Philip Lane on the Big Problems Facing the Euro-zone Economy

Summary

Odd Lots Podcast Summary: Philip Lane on the Big Problems Facing the Euro-zone Economy

Bloomberg's Odd Lots podcast, hosted by Joe Weisenthal and Tracy Alloway, delves into the most compelling topics in finance, markets, and economics. In the February 7, 2025 episode titled "Philip Lane on the Big Problems Facing the Euro-zone Economy," the hosts engage in a comprehensive discussion with Philip Lane, Chief Economist at the European Central Bank (ECB). This summary captures the essence of their conversation, highlighting key points, insights, and notable quotes.

---

1. Introduction to Eurozone Competitiveness Reports

Timestamp: [01:03]

• Discussion Starter: Joe Weisenthal references two significant reports aimed at enhancing Eurozone productivity—the European Commission's 27-page "Competitiveness Compass" and Mario Draghi's extensive 400-page competitiveness report.

• Philip Lane's Insight: Lane emphasizes the complexity of measuring productivity and the differing approaches between the Commission and Draghi’s reports, highlighting the challenges faced by the Eurozone in maintaining competitiveness amid slowing growth and stable but elevated inflation.

2. Current State of the Eurozone Economy

Timestamp: [07:20]

• Economic Overview: Philip Lane outlines the Eurozone's economic trajectory from the pandemic recovery phase, through the Russia-Ukraine war-induced energy crisis, to present-day challenges with growth stagnation and persistent inflation.

• Growth and Inflation Metrics: Lane notes inflation fell from a peak of 10.6% in October 2022 to 2.5% recently, signaling progress toward the ECB’s 2% target, yet growth remains tepid due to ongoing global uncertainties.

• Notable Quote:

  "I think there's some cyclical factors in those Q4 data. On inflation, we're down from 10.6 in October '22 to 2.5 in the most recent number. We're fairly soon back at our 2% target."
  — Philip Lane [07:38]

3. Impact of Tariffs and Trade Uncertainties

Timestamp: [03:22]

• Tariff Speculations: The conversation addresses the potential imposition of tariffs by the U.S. under the Trump administration and their implications for the Eurozone.

• ECB's Approach: Lane differentiates between speculative impact—reflected in investor and consumer behavior—and the ECB's cautious stance in incorporating actual tariff details into monetary policy forecasts.

• Notable Quote:

  "I don't think it's a one day only type event. It's something we will continually reassess."
  — Philip Lane [03:59]

4. Structural vs. Cyclical Challenges

Timestamp: [25:34]

• Debate Overview: Hosts and Lane discuss whether the Eurozone's issues are primarily cyclical (temporary economic fluctuations) or structural (deep-rooted economic framework problems).

• Lane's Perspective: He argues that the distinction between cyclical and structural is blurred, as structural issues often influence cyclical dynamics. Lane underscores the importance of policies aimed at enhancing growth rates to address both sets of challenges.

• Notable Quote:

  "There isn't a clear bright line between cyclical and structural."
  — Philip Lane [25:34]

5. Competitiveness and Integration within the EU

Timestamp: [29:05]

• Single Market Importance: Lane highlights the enduring value of the European Union's single market in fostering scale economies, essential for competing in high-investment sectors like AI and green technologies.

• Political Will: He points out that achieving deeper integration requires strong political leadership but remains optimistic about the EU's commitment to scale and integration.

• Notable Quote:

  "The European Union building scale through a single market, the case for it is now reinforced."
  — Philip Lane [29:35]

6. Labor Market Dynamics and Inflation

Timestamp: [17:15]

• Unemployment Trends: Despite overall low unemployment rates in the Eurozone, Lane explains discrepancies across member countries, with Germany experiencing rising unemployment contrasted by decreasing rates in Spain.

• Labor Tightness and Wages: He acknowledges that tight labor markets contribute to wage growth but contends that the primary driver of inflation was unprecedented energy shocks and the post-pandemic reopening.

• Notable Quote:

  "Implementing the most basic macro model only gets you so far. This is a very unusual configuration of events."
  — Philip Lane [17:15]

7. Monetary Policy Transmission Mechanisms

Timestamp: [19:53]

• Rate Adjustments: Lane discusses how changes in ECB's policy rates influence the broader economy, noting the complexities introduced by Europe's bank-based financial system and the prolonged lag before policy effects materialize.

• Policy Agility: Emphasizing data dependence, Lane explains the ECB's flexible approach to adjusting policies in response to real-time economic developments.

• Notable Quote:

  "It's multi-year. It really is a long lag."
  — Philip Lane [20:28]

8. Climate Change and Monetary Policy

Timestamp: [38:19]

• ECB's Climate Commitments: Unlike the Federal Reserve, the ECB remains committed to integrating climate change considerations into its monetary policy, participating in organizations like the Network for Greening the Financial System (NGFS).

• Policy Adjustments: Lane outlines how the ECB is adapting its policies to address climate shocks and support transitions to sustainable technologies, emphasizing tactical recalibrations rather than overarching shifts.

• Notable Quote:

  "The identification of the problem is there, but making sure that the trade-offs are recognized is part of our work in progress."
  — Philip Lane [38:19]

9. China’s Economic Growth and Eurozone Competitiveness

Timestamp: [43:21]

• Global Competitiveness: Lane discusses China's rising economic stature and technological advancements, acknowledging the competitive pressures this places on the Eurozone.

• Adaptation Strategies: He advocates for leveraging WTO mechanisms to address unfair trade practices while encouraging the Eurozone to adapt and innovate in response to increased competition.

• Notable Quote:

  "The answer to that is not to wish this new competition didn't exist. The answer is, okay, how do we adjust."
  — Philip Lane [44:16]

10. Political Landscape and Economic Integration

Timestamp: [31:06]

• Political Stability: Addressing concerns about rising right-wing parties in Europe, Lane remains optimistic about the EU's unified approach to economic challenges, stressing the importance of shared growth objectives over nationalist agendas.

• Integration Progress: He notes improvements in fiscal policies and financial system stability, which diminish the likelihood of fragmentation reminiscent of the Eurozone crises in the early 2010s.

• Notable Quote:

  "I don't think there's any anti-EU kind of proposals in any of the national systems."
  — Philip Lane [35:54]

---

Conclusion

Philip Lane provides a nuanced analysis of the Eurozone's economic landscape, balancing immediate cyclical challenges with long-term structural reforms. His insights into monetary policy, labor markets, competitiveness, and integration underscore the complexities facing the Eurozone as it navigates a rapidly changing global economy. Lane remains cautiously optimistic about the EU's ability to adapt and grow, emphasizing the critical role of political will and policy agility in addressing both present and future economic hurdles.

---

For more in-depth discussions and expert insights, listeners are encouraged to tune into Bloomberg's Odd Lots podcast every Monday and Thursday.

Transcript

[Philip Lane]

Meta's open source AI available to all.

[Tracy Alloway]

Not just the few.

[Philip Lane]

Here's Dr. Annie Hartley, Yale professor. We use Meta's open source AI model llama to build an AI tool that.

[Joe Weisenthal]

Helps us tailor medical advice in remote areas.

[Tracy Alloway]

Learn [e-mail] open are your hands full? More to get done than resources to do it. Get the help you need for your workforce from Express employment professionals visit ExpressPros.com today. Whether you're looking for contract workers or a new team member, the the streamlined process from Express Employment Professionals is more efficient than hiring on your own. [e-mail] Hope you enjoyed this podcast brought to you in part by Express Employment Professionals.

[Joe Weisenthal]

Bloomberg Audio Studios Podcasts Radio News hello and welcome another episode of the Odd Lots Podcast. I'm Tracy Alloway.

[Dr. Annie Hartley]

And I'm Joe Weisenthal.

[Joe Weisenthal]

Jo, did you see last month the European Commission released a competitiveness compass with a bunch of recommendations for how to boost productivity in the Eurozone?

[Dr. Annie Hartley]

I missed that. However, I know that there have been a number of sort of similar reports and studies. Mario Draghi, I think the former ECB chief last year put out this big thing. There's certainly been a source of debate, consternation, anxiety, so forth.

[Joe Weisenthal]

So Mario Draghi's competitiveness report was 400 pages and the European Commission one was 27 pages. And I can't figure out whether or not that makes the Commission more productive than Draghi or less. Like their output is physically smaller, but maybe it's more efficient and succinct. You're absolutely right. This is kind of a tough spot for the Eurozone. So growth has been slowing while inflation is still kind of stable. In fact, we had EU inflation for January recently and it came in slightly hotter than expected. I think it was something like 2.5%. And Europe's been dealing with an energy crisis, plus now the threat of tariffs emanating from the Trump administration and against all of those sort of short term immediate challenges kind of hovering in the background is the sense that Europe is falling behind in key technologies like AI, that it's becoming less competitive, less productive relative to other places.

[Philip Lane]

Right.

[Dr. Annie Hartley]

And it's sort of implicit in what you're saying here. But the other big key source of anxiety is just the sort of core industrial superpowers and their competitiveness, particularly vis a vis China. And I'm thinking about oil, perhaps the chemical industry and so forth. And then, you know, you layer onto it, as you already mentioned, the possibility of tariffs and the future of trade with the United States Specifically, there's a lot going on.

[Joe Weisenthal]

Yeah. All of this is a very long winded way of saying that Europe is facing both cyclical and structural problems or challenges.

[Dr. Annie Hartley]

Yes.

[Joe Weisenthal]

So I am very happy to say we have the perfect guest to discuss all of this. We're going to be speaking with Philip Lane, the chief economist over at the European Central Bank. So, Philip, thank you so much for coming on.

[Philip Lane]

Allthoughts, good morning. It's great to be here.

[Joe Weisenthal]

Why don't we start with the thing that is all over the news, which would be tariffs. Joe and I personally are kind of struggling to cover these because the headlines change so fast. By the time we get a podcast out, like the news on trade restrictions has already changed. How does the ECB factor potential tariffs into its monetary policy? Because your forecast right now, I don't think they actually take tariffs into account. But we know that Trump has talked about imposing tariffs on the EU at some point.

[Philip Lane]

So let me make two differentiations there. Number one, of course, for a long time now there has been speculation about tariffs. So to the extent the speculation about tariffs is feeding into investor plans, consumer plans, it's there in the data. And as you said, a lot of the sentiment indices are kind of subdued. And I think clearly the uncertainty about trade is one of those factors. What is true though is we have looked in great detail about different tariff scenarios, but until you really know the scope of what we're talking about, putting those into the baseline we haven't done. We will essentially adjust when and if we see more detail. And of course this can evolve. The trade policy configuration we have in spring 2025 may not be the trade policy configuration we have in the autumn or next. So I don't think it's kind of a 01, one day only type event. It's something we will continually reassess sitting aside.

[Dr. Annie Hartley]

Obviously there's a lot of uncertainty. We don't know, 10%, 25%, 0%, we don't know. But how do you think about tariffs? Because you hear two different things when it comes to tariffs and cyclical policy. One is, okay, maybe you get some sort of price shock or something like that, and maybe that's inflationary, maybe that's not. But then also the implication is that tariffs force a longer term adjustment and perhaps countries have to invest more to be more self sufficient, et cetera. When you think about the Eurozone's trading position today, what are the vulnerabilities and how do you think about the sort of macro effects of how tariffs play out?

[Philip Lane]

I don't think there's any question in terms of ATPAs. The effect of introducing frictions into global trading system is a negative. So it has to be bad for rapid. Now there will be mitigants, as you say, firms will work out okay. Now I'm going to find another supplier. Now I'm going to build another plant somewhere else to kind of get around tariffs. But those are mitigants. They're not going to say, well, all of a sudden that's a net positive. So I think there's no doubt it's net negative for output, as you say for inflation. There's many conjectures that of course, mechanically, if it turns out to be the case that there's more expensive imports from America, mechanically there's an upward effect from that. On the other hand, as we just talked about, if there's kind of a weakening of domestic demand in Europe, if there's a lot of trade frictions globally, if there's a weakening in the global economy, those are disinflationary forces. So in December we basically. And now again in our January meeting we said for output it's a downside scenario for inflation, the effects are uncertain. But as you indicated earlier on, there's also classic issues about price level versus inflation, how big this is compared to all the other factors we have to think about for inflation. So I would say I think it's very natural to focus on the economic effects and then we will look at the inflation effects as we see it unfold, rather than taking a very strong ex ante position on that.

[Joe Weisenthal]

I'm going to ask a very broad question, but European growth has kind of been flatlining and at the same time we had that inflation number recently coming in slightly hotter than expected. How would you characterize the EU economy right now?

[Philip Lane]

So I think what you have to go Back to is 2022. So 22 on the one side, we were coming out of the pandemic, there was a burst of activity as we reopened. And remember Europe had a much longer lockdown than over here. But then we had the Russia Ukraine war in spring 22. So after that we had inflation going all the way to 10.6% in October 22nd. And of course we had to respond to that by raising rates which were in a low for long before then. So our policy rate went from minus 0.5 to plus 400 in terms of basis points. So there's a lot of adjustment. What that meant is in 2023 we did flatline in 23Q4, the Eura economy grew by 0.1. Now if I look at last year, 24, there was a partial recovery. We went from 0.1 in 23 to 0.9 in 24. And that we expected that we expected consumption to recover in particular. Now, it wasn't as strong as we would like then. We have, as we just talked about new types of shocks hitting the economy. But let me emphasize is that we do think, going back to this cyclical structural issue you raised, that there is cyclical recovery as our baseline. We should expect to grow probably a bit above potential this year and next year. And essentially, if you think about a lot of factors are kicking in as we ease monetary policy. We still expect this year to be led by consumption and then in 26 more than this year, a recovery in investment and then also I think a contribution from exports. So I think it's important if you kind of are too backward looking about this, you're looking at maybe the stagnation in 23 or you are looking, in fairness at the Q4, which did flatline a bit. But I think there's some cyclical factors in those Q4 data. On inflation, we're down from 10.6 in October 22nd to 2.5 in the most recent number. That's, by the way, I know there was some market speculation. Was that a bit high? From my point of view, what's been developing is a bit more energy inflation, but actually services inflation, which has been what we've been really looking at, came in softer than I would have expected. So it's not the case. The overall inflation profile is too dramatic. And what we think is fairly soon we will be back at our 2% target. And essentially that's why we cut rates last week.

[Dr. Annie Hartley]

The market is still pricing in several more rate cuts for 2025. I take your point about the salience of services inflation. And obviously it's very common for central bankers to recognize that there's only so much you could do about the energy price component. But given where inflation is and given what you describe as a cyclical recovery, likely further impulse, does it make sense to still be cutting into that environment or at that depth?

[Philip Lane]

Well, I think we're trying to be cautious. So one of our kind of stable sentences is no preset path. So even if the market is pricing several cuts, I'm not saying there's any reason not to have that market view. From a policy point of view, our emphasis is really on agility. The energy situation is changing. It may change again in either direction. In the coming weeks. And I say we have a balancing act. We do have the recovery, but we also know that essentially the disinflation is well on track. And as disinflation continues, finding, if you like, the new normal for interest rates is essentially a part of our challenge. And when we cut last week from 300 basis points to 275, that was essentially saying, well this 300 is not the new normal. And I think we'll be in that search process as we go along.

[Joe Weisenthal]

Since you brought up the new normal, I mean one thing the US and Europe do have in common right now is this debate over the neutral rate. So r, how useful is that idea when it comes to setting interest rates? And also when you look at the economy right now, how restrictive do you think rates actually are?

[Philip Lane]

I think it's important to have narrative frameworks. And one of the narrative frameworks is when inflation is well above 2%, it's very important that everyone understands that monetary policy is going to be restrictive. And that's important to be able to demonstrate that the policy rate is higher than so called normal. It's important to look at is demand dampening, that is, is the pricing environment making it more difficult for firms to be able to get through price increases. As inflation comes back to more or less around target, those factors lose kind of resonance and you do have to kind of change the narrative framework. Now what we said in December, and I think this is maybe not rocket science, but maybe it's helpful is what we're going to do is we're going to set monetary policy appropriately. Now the appropriate phrase is essentially saying what do we need to do to keep inflation around too? And this is where the neutrality debate loses some relevance. What is the probability in the next number of months the world is neutral, so there's no shocks. So it's a nice hypothetical conjecture. But if you are more dealing with shocks, so whether downside shocks or upside shocks, Monte Paulity has to, if they're material, so they're there for the medium term, not just noise. So I think now as you get closer to that zone, let's not talk about neutrality, let's talk about what's appropriate. And then you do the standard wish list. What are we seeing in the pricing data? What are we seeing in the activity data? What are we seeing in the transmission? Because again, we have a bank based system over here in America, much more market based system. I mean the markets of course matter in Europe, but we pay a lot of attention to banks and right now to one of the dimensions of the question is what we see is credit starting to pick up. So there is some easing there, but it's still very subdued, still well below historical averages. So what I would say is compared to the peak, there's been some easing, but it's not the case that that process has gone into a kind of new steady state. We're still in a recovery phase. This show is sponsored by BetterHelp.

[Dr. Annie Hartley]

BetterHelp has been revolutionary in connecting people to mental health services. Using BetterHelp can be as easy as.

[Joe Weisenthal]

Opening your laptop or your phone and.

[Dr. Annie Hartley]

Clicking a button and the session begins. Clients are able to choose in what.

[Philip Lane]

Way they would like to communicate with me.

[Dr. Annie Hartley]

Whether video or on the phone or.

[Joe Weisenthal]

Chat texting, BetterHelp is there when you need it, and that's what makes all the difference.

[Philip Lane]

Visit betterhelp.com podbusiness to get 10% off your first month.

[Mikayla Shifrin]

Therapists were compensated I'm alpine skier Mikayla Shifrin. I've won the most World cup ski races in Haiti. But what does success mean? To me, success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stifel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there.

[Stifel Representative]

At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row.

[Mikayla Shifrin]

If you're an advisor or investor, choose Stifel.

[Stifel Representative]

Where Success Meets Success stifel, Nicklaus & Co. Inc. Member SIPC and NYSE for J.D. power 2024 award information, visit jdpower.com Awards compensation provided for using not obtaining the.

[Dr. Annie Hartley]

Award I want to ask you a question that I've actually asked several policymakers in the US about the last several years. The nature of inflation in the US and in the Eurozone. Some similarities, some differences. The spike of the Eurozone was probably more pronounced a bit thanks to the energy shock specifically. But you know, obviously there's a sort of like cyclical component and then an energy shock specific component. What's interesting to me, setting aside energy unemployment in the Eurozone, if I'm looking at this correctly, is actually at a multi year low right now, lower than it was at The Peak in 2022 what is your story for if we think of central banking as working through this unemployment or employment activity, inflation trade off, what is your employment for why the core measures of inflation or services inflation have eased so much, even at a time of what seems to be labor market tightness, no easing at all.

[Philip Lane]

So I think the labor market tightness is part of it. And actually the euro area is an interesting place to look at that because of course, across the euro area you have some economies that are hotter than others. You've kind of a laboratory. So absolutely there is a correlation between a tight labor market and wages. But the strength of that effect is not big compared to the size of the inflation shock we had, which was essentially an intersection of two factors. One was the energy shock and two was the exit from the pandemic. So more or less exactly at the same time, in spring 22, we had the Russian invasion of Ukraine. And that wasn't just a kind of a level shift in energy from there until August 22nd, you this really large extreme run up in gas prices, but in the same six months, so spring to autumn 22, this is when the European economy reopened. So actually, if you look at activity data, it's quite strong for those six months because tourism restarted, hospitality restarted. So this is a very unusual configuration of events. That reopening had a demand element to it because of course people really wanted to spend and of course the supply was still pandemic constrained. So this I would say is weird, unusual, not representative. So I'm not that surprised. Implementing the most basic macro model only gets you so far. And then if you compare it since then, and I think that's common across the US and Europe, is a lot of what's happened is the supply side has recovered. The exact nature of it on both sides of the Atlantic is there. And that recovery in the supply side is essentially why you are able to have disinflation and recovery in the economy. And as you say, we do have the lowest unemployment in the history of the euro area. Again, let me come back to this. Differences across the EU area, Germany's been suffering. We know that unemployment has gone up in Germany, so the labor market is what you would expect. Spain has been very strong. Unemployment is coming down in Spain. And so when you think about the overall EURA narrative, I mean, when you talk about the US economy, we all tend to think about the US in the aggregate, but of course there's differences across California, Chicago, New York and so on. Same for us. There are big differences right now across some of the major countries.

[Joe Weisenthal]

You touched on this earlier, but could you talk a little bit more about the transmission mechanism of lower rates and how those actually feed into the economy and perhaps more importantly, how long they actually take to take effect. So in the US we hear the Federal Reserve talk a lot about long and variable lags, which gives them quite a lot of wiggle room to argue whether or not hikes or cuts are actually having an effect. How do you think about the transmission mechanism and the timeframe for changes in policy to take effect?

[Philip Lane]

So I mean, this is what keeps us busy and this is why throughout this period some people don't like these phrases, but they're essential. We said we're going to be data dependent and we said we have this reaction function where essentially as we see the transmission in action, we can recalibrate our policy. So let me maybe explain why it's the complexity. In the EU area, we were in a low for long environment. Even in December 21st when already inflation was picked up, the markets believed the policy rate would not go above zero until around 2027. So there's high conviction that we were in this low for long period.

[Joe Weisenthal]

This is my favorite chart, the Harry charts.

[Dr. Annie Hartley]

The Medusa charts.

[Joe Weisenthal]

Yeah, the Medusa charts of market expectations of rates and they're always, always off.

[Philip Lane]

Well, I mean the world changes. Then we had this fairly rapid hiking cycle to 4% and now we're coming down from that. And then the market is debating. Somewhere in the neighborhood of 2%, let's say, is the new steady state. So in terms of how people are thinking about the financial system, some of it is, well, we're gone from an old steady state of basically at the floor. The new steady state is around 2%. And how do I value assets, how do I organize my saving, my investment around that? On top of the cyclical issue of as we ease rates, but we're easing from 400 to in the neighborhood of 2%, we're not going back to the pre shock super low rate. We don't expect to. So that's an additional factor in transmission. Let me emphasize a couple of things. One is about the bank based system and then one is how the economy responds in a bank based system. And we had new numbers this morning essentially because of course banks are partly funded by deposits, partly funded by market funding deposits. They have responded, but not one for one. There's still lots of zero interest overnight deposits funding banks. So the one for one transmission of the policy rate that works in the money market. It's softer both on the way up and on the way down for the banking system, we have taken into account in the banking system with a mix of deposit funding and market funding, the transmission is slower. And then on the economic side, one issue we talked about last week was housing investment. That's a classic interest rate sensitive area. And we are seeing mortgage loans pick up quite a bit in Europe, but we haven't seen housing investment move up yet. And this goes back to like here to some extent. Okay, someone's decided I'm going to start a new project. Getting the permits, finding the workers, all of that takes time. And so this is why I said to you earlier on we think the big recovery investment is going to take a while. It's not all going to happen this year. In 25, it's going to go into 26. A long way to summarize where we are is it's multi year. It really is a long lag. And again from word go, from the time we started hiking, I and the ECB flagged quite a bit. We haven't done this very often. How much of an evidence base do we have about how long are those lags? How powerful is transmission? And in the context of a pandemic and a war. So for all of those reasons it really goes back to. I'm reassured that transmission is working. I see it. But I'm also validated, if you like, that it takes real time. It takes real time before it transmits all the way through the economy.

[Dr. Annie Hartley]

Tracy, I just remembered something and you started the episode talking about some of the big structural things which we should get to. Do you remember in the blogosphere like the 2000 and tens. I just remember this. The six versus the strucks debate.

[Joe Weisenthal]

Oh no, I don't remember that.

[Dr. Annie Hartley]

Where it's like some people are like, oh, is the US face like just a cyclical challenge where we need more demand or is there a struck thing where we need to like structurally change how the US economy works?

[Mikayla Shifrin]

Do you remember that?

[Dr. Annie Hartley]

Anyway, it occurs to me like every time there's some big economic shock of any. You get this debate right? How much is it a cyclical thing where economies go up and down, inflation goes up and down, unemployment goes up and down versus something structural deeper with the economy perhaps, which demand policies, whether they be fiscal or monetary, are sort of to some extent insufficient to address them. And obviously Tracy mentioned in the beginning these competitiveness reports, the Draghi report and all that stuff. Do you feel like we are at a moment where it's important for Europe to be Thinking about deep structural issues, or is it just weird, sort of taking our eye off the ball and that in the end these are still sort of cyclical challenges for the economy?

[Philip Lane]

Well, let me make a few points about this because of course this debate is ongoing. First of all, I think it's important to recognize there isn't a clear bright line between cyclical and structural. Because of course, if an economy faces structural issues, more or less, if you pessimism on a structural basis, it will lower demand. So cyclical policy is called for, even if the origin is structural. But let me say on top of all the structural issues, which are global, every country debates how to deal with aging, how to deal with climate change, how to deal with digitization, AI and so on. In a European context, maybe there's two extra factors. One is the structure of Europe, that's literally a structural factor. We have choices and debates about essentially more integration, the single market. And as you mentioned earlier on, Tracey, last week the European Commission announced this competitiveness compass that's essentially a long to do list to convert the Draghi report, the letter report, into essentially action. And of course you can imagine in a European Union there's a lot of things need step by step action. So I would say it's all aligned, but it's just we have a new commission, it's basically a kind of an agenda for the next few years. But fundamentally, and this is where the Draghi report starts, is Europe had a very good idea 40 years ago now that essentially in a modern world, scale economies matter. If the European member countries essentially come together and build a single market, that will really help. That remains. And the intersection now is, I think with digitization, with other new technologies, scale economies really matter. It's really hard to think about, okay, if I have a big fixed cost investment, if I build some new AI kind of business model, rolling that out is a function of scale. So the European Union building scale through a single market, the case for it is now reinforced. So I think there's new energy about that. And then of course, the other big one, maybe Joe, just because I think this is interesting from a global point of view, is the global, if you like, equilibrium. One thing the ECB has worked on and identified is essentially when you, you can do this exercise of comparing economies and what's interesting of the last 15 years is Europe and China have become more similar. The US has not become more similar. So if you think about which industries are important activity, the composition of activity, and of course this is immediate applications, like in the car industry. Now China is much more similar to Europe. And with that, of course, if you think about individual firms who might have been used to certain margins, certain ability to obtain market share, they are under a new competitiveness challenge. So that is something where Europe is in between China and America. Everyone has their kind of structural priorities, but this issue of how do you not try and build a wall, but how do you navigate this new world is important.

[Mikayla Shifrin]

I'm alpine skier Mikaela Shifrin. I've won the most World cup ski races in history. But what does success mean? To me, success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stifel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there.

[Stifel Representative]

At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row.

[Mikayla Shifrin]

If you're an advisor or investor, choose.

[Stifel Representative]

Stifel where success meets success stifel, Nicholas & Co. Incorporated member SIPC and NYSE for J.D. power 2024 award information, visit jdpower.com Awards compensation provided for using not obtaining the.

[Tracy Alloway]

Award from providing extra support during busy seasons to replacing vacant roles, you need Express employment professionals on your team. Express can handle everything from contract placements to finding the right full time team member. Solve your workforce challenges when you let Express to deal with workers compensation, payroll, benefits and more so you can concentrate on what really matters growing your business. Go to expresspros.com if you've never used a staffing company, here's how Express has helped business like yours. 80% of businesses turn to staffing companies to fill temporary vacancies, 72% use staffing for extra support during busy times and 68% to staff special short term projects for all types of jobs and a variety of reasons. Choosing Express Employment Professionals is the move to make this year with more than 860 locations in the U.S. find the one near [e-mail] so there's a general.

[Joe Weisenthal]

Recognition that competitiveness is an issue, low productivity is an issue, and as you mentioned, there's probably multiple to do lists and ideas about how you could go about addressing some of these issues. I guess my question is how confident are you that the various parties within the European Union will be able to follow through on some of this and actually turn their economies around. Because the other thing that's happening is we've had the rise of right wing parties in lots of places in Europe and often those parties come with an agenda which is cutting spending and really cracking down on debt and things like that. So it feels like there's a tension there. Right. How are you thinking about that?

[Philip Lane]

So I would say there's a shared identification of essentially the challenge that. What I would say is a lot of the problems you're faces, let me not say problems, but a lot of the desires, what we want, a lot of these would look a lot easier to achieve with a faster growth rate. And this is one going back to 400 pages with the Draghi report. Some of those pages were devoted about, look, all of this debate about fiscal space, it looks a lot better if you get your economy to grow more quickly. So I think fundamentally the identification that if we can grow more quickly, how to distribute resources, how to make progress on decarbonization, all of these issues would look a lot easier. So let me focus on the fact that there is a kind of more and more and identification is the only way to square the circle is to commit to policies to improve the growth rate. But let me say there's a huge opportunity here. You can look at the fact that Europe has been a bit slower in terms of, for example, adoption of AI, you might say, oh my God, going more slowly. On the other hand, you may say, okay, here's a real opportunity so to embrace the diffusion of new technologies again. If you looked 30 years ago with the transmission of Internet to the business sector, that happened here first, but it then happened in Europe because of course, European firms could see what's possible. So I'd be in the optimistic camp that there's a lot of opportunities. And going back to the single market idea, again, it does require political will, it does require political leadership, but it's a huge opportunity here.

[Dr. Annie Hartley]

Just on this point about the idea that the Eurozone is an unfinished project, that there's still more opportunities for integration between the member nations. And one very crude way of looking at European fragmentation, so to speak, and there are probably multiple ways, is just looking at the fact that there is not a uniform sovereign spread, right? Because each country has its own bond market. And we saw that play out very dramatically in 2011 and 2012. But lately spreads for some countries are widening out. Again, it's come in a little bit, but say The French, German ten year spread is certainly higher than much of the sort of post2014 period. Not as high as it was in 2011 and 2012. How much when you look at these spreads, is this a function of. Part of the agenda of some of the parties in Europe is essentially capital as sovereignty. This idea that is it compatible to talk about creating a single market, finishing the project of integration at the same time as there is this big push for a sort of nationalist sovereign agenda.

[Philip Lane]

So I think what you've seen in Europe is essentially, I'm not seeing that debate these days too much. No one is really saying the answer is to kind of go on a nation state basis. Because of course you can see going back to the scale economy issue, it's really hard to think about being a small country in today's world. So the value of the European Union is, I think common. I don't think there's any anti eu, serious anti EU kind of proposals in any of the national systems. And going back to the spread issue, I mean, there's nothing like the situation we had 15 years ago. So of course going back to the vision here that essentially the European Union is a unique structure and I think that's very important because sometimes in my career I've heard why can't he just be like the US and of course this kind of one line.

[Joe Weisenthal]

Do people still say that?

[Philip Lane]

Yeah, I get it. But of course you need a certain amount of fiscal integration. We have stepped forward with more joint debt and so on. You do need a certain amount. You need to make sure your banking systems don't require a lot of fiscal support. That is, they have to be well capitalized and well regulated. And we've come a long way on that. And you have to make sure every member country is following fairly stable policies. So we don't have the really large property bubbles, the big current account deficits we had. So Europe is quite a kind of stable environment, not super growing fast. So dynamism is an issue, but stable. Yes, but stability is, if you like, a kind of minimal condition. And I think this is where the conversation is. Let's move on from being stable to delivering more of what we want. And if we grow more quickly, we can do more on all of the different dimensions of policy that Europeans want.

[Joe Weisenthal]

Just going back to the very beginning of this conversation, we were talking about energy prices increasing and feeding into inflation. I mean, energy price is just one of many external shocks to the European economy in recent years. As a central banker, what can you do to actually offset those types of supply side.

[Philip Lane]

So what we have to make sure is when we had a really big energy shock and we had to make sure and to be able to provide the reassurance to everyone that we will make sure inflation comes back down to 2%, not overnight, but in a realistic timeframe and essentially throughout the whole process to keep inflation expectations stable. So in contrast to 1970s this has happened. So the famous second round or third round effects, they were there to an extent. They'd have to be a catch up phase for wages, which is now maybe nearly over. But no, I think the central bank world, once it was diagnosed that we needed to act, that has not been the biggest headache here. So for central banks, that's our offer or our promise. We will deliver price to both in the medium term. That doesn't mean there won't be shocks, but when there is a shock we get it back down to 2% in a realistic timeframe.

[Dr. Annie Hartley]

One of the things that we saw recently is that the Federal Reserve has removed itself from the NGFS organization, where central banks think about the greening of the financial system, the effect of climate change on its goals and so forth. The ECB is a member of this organization. Over the last several years, various political reasons, I'm sure, inflation and the energy shock. It feels like many organizations certainly in the US have lost some of their motivation to prioritize climate. What is that like in Europe? Is there any change in the amount of energy and interest and prioritization of climate change issues, both at the ECB specifically, but also at the sort of political and corporate satellites around it.

[Philip Lane]

So I think the assessment is pretty stable and that's not just in central banking, but in many dimensions. The assessment is the world is getting hotter. The assessment is policy is needed both to slow that down and to cap it, but also to make sure the economy and society adapts to hotter temperatures. So it's I think important for central banks to prepare the financial system for that. It's important for central banks in how we do monetary policy to recognize the effects of these climate shocks and also the underlying transition issue. So what is true, which is inevitable, these are pretty big policies. There's big policies, but of course all the time you have to think about recalibration. What exactly is the right subsidy policy for heat pumps, for example? So to move housing away from using oil and gas towards using heat pumps. What is the right policy and the right timeline for getting people to move from petrol and diesel cars to electric vehicles? I would view all of that as recalibration, tactical adjustments. But again, coming back to where we started with the European Commission's agenda for the next few years, decarbonization remains central to that. So I would say we're learning a lot. The evidence from all of the severe weather effects, not just in Europe but around the world, people see it, they see it every day, how they live their lives. So I think the identification of the problem is there, but of course making sure that the trade offs are recognized, the scope for new technologies to help and to be sensible about what you ask different parts of the economy, whether it's households, large corporates, small corporates, the banking system that's essentially involving work in progress.

[Joe Weisenthal]

So I can't pass up an opportunity to talk more about the hairy charts of market expectations of the future path of interest rates, Medusa charts, spaghetti charts people call them. Sometimes the market currently is pricing in at least three more 25 basis point cuts. Is that reasonable in your mind? Is the market finally going to get this one right?

[Philip Lane]

Okay, I'm going to sidestep that to some extent because philosophically the world is subject to shocks. So going back to when you get these market revisions, that's their point in time view right now. Let's see what happens. So my role is not really, I think, to kind of overly comment on the market view, but let me go back to the peak inflation of late 22. Our staff, the euro system staff, I think did a pretty good job of providing the timeline saying look where you are now, around 10% inflation, you're going to be basically back around 2% in 25. That was a kind of timeline that's been very stable. And under that timeline, which has really been followed then of course the market is recognizing the interest rates you need when you're at 10 or 5 or 3% inflation are not the interest rate you need when you're around 2. So I think in that context the predictability of how disinflation works has held up fairly well. The big issue was how did that inflation erupt in the first place and the scale of it. But once we got to the peak, going from peak back to 2% has been, I think, in line with how the macro modeling community would think about it. I don't think there's been all that surprising so far. Let me go back to this year. What I would say is, as we've talked about, there's a lot going on in the world and so the fluctuation of inflation, what would be the appropriate monetary policy is very much going to depend on a lot of policy decisions around the world.

[Dr. Annie Hartley]

The recent discovery, maybe in the us about deep sea created a lot of anxiety about Chinese growth in AI, but also just sort of hammered home. There are a lot of areas where China seems to be doing very well at the technological edge. And obviously we all know the incredible story with batteries and electric cars, the technology for green power. They have a growing petrochemical industry, they even have a growing pharmaceutical industry. These are industries that I really think of as core to a big part of. When I think of European industry, pharma, automobiles, chemicals and so forth. I'd like to just hear your thoughts about this more broadly. How anxious does that make you? And are there opportunities with respect to China, especially if the US's reliability as a trading partner grows more questionable?

[Philip Lane]

So let me focus on the economics because of course there's a parallel political debate, which is not for me, but economically what we've had for a long time now is China growing, becoming a bigger share of the world economy. And the most basic point is that operates in both demand and supply.

[Dr. Annie Hartley]

Yes.

[Philip Lane]

So as they get more productive, the technologies they diffuse around the world. So those who are able to buy a cheap electric vehicle, to buy cheap solar panels, windmills, all of those, I mean, there is a kind of global impact of that. Also, as China gets richer again, their interest in buying exports from Europe and from America goes up. So the baseline, of course, is essentially the world getting richer is win win. Now, of course there is a debate about industrial policy and under what circumstances, whether for economic security reasons or for kind of stability of various industries, you recognize that there are concepts such as captivating tariffs. So Europe imposed in a very calibrated way tariffs on Chinese EVs a while ago. But essentially that was done within, I think, WTO rules, which is basically, if you think the origin of some of the low prices out of China are, if you like unfair subsidies, then the handbook says you can countervail that and correct that. So what I would say is there are kind of WTO mechanisms that can go a long way in dealing with any kind of identification of if you like, unfair subsidies. But I think we should remember the world getting richer, technologies getting invented, wherever they get invented, creates global possibilities, I'll call them possibilities. But I would say, and I said it earlier on, is the fact that China is becoming more similar, whether in chemicals, auto and so on, does create adjustment issues. It does mean the kind of price at which a European firm can sell its output around the world. Is compromised. The answer to that is not to say, look, I wish this new competition didn't exist. The answer is, okay, how do we adjust? So I would say individual sectors, adjustment issues. That's always been true with trade, but often also to recognize that rising real incomes in China are, you know, add to the world's demand as well.

[Joe Weisenthal]

All right, Philip Lane, truly the perfect guest to discuss all of this. Thank you so much for coming on the show.

[Philip Lane]

Well, thank you for having me.

[Joe Weisenthal]

Joe. I thought that discussion was really interesting and it's been a while since we've had a Europe centric episode. One thing I was thinking is it's kind of amazing how much politics is intertwined with the economy and monetary policy right now. And we asked a bunch of questions along these lines. But there's a broad recognition of the challenges that Europe faces and there are some concrete ideas about what to do about those. But at the same time, it feels like politics is heading in the other direction away from multilateralism, as you pointed out. And even, I mean, even Belgium, so Brussels is like the seat of the European Union. Even Belgium has a far right party in power now. So, you know, it seems like an uphill battle.

[Dr. Annie Hartley]

Yeah, right. I mean, I really like the way he framed the answer when we sort of pivoted to structural questions because sure, there's always structural questions, but Europe seems to have both external structural questions and internal structural questions. And it's hard to think about addressing some of the external structural questions such as how and do you sort of have a competitive AI sector? Do you want a competitive AI sector but how would you have one given the scale of investment? Or can you compete with the scale of Chinese chemicals or autos at the same time as the internal structure still is not complete? There are still individual states and obviously there are formal trade barriers between the states, but there are different countries still in different financial markets and a not fully integrated banking system. And whether, as you say, there's the appetite currently in today's 2025 politics to talk about further integration is a challenge.

[Joe Weisenthal]

Definitely an open question. Shall we leave it there?

[Dr. Annie Hartley]

Let's leave it there.

[Joe Weisenthal]

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me racialaway.

[Dr. Annie Hartley]

And I'm Joe Weisenthal. You can follow me at the stalwart follow our producers, Carmen Rodriguez, Armenurman Dashiell Bennett at dashbot and Kell Brooks and Kael Brooks. For more odd Lots content, go to bloomberg.com oddlots we have transcripts a blog and a newsletter and you can chat about all of these topics 24. 7 in our Discord Discord GG Oddlauts.

[Joe Weisenthal]

And if you enjoy odd lots. If you like it when we do Europe Centric episodes then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

[Philip Lane]

Switch to Verizon Business and get more.

[Dr. Annie Hartley]

From your Internet without paying more for your Internet. Get LTE Business Internet starting at $39 a month when paired with a Business Unlimited Smartphone plan. That's unlimited data and with it unlimited possibilities. Start saving today with Verizon Business ranked number one in small business Internet customer satisfaction by J.D. power.

[Philip Lane]

Starting price for 25 Mbps Internet plan.

[Dr. Annie Hartley]

With savings plus taxes, fees and economic.

[Philip Lane]

Adjustment charge terms apply for J.D. power 2024 award information. Visit JD Power.com awards join Bloomberg in.

[Joe Weisenthal]

Atlanta or via livestream on February 11th for the future investor finding the opportunities this 2025 event series will examine how companies are investing in their businesses to create efficiencies, innovate their products and services, and improve the customer experience. This series is proudly Sponsored by Invesco. Q. Q. Q. [e-mail] futureinvestoratlanta.