ECB’s Lagarde: Fiscal Choices Can Shape Productivity, Growth Path in Europe

22 November 2025

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Saturday warned that Europe’s fiscal stance over the coming years could either reinforce productive investment and potential growth or risk entrenching what she called “fiscal stagnation.”

Lagarde said in a speech at the European Meeting of the Trilateral Commission in Vienna that weak potential growth can complicate the ECB’s job by pushing down the natural rate of interest and keeping inflation higher than it would otherwise be.

She argued that Europe’s recent experience contradicts concerns of fiscal dominance, noting that the ECB raised interest rates at a record pace in response to the post-pandemic inflation surge and reduced its balance sheet by more than €1.1 trillion without any constraint from governments. “Inflation fell dramatically and, today, is close to our 2% target,” she said.

The greater risk is that insufficient public investment and slow productivity growth could trap the euro area in a low-growth equilibrium, she said. That scenario, she said, could emerge if governments prioritize current spending at the expense of research, education and other measures that raise long-term output.

She pointed to the EU’s reformed fiscal rules, which allow countries to extend their adjustment periods up to seven years if they commit to productivity-enhancing investment and reforms. Only seven of the 20 euro area members have chosen that option, she said.

Lagarde said that faster productivity growth can ease pressures on monetary policy and help offset the effects of aging on labor supply and wages. Conversely, “persistently low productivity growth” limits the room for rate cuts, as seen before the pandemic.

She urged governments to reallocate existing spending toward areas with high long-run returns. Citing research, she said that shifting 1% of GDP toward research and development and 1% toward education could raise output by about 6% over time.

Lagarde also argued that Europe should make fuller use of collective fiscal tools in areas where scale and cross-border benefits justify pooling resources, including innovation and defense. The creation of CERN and the EU’s new Readiness 2030 joint procurement program illustrate what coordinated investment can achieve, she said.

Private capital will also be needed, she said, given annual green, digital and defense transition needs estimated at €1.2 trillion through 2031. She pointed to evidence that the EU’s Structural and Investment Funds have generated “significant crowding-in effects,” with every euro of funding matched by €1.10 of private investment.

Lagarde said Europe can “combine the best of both worlds” by drawing on national flexibility, collective action and EU-level instruments to strengthen potential growth while preserving the social model.