Europe's growth model geared towards a world that is disappearing: Lagarde

Christine Lagarde, President of the European Central Bank, on Friday said that Europe needs to recognise that its old growth model, which is built on export-led growth, is coming under strain. She asked to focus on developing the domestic economy as a source of resilience in an uncertain world.

 

In her speech, Lagarde said Europe’s vulnerabilities stem from having a growth model "geared towards a world that is gradually disappearing." Lagarde further said that Europe "lacks effective tools to overcome barriers in the areas where progress matters most."

 

Speaking at the 35th Frankfurt European Banking Congress, Lagarde reiterated arguments from the speech she gave at the same conference in November 2019.

Lagarde calls out old regulations

Stressing that the world around does not stand still, Lagarde said, "In recent years, the global environment has been transformed in ways that none of us could have imagined. We have seen the post-war global order fracturing, the rise of new and some old powers, rapid changes in technology, and an uncertain outlook for global trade and finance. Uncertainty abounds and conventional wisdom is being challenged... this calls on Europe to consider its place in the world and reset its ambitions.” 

 

Lagarde said that Europe has become more vulnerable due to its dependency on third countries for its security and the supply of critical raw materials. Global shocks have intensified, with rising US tariffs, Russia’s invasion of Ukraine, and stiffening competition from China, she said, adding, "At the same time, our internal market has stood still, especially in the areas that will shape future growth, like digital technology and artificial intelligence, as well as the areas that will finance it, such as capital markets."

'Globalisation has become a vulnerability'

Lagarde noted that the European Union's openness to globalisation, which was once a sign of resilience, has now become a vulnerability. "We embraced globalisation more than any other advanced economy. In the two decades before the pandemic, external trade as a share of GDP almost doubled in the EU... and for many years, this was a source of resilience. But today, that same openness has become a vulnerability," she said, adding that exports have become a far less reliable engine of growth, reflecting the changing global landscape.

The way forward

Lagarde called on the policymakers to move towards a new governance model. She noted three ways in which progress can be achieved:

 

Revive mutual recognition: If a product or service is legally provided in one EU country, it should be accepted across the EU without needing to meet every national rule. This principle already exists in areas like professional qualifications and banking, but should be expanded, including to digital identities and services.

 

Streamline decision-making: Many important policy areas still require unanimous approval, which slows progress. Expanding qualified majority voting would help advance reforms, especially in taxation, where fragmented rules create complexity and disadvantage European digital firms.

 

Create optional EU-wide legal regimes: Instead of rewriting national laws, the EU can introduce voluntary '28th regimes' that companies can choose to follow. These would offer a single European rulebook, where beneficial, without needing full harmonisation.