Euro area shows economic recovery despite ongoing challenges

Christine Lagarde, President of the European Central Bank (ECB), spoke at the European Parliament’s Committee on Economic and Monetary Affairs. She addressed the current economic climate and the implications of changing US trade policies. Lagarde noted that since their last meeting in December, the euro area economy showed recovery in 2024, growing by 0.9%. However, challenges remain, such as ongoing manufacturing declines and investment hesitance due to uncertainty in domestic and global policies. She emphasized that services are holding up, with rising household incomes and a strong job market aiding consumption. Despite some positive signs, Lagarde warned that uncertainty may dampen investment and exports more than expected. The ECB projects steady GDP growth at around 0.9% in 2025, with inflation expected to moderate near their target of 2% by 2026. The current inflation rates show slight decreases, helping set the stage for a less restrictive monetary policy, with lower interest rates making borrowing cheaper. Lagarde highlighted that shifts in US trade policies are increasing uncertainty, which could negatively impact global growth. She explained that European economies, closely tied to the US, fear potential tariffs. A 25% US tariff on European imports could lower growth by about 0.3%, while a European response could worsen this outcome. To counteract these challenges, Lagarde urged for more trade integration both within the EU and globally. She pointed out that a deeper Single Market could reduce internal trade barriers, enhancing resilience against external shocks. The ECB remains focused on monitoring global trade developments to inform their economic strategies. Lagarde concluded by stressing the importance of a united Europe for economic strength. She called for continuous support of free trade to ensure prosperity for all Europeans.