Lagarde at Davos 2023: Reducing inflation is 'prime mission' of the European Central Bank

Against a backdrop of Europe-wide economic doom and gloom, the head of the European Central Bank has outlined her expectations for the bloc's economy in 2023 to an audience in Davos.

Speaking at the World Economic Forum’s Annual Meeting Finding Europe’s New Growth, Christine Lagarde said: “The rhetoric has moved from recession in Q3, Q4, and possibly to recession in Q4 and Q1 of 23, to now this small contraction.”

That “small contraction” is in line with the grim expectations of top economists for the upcoming year in Europe, as laid out in the Forum’s Chief Economists Outlook, an quarterly survey conducted by the Forum of top economists from across the world.

Of the economists surveyed between November and December 2022, 100% said they expected growth in Europe to be either “weak” or “very weak.”

Consistent with those predictions, Lagarde said: “What we are seeing at the moment is clearly an activity that is declining compared with an excellent 2022, where growth was 3.4%, to growth projections that we have for the full 2023 of 0.5%. So, it's not a brilliant year, but it is a lot better than what we had feared.”

Of the economists surveyed in the Chief Economists Outlook, 100% said they expect either “moderate” or “high” inflation in 2023 in Europe — a prospect that Lagarde said she takes seriously.

On inflation, she said: “Inflation, by all accounts, however you look at it, is way too high. Our determination at the ECB is to bring it back to 2% in a timely manner, and we are taking all the measures that we have to take in order to do that.”

She continued: “we have already increased interest rates by 250 basis points. And we shall stay the course until such time when we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner.”

While the inflation struggle looks set to continue, Lagarde also pointed out that European employment figures are positive.

“The job market in Europe has never been as vibrant as it is now. The unemployment number is rock bottom compared with what we've had in the last 20 years.”

Lagarde also tackled Europe's green and digital transition.

“We have to move towards digital and green transition,” she said.

“We know that the financing for that is going to be phenomenal. According to the Commission numbers, it's half a trillion dollars that will be needed from now until 2030 in order to move fast in those steps that will give us more independence, less vulnerability towards the flows of this world.”

To make that happen, she said, “step number one” is “get really serious, determined and fast on capital markets union,” a bloc-wide plan, seven years in the making, to create a single market for the entirety of the EU’s capital — essential to unlock the funding needed for the transition.

“The Commission has moved. We need to continue that movement in order to encourage equity. There's plenty of money around to go towards those investments that will transition us to a place where we are less vulnerable, more independent and more sovereign.”

The session also featured Mark Rutte, Prime Minister, the Netherlands; Valdis Dombrovskis, Trade Commissioner, European Commission; Andrej Plenkovic, Prime Minister, Croatia; Christian Sewing, CEO, Deutsche Bank. It was moderated by Roula Khalaf, Editor, Financial Times.