Christine Lagarde: Turning size into scale: Europe’s new growth model

ECB Press · Feb 23, 2026 · Collected from RSS

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Acceptance speech by Christine Lagarde, President of the ECB, for the 2026 Paul A. Volcker Lifetime Achievement Award at the 42nd Annual NABE Economic Policy Conference in Washington DC, United StatesWashington DC, 23 February 2026There is perhaps no greater question in political philosophy than whether history is shaped by individuals or by the forces that carry them. Tolstoy devoted the philosophical heart of War and Peace to this question.His answer was uncompromising: the so-called great men of history were not its authors but its instruments.This is a powerful thesis. But in the history of economic institutions, the evidence points both ways. Institutions are shaped by the laws they are built upon and the mandates they are given. But they are also shaped, sometimes decisively, by the people who serve them.Perhaps nowhere is this clearer than in the story of Paul Volcker, whom this lecture honours.What Volcker did in the early 1980s went beyond taming inflation. He transformed the character of the Federal Reserve System. Before he came along, the Fed’s independence had been established in principle by the US Treasury-Federal Reserve Accord in 1951, but it had not always been defended with equal vigour.Arthur Burns had given a lecture on what he called “the anguish of central banking” – an argument, in essence, on why central banks could not be expected to control inflation against the weight of political pressure.[1]Volcker offered no such apology. He raised rates to levels that induced the deepest recession since the 1930s and came under sustained political attack.His act of personal conviction changed the trajectory of central banking not only in the United States, but worldwide. It is the same tradition that Jay Powell has upheld with such resolve.Their efforts serve as an important reminder that, while we need legal frameworks to ensure central bank independence, frameworks alone are never enough.Laws can be rewritten, mandates reinterpreted, institutional norms hollowed out. Independence ultimately has to live in the culture and conviction of the people who serve these institutions – because sooner or later, the legal limits will be tested.European models of decision-makingEurope, of course, has been accused of lacking precisely this kind of decisiveness. US Treasury Secretary Bessent captured the sentiment recently with his quip about “the dreaded European working group”. It is a familiar charge, and not always an unfair one.Too often, Europe has allowed itself to become entangled in its own procedures. Progress has been blocked by the need for unanimity, slowed by the impulse to harmonise every detail across 27 countries, and frustrated by an instinct to regulate before we innovate. These are real problems, and Europeans know it.Some of this is the inevitable result of how the EU has been built. It was conceived to require compromise, diffuse authority and ensure that no single country could impose its will on the others. That was a deliberate choice, born of a continent where the unchecked power of individual states had too often led to catastrophe.But the idea that this structure condemns us to inaction is wrong. And the clearest evidence of this is the institution I represent.With 27 members, the ECB’s Governing Council is by far the largest monetary policy committee among the major central banks.[2] The Federal Reserve has 12 voting members. The Bank of England and the Bank of Japan each have nine.One might expect a structure of this size to result in inertia. In practice, it gives us distinctive strengths.First, it makes us harder to influence. A decision forged on the basis of 27 informed perspectives is harder to reach, but it is also far more difficult for any single government to influence or reverse under pressure. In that sense, our very structure reinforces our independence.Second, our diversity is an asset in times of high uncertainty.Each member of the Governing Council brings a different assessment of how the economy is evolving, how monetary policy is transmitting and where the risks lie.[3] Taken together, these perspectives form a natural distribution around the central forecast, mapping the uncertainty in a way no single decision-maker can.When you are confronted with a pandemic, an energy crisis, a war and a reconfiguration of global trade within the space of a few years, that diversity becomes a form of institutional insurance.Third, none of this comes at the cost of speed.When the pandemic struck, we designed and launched a €750 billion emergency asset purchase programme within days. When inflation surged, we raised rates by 450 basis points in a little over a year, the fastest tightening cycle in the ECB’s history. We then cut them again by 200 basis points as inflation stabilised at our medium-term target.Of course, monetary policy is a special domain. We have a clear mandate to guide our decisions, whereas lawmakers face more competing objectives. But the wider EU has also shown it can act when confronted with urgent crises. Our monetary response during the pandemic, for example, was made far more effective by the decision of EU leaders to create the Next Generation EU programme, a €750 billion common fiscal instrument agreed within months and financed through joint borrowing. This kind of programme would have been unthinkable just a year earlier.The question today is whether Europe can act not only under the pressure of crisis, but also on the structural issues that determine long-term growth. The argument that Europe is incapable of this kind of change – that our procedures condemn us to stagnation – is being tested against the evidence. And the evidence is starting to tell a different story in three key areas.The changing composition of demandThe first area is in the composition of demand.For much of the past 15 years, the euro area relied heavily on the rest of the world to generate growth. After the global financial crisis, domestic demand as a share of GDP fell to the bottom of the range among advanced economies. At the same time, the current account shifted from being broadly balanced to showing persistent surpluses.Fiscal policy played an important role. Between 2009 and 2019, the euro area’s cyclically adjusted fiscal stance averaged at a surplus of 0.2% of GDP, compared with a deficit of almost 3.7% in the United States. Inadequate domestic demand was identified by our US partners long before relations became more complicated.Today, Europeans widely recognise that this model has run its course. It presents two fundamental problems.First, we now operate in a world in which our largest single export market is subject to tariffs, and where our third-largest export market, China, is running a trade surplus of around USD 1.2 trillion. In such an environment, external demand is inevitably less reliable.Over the next three years, Eurosystem staff expect exports to expand at roughly half their historical average pace.Second, this model has meant exporting our savings at a time when we face substantial investment needs at home.US capital markets now account for roughly one-third of euro area residents’ holdings of listed equities, a share comparable to that invested domestically.These investments have generated significant income gains. In 2025 alone, euro area investors earned almost €200 billion from their US equity holdings, or around 1.3% of GDP.[4] But the broader returns, in productivity gains and innovation, accrue where the capital is deployed. That has overwhelmingly been in the United States.As an illustration, if the euro area were to deploy some of that capital productively at home – enough to close just one-quarter of the productivity gap with the United States – the gains for the economy could be in the order of €500 billion per year. That is more than twice the income earned on those foreign investments.[5]Yet a shift is now underway.Last year, euro area growth reached 1.5%, its strongest performance in three years, despite rising trade tensions. This growth was driven entirely by domestic demand, with net exports subtracting half a percentage point.Europe’s geopolitical needs and macroeconomic interests now point in the same direction: the investment required for security and resilience will also strengthen our domestic growth.Government spending on defence and infrastructure is rising markedly while simultaneously supporting private investment. AI is providing an additional tailwind: private digital investment[6] has risen by almost 20% since 2020[7], and our survey of large European corporates points to ongoing strong growth in AI-related spending.This momentum is likely to be sustained. Much of the increase in defence spending still lies ahead, and investment in data centres and energy grids is now moving into the implementation phase.Overall, between 2026 and 2028 investment[8] is projected to account for almost 40% of euro area growth – well above its historical average of around one-quarter – representing more than €150 billion in additional cumulative investment.[9]While these investments are being made to promote Europe’s own growth and resilience, they also support a more balanced relationship with our trading partners.The current account surplus fell to 1.6% of GDP in 2025, down from 2.7% in 2024, and our projections indicate that it should remain around that level.[10] A significant share of what remains reflects the savings behaviour of an ageing population.[11]New possibilities for supplyThe key question for Europe, however, is how stronger demand can translate into stronger sustained growth.There is a link. Eurosystem research shows that aggregate demand conditions play a role in productivity growth. When revenues rise and financing constraints ease, firms are more likely to increase spending on research and development and adopt new technologies.[12]But that transmission is not automatic. Looking at domestic demand as a share of GDP, Germany