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- ECB's Lagarde: Europe is falling behind in innovation and productivity compared to the US
ECB's Lagarde: Europe is falling behind in innovation and productivity compared to the US
European Central Bank (ECB) President Christine Lagarde said on Monday that Europe should pool its resources in areas like defense and climate as its productivity growth falters and the world fragments into rival blocs, per Bloomberg.
Key quotes
Europe is falling behind in innovation and productivity compared to the U.S. and China.
EU specializes in outdated technologies; only 4 of the world’s top 50 tech firms are European.
Lack of unified digital market and venture capital investment hinders technological progress.
Global trade fragmentation and competition with China threaten Europe’s open economy.
EU's declining world trade share and increased reliance on foreign venture capitalists for tech funding.
Global trade fragmentation and competition with China threaten Europe’s open economy.
EU's declining world trade share and increased reliance on foreign venture capitalists for tech funding.
Slowing productivity growth reduces tax revenue potential, threatening funding for pensions, climate, and defense needs.
Estimated €1 trillion annually required for climate, innovation, and security investments.
Market reaction
At the time of writing, EUR/USD is trading 0.01% lower on the day to trade at 1.0590.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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