Inflation in the eurozone dropped to 2.4% in December 2024, a significant decline from its peak of 10% in late 2022. European Central Bank (ECB) chief economist Philip Lane emphasized that while progress has been made, services inflation and uneven economic growth still present hurdles.
In an interview with Der Standard, Lane highlighted the need to stabilize inflation at the ECB’s 2% target without stifling growth. “Energy price declines have helped lower overall inflation, but this trend will not continue indefinitely,” Lane cautioned.
Striking a Balance on Interest Rates
Lane stressed the importance of a balanced approach to interest rates, avoiding extremes that could harm economic stability.
“We must follow a middle path,” Lane said. “If rates fall too quickly, controlling services inflation becomes harder. However, keeping rates too high for too long could push inflation below target, which is equally undesirable.”
The ECB reduced its key interest rate from 4% in June 2024 to 3% in December. Lane acknowledged that further adjustments are expected but refrained from specifying the final rate target. He emphasized that the policy direction remains clear: balancing inflation control with support for economic growth.
Regional Growth Gaps and Structural Reforms
Although inflation is easing across the eurozone, economic growth varies significantly among member states.
Lane noted Spain’s strong performance compared to struggles in Germany and Austria. “Some countries, especially those reliant on manufacturing or energy-intensive sectors, face challenges from global trends and the Russia-Ukraine war,” Lane explained.
He advocated for structural reforms as a key to long-term growth. Referencing Mario Draghi’s roadmap for competitiveness, Lane highlighted the importance of integrating fragmented industries like energy and telecommunications. “A larger, more unified domestic market can help European companies grow faster and strengthen resilience against external shocks,” Lane said.
Global Influences and the Path Ahead
Lane also acknowledged external pressures, such as China’s economic slowdown, which has lowered export prices and created disinflationary effects. Despite these challenges, he expressed confidence in achieving a medium-term inflation rate of 2% if monetary policy is correctly calibrated.
With eurozone growth forecasted at just 1.1% in 2025, Lane stressed that stability and growth can coexist. “We don’t need to induce a recession to achieve price stability,” he affirmed.
The ECB’s focus on structural reforms and balanced monetary policy will play a crucial role in navigating economic uncertainties and fostering long-term resilience.