By Marta Vilar – MADRID (Econostream) – European Central Bank President Christine Lagarde said on Wednesday that domestic demand was expected to remain the main source of euro area growth this year, arguing that Europe needed to turn its recent domestic resilience into a more lasting engine of economic expansion.

In a speech at the International Business Council of the World Economic Forum in Geneva, Switzerland, Lagarde said that the euro area economy grew 1.5% last year, driven entirely by domestic demand, while domestic demand also contributed positively to the 0.4% quarter-on-quarter expansion in the second quarter of 2026 despite the energy shock.

“Domestic demand is projected to remain the main source of growth for the euro area this year,” she said. “The task now is to turn that domestic resilience into a more durable source of growth over the long run.”

Lagarde argued that this was becoming increasingly important as the three pillars underpinning Europe’s post-war growth model – expanding global trade, competitive manufacturing supported by cheap energy and a stable rules-based international order – were weakening.

“Taken together, these shifts suggest that Europe’s post-war growth model is eroding,” she said. “And it is unlikely to return to the form we once knew.”

Lagarde said Europe needed to make better use of the scale of its 450 million-consumer Single Market to increase investment, innovation and productivity, particularly as artificial intelligence reshapes the economy.

“We cannot afford to repeat” Europe’s failure to capture much of the commercial gains from the first digital revolution with AI, she said.

Euro area firms expected to allocate an average of around 9% of their total investment to AI this year, but fragmentation of the Single Market and capital markets risks limiting the technology’s diffusion and firms’ ability to scale, Lagarde said.

EU and San Francisco-based scale-ups raised broadly similar amounts in their first five years, but by their tenth year EU firms had raised around 50% less, while some 12% of EU scale-ups have relocated outside the bloc, she said.

“Fragmented markets reduce the returns on scaling in Europe, while fragmented finance makes that scale harder to fund,” Lagarde said.

She pointed to proposals for an EU-wide corporate legal framework and efforts to integrate European capital markets as ways to address those constraints.

“Turning European size into European scale would help innovative firms grow at home, allow new technologies to spread faster and boost productivity,” Lagarde said.