Key Points
Inflation, energy security, and monetary policy. The current rise in inflation in Europe is mainly energy-driven, stemming from the conflict in the Middle East, with an anticipated temporary increase in food prices reflecting adverse climate conditions. The ECB’s aim is to ensure inflation returns to target without undue delay. In this regard, headline inflation is projected to fall to close to target by 2028, and medium-term inflation expectations remain well anchored. The ECB's two recent rate hikes are an appropriate response, aligned with framework guidance. At the same time, higher long-term yields are also tightening financial conditions. Over the longer term, investing in a diversified mix of energy sources and increasing energy efficiency are key to reducing Europe's dependence on oil and fossil energy.
Fiscal challenges. Growth alone is not enough to resolve fiscal challenges, and action is needed on spending and, in some cases, on revenue. Countries with fiscal space, such as Germany, are rightly using it to invest in infrastructure and defense, with positive spillovers to the rest of Europe. Where pressures are more urgent, as in France, it is essential to adopt a budget, stick to deficit-reduction commitments, and build political consensus on a multi-year consolidation path. Currently, primary spending is under control, but the rise in interest rates has raised debt-servicing costs significantly. Past experience suggests that such an adjustment is achievable without weighing unduly on growth.
Growth and productivity. Price stability is an important pillar of growth but is not sufficient to make the European economy more dynamic. Lagging productivity reflects weak investment in technology, slow technology diffusion, and limited financing. Deepening the single market, particularly in the financial sphere, is therefore a priority, building on the roadmap from the Draghi and Letta reports. Key steps include completing the Savings and Investment Union through a securitization framework, common supervision of major market infrastructures, and savings and pension products that channel funds into European investments. Completing the Banking Union by removing remaining barriers to the free flow of liquidity and capital is also important.
Quotes
“I think the mandate of the central bank—having stable inflation and appropriate monetary policy—I believe, is an important pillar of growth. But beyond this, there is certainly more that we can do. […] In terms of policy, one of the reasons why we have lagging productivity is the lack of investment in technology and diffusion of technology and also financing of technology.” Emmanuel Moulin
“Growth is important, but I don't think it's enough and you cannot only grow out of fiscal issues. So there needs to be action on the spending level and maybe sometimes on the receipts.” Emmanuel Moulin
“Obviously we are dependent on the price [of oil] and that's the reason why we need to invest more in alternative energy—both for climate reasons, because it is key in our policy, but also for economic reasons. […] And so we're investing in renewables, nuclear, and other sources of energy, and also reducing the energy component of our growth by making energy efficiency a key aspect of our policy in Europe.” Emmanuel Moulin
Contributor: Maria Guerra Bradford
Overview
Europe's economic challenges are becoming increasingly complex in an environment marked by subdued growth, rising fiscal pressures, geopolitical fragmentation, and rapid technological change. Inflation has returned amid high and volatile energy prices. How policymakers meet these forces will have a lasting impact on Europe’s economic future—and central banks are playing a central role. In this Governor Talks session, Mateusz Szczurek, Director of the IMF European Department, and Emmanuel Moulin, Governor of the Banque de France, will discuss how to best address these economic challenges. The discussion will touch on the outlook for inflation, the implications for ECB policy, and the broader lessons policymakers can draw from recent inflation episodes. Beyond monetary policy, the conversation will explore Europe's progress toward deeper economic integration, the fiscal challenges facing European economies, and the role of structural reforms in strengthening productivity, competitiveness, and long-term prosperity.
