9 in March, we are at 0.8 in June, and the projection in terms of GDP are also revised. 1.4, sorry, 1 point, I'm looking at my scenario, which is the wrong way to look at things, of course, but anyway, we've revised slightly down on both 2027 and maintained at 2028. Inflation, same thing, we had to revise upward, as I said, 3% for 2026, 2.3% and then 2% in 2028, which brings us back to the medium-term target that we had.
So, in view of all that, you mentioned one of the instruments that we have available in order to address issues if they were to arise. And I would just like to mention that this instrument, TPI, which we engineered in previous times, is predicated on a number of criteria, on a certain number of conditions, and is certainly not intended to address the fundamentals of an economy and the necessary restructuring that needs to happen. So we have, I think, all the tools needed in order to address any development in the Euro Area, but each of them applies to a particular set of circumstances, and each of them obeys a number of criteria, which will be observed by the Governing Council, having the discretion to identify and diagnose the situation, and we will do so if and when it is needed.
No, what I said is, when we have a projection for 2026 coming from the whole Eurosystem at 0.8, it is not stagnation of our economy. And I think, you know, if I, I don't mean to brag about our wisdom, but I think that we need to examine our numbers with a lot of scrutiny because the Irish numbers, with all due respect to Ireland and the Irish economy, but for all sorts of reasons and the international activity of international companies, these numbers, in a way, distort a little bit the actual fundamentals of all member states, including Ireland, for that matter. So we do calculate on the basis of the modified domestic index, which has been produced a few years back under the leadership of Philip Lane as Governor of the Bank of Ireland, which I think reflects more accurately the activity in the Euro Area.
Thank you, Stocks. Autonomos. Gracias. Thank you very much for your question. As, as, as I tried to explain in my introductory statement, our objective, our mission, our mandate is price stability, and we have defined it in our strategy review, initially in 2021 and then again in 2025 when we updated. We've defined that price stability objective as the 2% medium-term target that we are constantly reviewing and analyzing on the basis of, you know, inflation outlook, underlying inflation, and the dynamics of monetary policy transmission. So we regard that as our mission, and I don't think that we are looking at trade-offs, so to speak. We are looking at whatever is going to have an impact on price stability. So if, for instance, growth was to stagnate or if sovereignty was going to be undermined, we have to analyze that in respect of what impact it has on price stability. That's how we take it into account. But for sovereignty to be affirmed and defended, price stability is what we can deliver. Custody of the currency is what we can deliver. Making sure that the payment infrastructure, making sure that in the digital age, our currency is solid. This is, this is our duty. But there are multiple other priorities and tasks that we cannot deliver because it is not our mission, it is not our mandate, and it falls within the remit of other authorities in the executive branch, in the parliamentary branch, and I very much hope that this is taken very seriously because it's going to matter a lot in the future.
No, I, I fully agree with you. My question is, don't you think that the strategic autonomy agenda or the new trade policy that we are implementing in Europe could have any impact on prices? This is, this is my question. Yeah, the strategic autonomy agenda, the necessity to review our trade policy, all of these elements will not have any impact on prices. And in that case, the ECB is thinking about or trying to calibrate or understand how these policies taken by other institutions could affect price levels. Thank you.
On that particular item, it's unclear. So we do not have, you know, a final and conclusive analysis of whether that acquisition and defense of sovereign autonomy, or on the contrary, lack of sovereign autonomy, is going to be having a disinflationary or inflationary impact on us. So we are looking at that carefully. We're trying to analyze it to understand better what the impact will be, but it's, for the moment, it's unclear, and I think I'll leave it there and hopefully we can clarify that. The sort of the intuitive conclusion is that the lack of sovereignty and therefore, you know, sort of being in the hands of other price determinants would likely be inflationary. But I think we have to get under the hood of that in a much more analytical way than I'm doing it now. But that's the intuitive response.
Thank you. For PFI. Thank you, Madam Chair. That was very well pronounced. I'll continue in Dutch. Forever Fin. Thank you. Well, thank you very much for your question, and it tackles clearly one concept, which is the neutral rate, the sort of ideal point where monetary policy neither stimulates nor restricts activity, and this is that sort of wonderful moment which you can never really assess because it's predicated on the absence of shocks, and we are just moving from one shock to the other. As, as one of you, I think, identified ever since, you know, 2014, the initial invasion of Crimea by Russia, and then on, we've been moving from shock to shock. However, economists are very attentive and try to do the best job they can to identify the area where we assume, assume that the interest rate is as neutral as possible, and that range has been identified by the staff of the ECB as being between 1.75 and 2.25%. That was the reference until recently, where, as a result of multiple factors affecting our economy, it was possibly argued that this upper range was closer to 2.5% than to 2.25%. Does that make a difference? And should we, as a result, consider that inevitably there is a path as a result of this ECB staff analysis? I don't think so, because we do not actually use that R-star point or even range to necessarily decide the monetary policy decision that we make. We look, we apply a reasoning and a stance that I have tried to describe in my introductory statement, and it's on that basis that we make decisions. But I think I have tried to address your question of the R-star as well as could be, and it's what you said about pension and about, I don't know if you mentioned productivity, but it's clearly one point that would have an impact. These elements we constantly take into consideration, and staff does this analytical work on a regular basis.
Do you want a follow-up? Or can I please? Um, thank you very much for the explanation. Um, I gather from your point of view that at this moment, we're not past the situation of stimulating the actual economy. Um, with regard to the amount of public debt, are you worried? That was my final question. Thank you.
There is one element of my response on the previous point that I would like to come back to because you said, "What is your favorite rate?" or something like that. My favorite one is the one which actually keeps the medium-term inflation at 2%. Because that's, that's the objective we have, and that's how we define price stability. So whatever is the interest rate applicable that will actually deliver is the one that I would favor myself. Now, the issue of public debt is something that obviously is of concern to the Commission, to the member states, in how they define their debt sustainability, in how they define the service of their debt. And, you know, I should not be either fiscally dominated or financially dominated, and I should really focus at the ECB on price stability as an objective.
Thank you. ECR, Giovanni. President, President. For President, American Canada, Federal Reserve. Thank you very much. And I think you have described part of the rationale behind the decision that we took last year and the decision to increase rates in general, because the impact that we have in order to deliver price stability and fight inflation is by either dampening demand and or anchoring or re-anchoring inflation expectations. And when we see the risk of possible de-anchoring of inflation expectations at all levels, however measured, either by markets, by surveys, or by consumers themselves, it is very important that we make those decisions so that we do not have to necessarily dampen demand as much as we would have to if we didn't pay attention to inflation expectations. So, for the moment, as I have said in my introductory remarks, we have seen some de-anchoring of inflation expectations, particularly at consumer levels in the short term. So if you look at the, I'll bring you back to the charts that you have, I don't know if you look at the one on the right side of the first page, you have the inflation expectations, and you see that when you compare the October, sorry, the February and the April expectations, you see that it has moved up for the first year, a little bit for the three years, and virtually not for the five years. Those are elements that we pay close attention to. And whether it is, this one is obviously an indication for the short term, but that's often the case when there is a rise of prices that the expectations of the consumers are hiking up. What matters to us is the longer-term expectations, and that one has been broadly unchanged, either by market measures or by survey measures or by consumer measures. So this, you know, I just wanted to come back to that because it's a really important component in the assessment that we do of the impact of our decisions. I think I will again say what I mentioned when we see inflation HICP, which includes all the components of the basket, including energy and food, move up in the way it has from the 1.9% that we had in February to 3.2% in May, and more importantly, when we see that core inflation, taking out energy and food, is also moving up, particularly propelled by services, which went from 3% to 3.5% in short order, then we have to be very attentive, and we think that we have to take measures, particularly if in the meantime we see that growth, which we have revised a little bit by 0.1, is holding, and when we see that the financial sector is solid. And that brings me to the comparison with what we have seen in 2008, in 2011, and in 2022, where we had different sets of circumstances: midst of a financial crisis (2008, 2011), when interest rates were hiked in the midst of an energy crisis, and 2022, when it was not a pure supply shock, you had a mixture of supply and demand, and a fiscal and monetary situation that was vastly different. So I hope I have explained to you a little better the context in which we have taken our decision, which we believe is, as I said, robust across all scenarios, better than baseline, but also worse than baseline. Bearing in mind that at the moment, given the reduced uncertainty, we are probably between baseline and milder.
Follow-up. See gentlemen. Polit. I think my first response to your question is that I do not think that, as currently decided, our monetary policy is restrictive, as simple as that.
For Renew. Thank you, Madame President. Uh, I broadly share the assessment you gave us. When we have supply shocks, weak economic activity, and huge uncertainty. And even I would add two more hurdles. One is that you mentioned that you are having your reaction function based on the nature of the shocks. I'm even not sure about the nature of the shocks, whether these are temporary, persistent, big, small. You know, it's, it's, these are times of high uncertainty. And also the second hurdle I wanted to mention is that also the effectiveness of monetary policy is lower in this environment. Since we are watching the World Cup right now in football, I want to mention the famous Maradona theory of interest rates, which means that if you can somehow shape the expectations of the private sector, then there is no need to make abrupt changes because, you know, you can have a kind of pre-commitment, which in the current environment is impossible. So therefore, even for the shaping the expectations of private players is very hard. So I have two questions related to that. First one is that you mentioned energy prices, but I'm a little bit concerned also about food prices because of the fertilizers. And the second question is, this uncertainty lowers the potential output because, you know, it's much harder to invest in an uncertain environment. Do we have a kind of an estimate of the potential growth in the Euro Area? Is it declining because of this uncertainty? Thank you.
Well, thank you. Thank you so much for your assessment of our reaction function. Um, I don't suggest that we need the hand of God to deliver, but maybe Maradona can give us a little bit of a push in the right direction here. Um, I completely agree with your analysis of the nature of the shock, which in the climate of uncertainty and almost daily changes is difficult. And that's, I think, the reason why we need so much the scenario analysis that we have produced and that we have published. We are available, and they are I think reasonably clear to understand, and they really test our decision across different sets of energy prices, length of the shock, and repercussions within the economy. So that, I completely agree with that. So energy prices, as you will see in the scenarios, they are of a different level. They last for a period of time. They return to pre-war levels or sometimes below that, depending on the scenarios. And all in all, what we are seeing now is a significant decline since the war alleged peace agreement memorandum of understanding, and we've seen a decline of 17% for energy, for oil, 18% for gas, increase of electricity prices, but there has been a significant impact of the announced memorandum of understanding between the United States and Iran. Having said that, we are still significantly above pre-war levels by a range of about 30%, certainly on oil. Food prices is more complicated, and I, when you look at the food prices now, food prices have declined in the last couple of months, and it's counterintuitive because we would have thought many, conventional wisdom would dictate that because of the impact on the price of fertilizers, a significant amount of which goes through the Strait of Hormuz, the result would have been an increase in food prices, and you could also deduct from the impact of El Niño that we would also see increased food prices. This is not yet the case, and we believe that the impact on food prices is likely to take a bit longer, and we are likely to see that in the course of 2027 more than in the course of 2026, but we have to be very attentive to that. On the, in so food inflation decreased actually to 1.9% in May 2026. On investment, we are seeing a stabilization of investment. Investment had been on the rise. We're now seeing a flattening of investment, particularly from the private sector, less so from the public sector, notably because of the investment in defense and infrastructure.
Thank you. Thank you for the Green. Rasmusen. Thank you so much, President. Um, in our committee, we are currently discussing how to strengthen the global role of the euro. We are working on a report there and we will have an event later. But I would also like to get your assessment on this already in our monetary dialogue today on what your view is on the state of play when it comes to the global role of the euro. You have earlier called for the creation of a common euro-denominated safe asset to deepen the EU's capital markets, and this is also one of the topics we would like to address with our report. So what I would like to hear from you is on what kind of steps do you see to establish this, and also in general, a bit more on the current state of play on the global role of the euro, and also on how Europe can be strengthened in the economy and monetary world, which is a bit different than it had been some years ago.
Well, thank you so much, and thank you for taking a clear interest in the international role of the euro. For those who don't know, we have an event later today at the House of the Euro at which we will debate with you, notably, but with also Valdis Dombrovskis, Commissioner Dombrovskis, the role, the international role of the euro, and how it is characterized, what are the components, what are the missing components, where do we need to do more work. So I think in each and every area, we have to do what is necessary, and we, as the central bank for the Euro Area, we look at what is within our remit and what we can do. We do so with in the background of our mind the attributes of a sovereign currency which plays an international role. The facts first. The euro represents a little over 20% of the currency reserves held by national central banks around the world. It has been more or less stable since 2019. We did not take a hit at the time of the crisis, or if we did, we recovered, but we are now pretty much where we are in 2019. The other major currencies are, number one, the US dollar, still of course, although slightly declining, and other currencies, including in particular the renminbi, which has slightly increased in both reserves but also by other measurements. And one component has increased as well most recently is the volume and the value of gold as reserves in the reserves of the national central banks. I think this is not the only account by which you measure the solidity and the international pattern of a currency. You have to also measure how much invoicing is done in a currency, how much issuance is done in a particular currency, and that gives an idea of how strong a currency is. It's also obvious to us that to strengthen the international role of our currency, we need several attributes that have nothing to do with monetary policy. I think where we can play a role is by being a strong institution, by being an independent institution, by respecting the rule of law and inscribing our action within those parameters. We also have the responsibility to provide enough liquidity so that those in need of euros in order to avoid fire sales, for instance, that would be damaging for the proper transmission of our monetary policy, have access to plenty of liquidity. And it's in that context that we enlarged and redefined the role of our repo lines in euro, which will become effective in the new format, new framework, as of July the 1st. But other elements are necessary: a clear international trading network, a strong defense, predictable policies by other actors, and all of that is outside the remit of the central bank. But from our perspective, we try to do the best we can in order to respond to the demand in terms of liquidity, the demand in terms of safety and security, and reliance on the institution. Thank you.
Thank you. You follow-up. Yes. Very briefly, just because I think in some of your statements in the past, you have been even more clear on what kind of instruments we need to see. I don't want to quote them, but I just would like to ask you if you think, or your assessment is, that we are doing enough to strengthen the role of the euro, or if you would like a little bit more ambition when it comes to some of the things we are debating right now.
Well, as we both know, it's a strong attribute of an international currency of reference to have a deep and liquid market that includes treasury, all treasury bonds, like the US treasuries, for instance, and that we do not, for the moment, satisfy that requirement. When you look at what is common debt issued at the European level, it's one trillion, as opposed to what would be the international issuance of Treasury bonds, which is much more than that. Obviously, under what conditions this could happen, what criteria, what attributes, what guarantees, what moral hazard containment, and all of that is something that obviously other parties than the European Central Bank should have to decide, but it's an important step. Yeah.
For ESN, Rada Leova. Thank you, Madame Chair. Um, Madame Lagarde, the IMF warned recently that several Euro Area states are heading towards debt of 130 to 140% of GDP within a decade. So markets actually do not care why the mass drift limits are breached, whether it's defense, health, or anything else, the debt is debt. And meanwhile, Brussels keeps banks loaded with government bonds. Through the NSFR quick fix, the EU froze its liquidity rules below the Basel standard so that demand for state bonds would not fall and borrowing costs stay low. The banks once again treat sovereign bonds as always safe and liquid, which the last crisis proved they are not. This tightens the dangerous link between fragile states and banks. And on top of this, the EU is reviving securitization, the ABS market, which is the very instrument at the heart of the 2008 crisis. So together, this looks similar to the conditions before the last crisis. I know fiscal policy is not your mandate, but the ECB's asset purchases have repeatedly made it your concern. So my question is, how do you assess this combination: reviving ABS, freezing Basel through the NSFR, and the escalating debt of member states? Thank you.
Thank you very much for your question, which I'm going to use to actually address a point which is under debate, which will come to you at some stage, I'm certain, and that is the issue of changes, improvements on the financial scene and in the financial sector, which is often presented as simplification, and which, in our view, is necessary as long as it does not undermine the resilience of the financial sector. And trust me, we will be very attentive to all proposals, and there are some very interesting ones underway at the moment, but obviously, they should not undermine the resilience of the system. We have lived through 2008. We have experienced the trauma that can result from a financial crisis, and this is not something that we should consider lightly. As a result of which, obviously, simplification should not be equal to deregulation, and I think that it's important that this be reminded. Thank you.
Thank you. Follow-up. Yes. Thank you. Let me develop my question further. The EU's energy and sanctions policy here, in practice, is a partial self-embargo. So, combined with the instability in the Gulf, it points to lasting pressure on energy prices and therefore persistently higher inflation, which leaves you little room for new quantitative easing. And at the same time, the rising debt of member states may soon demand the opposite: a new ECB program to keep it afloat. So the ECB ends up in sort of a stalemate, unable to do quantitative easing for inflation but pushed to act because of debt, until monetary policy will no longer work. So, Madame Lagarde, how do you intend to avoid being trapped in a similar scenario?
Well, thank you so much. But I don't think that I agree with the premise of your own scenario. When you say that we will have lasting pressure on energy prices, this is not what we anticipate. We flag various hypotheticals in our scenarios, and in particular, in the, if you look at them in the adverse and the severe scenario, we look at prices and we try to anticipate that. This is not the baseline, certainly this is not the milder scenario, and as I've indicated earlier, we are seeing ourselves now between the baseline and the milder scenario. So we don't anticipate that. If you look at what the experts in terms of energy, in terms of reserves, are telling us, they expect or fear more of an abundance of energy in the future than restriction and an increase of prices as a result. But we have to be prepared for all scenarios, and that's a point where I agree with you. And under the circumstances, we also believe that the best response in the face of what we have, this energy shock, its persistency, its size, and its possible diffusion throughout the economy, the best response that we have is the interest rate. So we're not looking at anything else at the moment. We have plenty of tools in the toolbox, but what we're looking at is the interest rate. Thank you.
Thank you so much. Second round of questions. One minute for the question. Three minutes for the answer. And I will start with Ludek Nida for HP.
Thank you, Madame Chair, and thank you, Madame President, for being with us again. So, first, thank you for the clarity and transparency with which you explain your monetary action. I guess it's well justified, and I also share your view that we must very carefully follow the data and be able to react appropriately because the level of uncertainty is really, really huge. I want to look a little bit more into the future and ask you how you see the medium-term perspective of the EU economy, especially from the point of view of growth. Obviously, better global conditions would be good for us, but this is something that is hard to achieve. But we have still a lot of things in our hand, this is the so-called famous Draghi report and so on. So I wonder your assessment, how, at which areas you think that we are sufficiently progressing and where we should do much more. And secondly, what would be the impact on monetary policy in the future if we succeed in this agenda? Sorry, I did not understand the last part of your question. The impact?
I mean, if we, if we are able to achieve better sustainable growth, let's say potential growth, how it would be reflected in monetary policy.
So on growth, once again, we have revised slightly down: 0.8 in 2026, 1.2 in 2027, and 1.6 in, sorry, 1.5 in 2028. This is the revision that we have, and it's predicated on the monetary policy decisions that we have made in June and on the inflation outlook and GDP outlook that was produced by the overall European staff. Is that sufficient progress? Well, more would be much appreciated, I'm sure, by all our citizens, because with more growth, things are much easier in multiple respects. Whether you look at jobs, whether you look at investment, whether you look at the monetary policy decisions that we make, it's helpful in each and every respect. I think there is one area which we have not yet discussed at this stage of my hearing, and that's in the area of what active energy policies we put in place in Europe in order to respond to the dependency and the lack of sovereignty that we have in that regard. And, you know, I don't often do that because we look at aggregate numbers, but when I look at particular member states' results and when I try to associate that with the energy policy, there is a clear link. When you look at growth in Spain, you look at growth in Portugal, for instance, you look at the price of electricity in these two countries and the effort that they have put in place in order to change the energy mix, it's pretty obvious that there is a correlation between the two. And I would hope that not only these two, you know, France, my country, France for that matter, thanks to the nuclear investment that has been made over the course of the last 50 years or so, finds itself in a decent energy price position, which does not necessarily translate into growth of GDP numbers, at least as of now. But I think this is an area where policymakers outside the ECB can play a role in order to deliver more growth that would be helpful, as I said, on all accounts: jobs, investment, monetary policy, inflation. Thank you.
Thank you, Evelyn, for the SND. Thank you very much, Chair. Uh, first of all, thanks for your words on the single currency package. We definitely need projects for the future where we are sovereign and sustainable. For my question, I will switch right now to German. Um, I don't care. Fore. Well, thank you so much. That's a really interesting question actually. Um, and I will be perfectly blunt with you. I don't know that we are doing that at all. Maybe we do.
Um, but I think it's really important for the reasons that you've mentioned because the spending capacity, the analytical capacity of price increases in particular is more acute, uh, from women than men in general. And obviously, there are multiple exceptions, and I would not dream of categorizing women doing this, men doing that, because there is a, a great, um, it's, it's much more blurred, uh, than, than we think. But I'm certain that the, uh, inflation expectations in particular is, uh, assessed in a different way, um, from by women than, than by men.
Second is, you know, I'm taking you back to my old days when I was, um, head of the IMF, where we pushed gender budgeting very strongly, uh, in order to have an active, um, determination as to how sovereign spend money and where they direct their budgeting, taking into account the differences, uh, between women's contribution to the economy and men's contribution to the economy, especially if they have as their objective a better representation on of of both genders. But I promise to get back to you because I don't know whether we do that or not, and I think it's a really interesting proposition. Thank you.
>> EP dear Cing.
>> Thank you very much, chair, and thank you, Miss Lagara. It's always great to have you here, and I share the, um, well, basically the understanding of the ECB's, um, decisions over the past, uh, weeks. I have a question that relates to, it was already brought up by, by my Italian colleague, Mr. Cochetto. It's the balance between monetary and fiscal, uh, policy. Um, because obviously, uh, everyone is, is, is trying to deal with the fallout of the energy situation. And what the commission then does is it gives out, uh, basically free lunch to, um, uh, be able to finance energy projects back home in some member states. Member states that are heavily indebted, and in this case, especially if we speak of Italy, they receive almost 200 billion in Next Generation funding, of which a quarter goes to energy, renewable energy, and, and energy sector investments. So, um, and, and now we're at the same time also giving more leeway to somehow not, uh, take that into account in, in their, um, statistics. The European Fiscal Board says is highly questionable. I would like your reaction to that, and to what extent fiscal policy in Europe narrows your path on a monetary, uh, level. Thank you.
Thank you very much for your question. Um, what I, I was a little bit confused about is your reference to the, um, what you call the free lunch, which I thought referred to the, um, the escape, which I understand is capped at, uh, 0.3 in the first year and a total of 0.6, six of GDP and focused on energy, uh, expenses in order to, uh, change the energy mix, or whether you were referring to the whole package under the RFF, which is, so you're referring to the, the, the, what I would call the small escape clause. Is that right?
>> Yeah. Yeah.
No, I know. But it's a, it's, I know by all accounts, it's not small, uh, but at least it's capped, uh, and it should not exceed an overall of 1.5% of European GDP, uh, as well, if I understand correctly. I, you know, I, I cannot opine on that because I think it's, it, it obeys, um, a direction that is otherwise determined by the commission, by the council, in order to move faster in the energy transition that was predicated, and which I think has to be accelerated in view of the dependency that we are under. Now, the second point, I think that your question brings about is how is that, uh, how is it spent? How is it controlled in order to satisfy the requirement of this energy mix, which will accelerate the transition towards more renewable, and this again is not within the remit of the, of the ECB. The third point that you make, which is more relevant, is this fiscal approach likely to reduce, uh, the, um, the monetary policy, uh, space that we have? And the answer to that is that we will not be fiscally dominated, and we will determine our monetary policy on the basis of our mandate, and we will take the decisions that we have to take in that respect.
>> Thank you for PF. Hello. Quantitative easing. Merci, merci beaucoup. And I think there is a link actually between what we do in relation to short-term rate. And you are, you are correct that when we take an interest rate, uh, decision, uh, when we move the DFR by 25 basis points, it impacts the short-term rate predominantly. But I, I would also contend that it has an impact on the long-term interest rates. Because if we did not make a decision of that nature, then markets would assume that we are going to be, um, complacent, and it's very likely that if that is the case, the risk premium associated with the long-term, um, definition and, and setting by markets would take it into account and would probably increase as a result. So I think that the interest rate decision that applies directly to the short term also impacts, uh, at the long end of the, of the, of the curve as well.
>> Thank you for rein. Thank you. Uh, I have, uh, two relatively short questions. The first one is that we are still talking about the problems with supply side shocks, and especially in the energy sector, it always, uh, transforms into big differences in, in member states in relation to inflation because many countries have very different price mechanisms in the energy sector. So if there is this higher dispersion, uh, do you think it, um, affects the effectiveness of monetary policy? Because, you know, if in one country it's, uh, 6, 7, 8% inflation, in another country too, then it's your job is even harder. And the second question is that, uh, in recent days, uh, uh, days, maybe even, uh, months, uh, we've been watching, uh, um, a bit of a problem in the relations between the US and the EU. So is that applies also to the ECB, Fed relationships with the new governor?
Thank you very much for your two questions. So on, on the first one, you are right that we have always, um, faced a differential of inflation between the member states, and that differential has narrowed, uh, markedly to below the pre-pandemic, uh, averages for overall inflation in February and in March this year. But again, now it has reopened a bit in, in the latest numbers that we've seen in April and May. So, you know, you, you, you know the business because you're a former central bank governor yourself. We, we cannot have a monetary policy that is applicable on a per member state basis. We have to, uh, define our monetary policy with reference to the entire, uh, euro area, and we have to analyze the transmission of our monetary policy, uh, stance throughout all the member states, and we, we do that. We try to measure, uh, how it impacts, um, lending both in terms of volumes, in terms of transmission of rates, and that differential is, is kept, uh, at, at a, a reasonable level, uh, so far, but, but we, we do see a widening of it. The, the relationship, um, between central banks, um, I think operates in a different, um, environment than the political relationships, probably because we are all guided by the same objective of price stability, and being driven by the same objective, I think helps understand, uh, the complexity of what we do, the differences of our, the economic background against which we operate. And I can assure you that certainly from a personal point of view, my relationship with the new, um, chair of the Fed is, is very good. I've known him for a long time, and, uh, and it's, um, it's a very good relationship.
Thank you. Forational. Thank you very much, uh, Madame President. Um, I concur with your analysis of the stable coins market with one exception, which is that while 99% is denominated in US dollars, not all players are US actors. And in particular, one of the two is actually headquartered outside the United States and escapes the governing law of the US, in particular the Genius Act. Um, so without naming any of the two, it's the largest of the two is actually located outside and and registered outside the United States, which I think reinforces your point. The second comment I would make is that, um, I like the way in which you characterized an asset against an asset. Because I would contend that to assume that stable coins is a coin and therefore a currency is slightly abusive. I think like you do, uh, that it is an asset, um, which has depegged multiple times, um, and which cannot be really characterized as a currency, uh, does not satisfy the three criteria of what a currency is. Safe assets, yes. And I think it's, uh, it, it would be very much required in the context of Capital Market Union, which is badly needed, which has been, uh, called for by the Draghi report, which has been called for by the Leta report, and which I think is only going to be amplified and made stronger and safer if there are safe assets of a European nature. Yes.
>> Damian Ma for the Green.
>> Yes, thank you, President. I have a, um, two very short questions. The first one is that, as you know, we were quite shocked by the anthropic, uh, cutting of the LLMs, um, for, for Europe and others, and it just sheds light again on the vulnerabilities and the dependencies that we have also when it comes to our financial stability. And what, how do you see that? And the second one is on the Draghi billions, which you also just mentioned once again, um, even if all the acts were concluded that are currently on the table, I don't really see innovation capital, um, coming in in great masses. So I was just wondering what measures are still missing in order to, um, incentivize investment? Do pensions, for example, have to invest more in venture capital as well? Thank you.
Thank you very much for your two questions. Uh, I'll start with the latter. You know, I, I applaud the efforts undertaken by the commission and by anybody who cares to listen to the Draghi recommendations and the Leta recommendations. I think they should, they, they go hand in hand. And while the Draghi report is of a much broader scope, the improvements of the competitiveness of the internal market and the removal of obstacles along the way of moving goods, services, uh, capital, uh, within the, the European Union are, are very important as well. But if I had to pick one, uh, and, and actually deliver on that one in addition or as, as an accelerator that I would, I would favor, it would be the U saving and investment unions, or, you know, what I call the Capital Market Union, because I think that, and that touches on this first question that you asked, what is badly needed to respond to the inventiveness, the creativity, the talent, uh, and the markets that we have when it comes to LLM, um, product, the like of Metos, the like of Chat, uh, 5.5, the likes of whatever China will introduce on, on the global market, it is capital. And we need to be able to harness not only public money, because there is a limit to how much public money can be mobilized, but we have to mobilize private, private, uh, capital in order to sustain and to encourage, uh, this, this capacity we have in Europe. And that would be a response to, uh, what has clearly been, um, a frustration of many in experiencing, um, some LLMs in the last few days. Thank you.
>> Thank you. Catch eyes. I will give the floor to Fabio de Mazi for one minute.
>> Thank you very much. Um, my question also relates to the, uh, um, dangers emanating from potential AI bubble, but also some very disruptive AI models. The IMF has commissioned, um, a report, warned against, uh, bigger financial crisis risks. Would you, did you create any kind of, um, let's say task force within the European Central Bank to to look into these risks, uh, firstly? And secondly, um, do you see the need for strategic public intervention, let's say also when it comes to computer farms and own, uh, capacities in Europe? Lastly, uh, let me use my remaining 15 seconds for a short comment. Um, you, your response was that you, you regret that you have to react to supply side shocks with demand hampering measures like interest rate hikes, but you have to keep in check inflation expectations. I just want to say that also inflation expectations are not uncontested, also among central bankers, just to mention Jeremy Birat, a senior economist of the Federal Reserve, who has warned that address on very shaky foundations. Thank you very much.
Thank you very much for your two questions. On, on the first one, um, I think it, I'm tempted to give it a twofold interpretation. There is the AI bubble formation, which, uh, has been, uh, identified by not only the IMF, but also, uh, the financial stability report that we publish on a regular basis, in which the sudden market price correction is identified as one of the three key risks that need to be watched going forward. So the, um, the, we have an entire, uh, business area within the ECB that is looking at those financial risks, as well as, um, you know, other matters, but the financial stability risks associated with tech bubble, I would not call it AI bubble, but tech bubble is, is one of them. I think there is another, uh, aspect to this, uh, AI, uh, danger, uh, which has to do with the question that Mr. Fernandez was was putting to me, which has to do with sovereignty and with autonomy, and the fact that in a sector where market capitalization is very high, where capital draining is huge, and where the prospect of improved productivity or significant transformation is to be demonstrated, and might very well be demonstrated, uh, there is an element of uncertainty about it, which is a vulnerability, especially if we don't control it, and if we don't have alternatives to that, um, on, on, on the supply shock, you know, as I said, I tried to explain how both on the, uh, account of propagation of the shock throughout the economy and the consequences it could have, the potential second round effects that we do not yet see for the moment, I think that inflation expectations do play a role. I know that it's not universally accepted, but I think we at the ECB contend that inflation expectations actually matter when it comes to, uh, to demand going forward and formation of demand. Thank you.
>> Thank you. Uh, Nicola Nicolola.
>> Thank you. Thank you, dear sir. Miss Lagarde, I will make the question in Greek. So, Eurogroup.
Well, thank you very much for your question because it really addresses, um, a point that we are particularly attentive to, and that's the, the burden of inflation and the allocation of the burden. Uh, whether it falls largely on, on corporate, whether it falls on, uh, on labor. So is it the capital or is it the labor that actually bears the brunt of the, uh, of this external supply shock that our economies are suffering? And we are particularly attentive because we've been through 22, 23, 24, where in the first place, um, you know, unit profit increased, uh, and, um, margins were then later squeezed to the benefit of, uh, unit labor. Uh, this is not what we are seeing at the moment. We are not seeing an increase in margins. We're not seeing an increase in, uh, unit margin either, but we are very attentive to it because it's clear that, um, labor are suffering as a result, and, uh, we just want to make sure that the allocation is in check and that we can alert policymakers about this if it has to be, uh, addressed by them. Um, on, on the wages front, what we are seeing, and we, we know that there is a lag between the numbers that we are seeing, no matter how sophisticated our indicators have been, and the actual impact on, on the numbers. And what we are seeing at the moment is a moderation in the increase of wages. If we look at the compensation per employee, for instance, which is a, a traditional, pretty standard, and, and easy measure to, to compare, there has been a decline, and with the latest number, it is 2.6, 6% increase in compensation for employ per employee. I think it's not sufficient to just look at that one. We have to look at, uh, the, the, the other trackers that we have built over the course of the last few years to anticipate where wages, uh, are going and how they respond to the, uh, to inflation. But for the moment, it's more a track and a trend of, um, moderation that we are seeing in, in the numbers.
>> Thank you. I have two person on my list. Miss Pancova for the ascending.
>> Thank you. Uh, thank you, Chair, your President Lagarde. Pleasure for being, uh, here with you as always. It seems that the adverse supply shocks are becoming a new norm rather than an exception. Of course, the inflationary pressure across Europe is worrying our citizens. Uh, another, uh, key trend to observe is also that within the Eurozone, we see very different levels of inflation. Like if the average is about 3%, there are still countries where it reaches 6%. Which is very difficult conversation to be having. Uh, there are few countries running very high budget deficits, far above the, the 3% at the moment. So those discrepancies are creating a lot of price, social, and political tension within the member state. So I have two questions. First of all, when it comes to the interest rate hike, uh, it seems there is an expectation for one more by the year end. Do, would you be willing to consider a third one? And the second question, fiscal policies, um, a bit more stronger embassies probably, and how can we help on that? Thank you.
Well, thank you for your very pointed questions. Uh, I will not address your first question because, as I have said, we will decide monetary policy on a meeting by meeting basis, being data dependent, and without having any preset, uh, rate path, and I will stick to that because that's, that's, uh, the determination that we've made, and that's our stance. On, on fiscal policy, I think we've been very, um, clear that any fiscal measures that are intended to respond to the shock, to the energy shock, the supply shock that we have described, that those measures have to be, as I call them, triple T. They have to be temporary, they have to be targeted, and they have to be tailored. Um, I think it's really, uh, for the commission to determine whether the measures that are being decided by member states are actually complying with the triple T's. From what I've heard from the commission, it's not always the case, and, uh, while the, the volume of support has been, uh, limited so far, we are at 0.125, if I recall roughly, of, uh, additional special support, but it's not triple T compliant on, on all accounts. And, you know, if I can use this forum to remind member states that it should be, it should be temporary, should be targeted, it should be tailored. So when there is a, a shock in reverse, then these measures can be reversed as well, and the fiscal position of member states can be, uh, can be in a better shape. Thank you.
Thank you. And for a Mr.
>> dear colleagues, I will talk to Greek.
Well, thank you so much for your question. Um, one, and I, I want to turn the question over to you. Where are we on the digital euro? Hopefully, by the end of the day tomorrow, we will know a lot better where we are, and I hope we are in a good place in order to start the next stage of the work, which is going to be of a more technical nature, in order to, um, run the pilot, uh, function that we need to have in place in order to really make sure that the experience of all our compatriots in Europe is a good experience, because I don't think we have the chance to, you don't get a second chance to make a good impression. It has to be a good, uh, experience for all of them, and I very much look forward to that, that phase. So I'm not putting any pressure on you, but this outcome tomorrow is, is, is really important. I'm not sure exactly what is the point of view, uh, exactly what you mean by the by liquid money. But suffice to say that, uh, there is plenty of liquidity in the system. Okay. You want to clarify that, please. So the answer to your question, if it is, will you push the digital euro while at the same time having banknotes? The answer is a resounding yes. Yes, and yes. Uh, banknotes are here to stay for as long as our compatriots in Europe want to use them. The banknotes will be here. So one does not exclude the other. Absolutely not. That was a clear answer. Uh, thank you so much. You want a few minutes to conclude? No. Shock exterior. Shock. Presidential monitor.