Eurozone economic growth stagnates. Can Lagarde lead the European Central Bank to play a greater role?

Every central bank governor has a moment of success or failure. With the ravages of the Eurozone crisis in 2012, then-European Central Bank President Mario Draghi began to describe the common currency as a "big bumblebee": we may not know how this imperfect monetary union flies, but it does fly. Unsurprisingly, this did not work. Just a few months later, when the bee was in danger of hitting the windshield, Draghi leveraged existential pressure to lead the European Central Bank into a "whatever it takes" era.

Zhitong Finance APP notes that the euro is currently not in crisis, but that bumblebee-like complacency is evident. This "whatever it takes" spirit is insufficient to stimulate investment, growth, and confidence in the Eurozone. The economic imbalance between the North and South and geopolitical divisions between East and West are tearing the Eurozone apart. Draghi's recent proposals to eliminate structural barriers to economic growth are dangerously close to being settled.

The growth engines of the two major economies in the Eurozone are declining

With Trump's tariff threats looming, China's export machine is revving up again, and Draghi's successor Christine Lagarde now faces a life-and-death moment. The leadership vacuum in France and Germany requires institutions like the European Central Bank to step up efforts—just as Draghi did over a decade ago. Since June, the European Central Bank has cut interest rates four times, acknowledging the urgency of the situation to some extent. However, at the same time, the European Central Bank's "heavy artillery" remains firmly locked in the vault, and its rhetoric remains cautious.

It is time to put growth back on the agenda instead of suppressing inflation. Since 2019, the Eurozone's per capita GDP has grown by 2.5%, while the U.S. has grown by 7.9%. The GDP growth rate in the Eurozone is expected to be below 1% this year. A common refrain among Eurozone central bank governors is that monetary policy cannot do it all, which is true, but given the enormous investment needs in technology, defense, and climate over the next decade, this statement is also shortsighted.

Significantly lowering interest rates to stimulate economic growth is a delicate task—too large and too fast a cut could trigger inflation or lead to a recent decline in the euro against the dollar, resulting in a loss of confidence. However, the current danger lies in the fact that, under pressure to cut deficits and debt, governments in the Eurozone may lower interest rates too little, further suppressing demand. In an increasingly protectionist world, stimulating domestic consumption and investment will be paramount—this requires monetary and fiscal policies to move in the same direction.

Eurozone inflation rates have fallen rapidly

It is not enough to cover up old cracks, nor is it sufficient to state that the European Central Bank's "duty" is to prioritize price stability. In fact, the European Central Bank has a dual mandate, which includes financial stability—economic recessions can easily disrupt the smoothness of monetary transmission The recent remarks by François Villeroy de Galhau, the Governor of the Bank of France, are encouraging in this regard, as he carefully aligned himself with Joachim Nagel, the President of the German Bundesbank.

He made it clear that while price stability is the primary goal of the European Central Bank (ECB), the ECB must also "closely monitor" the risks of inflation rates falling below target and economic activity being unnecessarily sluggish. He also explicitly stated that addressing issues beyond monetary policy is the responsibility of the central bank. "If we do not defend open trade and fair rules, who will do it?"

Adhering too strictly to a cautious script may also lead to public discontent shifting towards the central bank governor, rather than just toppling current politicians like dominoes and fueling populism. Some European business leaders have begun to privately criticize the ECB's handling of monetary policy, believing that Europe's recession relative to the United States is largely attributable to the ECB, from its excessive bureaucratic regulation of the banking sector to its overly tight monetary policy. This should be a cause for concern in Frankfurt: how long will it take for international investors and executives to start publicly questioning the longevity of the euro?

Overall, the message should be that it is time for Christine Lagarde and the ECB to take a more proactive leadership role. If monetary policy aligns with fiscal policy rather than working against it, there are both risks and rewards