WASHINGTON — European Central Bank (ECB) President Christine Lagarde delivered a comprehensive assessment of the global and euro area economies during the fifty-fourth meeting of the International Monetary and Financial Committee at the IMF Annual Meetings. Speaking to global financial leaders, Lagarde highlighted that while the worldwide economy has demonstrated surprising resilience in the face of persistent geopolitical uncertainty and energy shocks, mounting inflationary pressures and structural transformations driven by artificial intelligence continue to present complex policy challenges.
The international landscape remains heavily influenced by external headwinds. Ongoing conflicts in the Middle East continue to expose energy markets to sudden, sharp price swings, while intensifying trade tensions and protectionist measures are weighing heavily on business and consumer confidence. These dynamics are contributing to a profound reconfiguration of global trade flows. Despite these formidable obstacles, the global economy has held its ground, supported significantly by the rapid rise of artificial intelligence. Investments in advanced technology are actively bolstering economic activity and trade, particularly across economies deeply integrated into global technology value chains.
Nevertheless, global risks remain heavily skewed. The balance of risks continues to lean toward the downside for economic growth, while remaining firmly tilted to the upside for inflation. Lagarde emphasized that a decisive return to an international economic order grounded in openness, predictability, and the rule of law would provide vital support for trade and investment to flourish once again.
Economic Activity in the Euro Area
Closer to home, the euro area economy has proven notably resilient despite the barrage of global headwinds and the persistent energy shock. Economic growth during the first half of the year was characterized by broad-based momentum across the majority of euro area countries and industrial sectors. Projections compiled by ECB staff in September foresee euro area growth stabilizing at 0.9% for the full year, before accelerating to 1.4% in 2027 and reaching 1.5% by 2028.
As the immediate impact of the energy shock gradually fades over the medium term, economic projections anticipate a significant boost to domestic demand. This recovery is expected to be fueled by rising real incomes, driven lower by receding energy inflation against the backdrop of a remarkably resilient labor market. Furthermore, public investments directed toward infrastructure and defense, combined with private and corporate investments in artificial intelligence and digital technologies, are poised to provide sustained support for economic expansion. Export growth is also projected to pick up steam, buoyed by strengthening foreign demand that is similarly propelled by the global adoption of AI.
Despite these positive medium-term trajectories, the economic outlook remains clouded by uncertainty regarding the intensity and duration of the conflict in the Middle East, and the mechanisms through which resulting economic shocks might propagate through international markets. Consequently, overall risks to economic growth are assessed as tilted to the downside.
Fiscal sustainability remains an indispensable anchor for broader economic stability across the currency bloc. Lagarde stressed the critical importance of maintaining sound fiscal policies, which includes strict adherence to established fiscal rules. In member states where public debt remains high, governments must prioritize fiscal consolidation, re-prioritize public spending, and enhance the overall efficiency and effectiveness of public finances to rebuild essential economic buffers. Furthermore, national governments should ensure that any fiscal interventions designed to cushion the blow of energy shocks remain strictly temporary, targeted, and tailored to those most in need.
Complementing fiscal discipline, structural policies that enhance resilience against climate change can significantly improve the economy’s capacity to absorb climate-related shocks. These efforts must be supported by broader structural reforms aimed at promoting higher labor market participation, equipping the workforce with the specialized skills demanded in an AI-driven economy, and facilitating the rapid diffusion of emerging technologies. Key priorities include advancing the European savings and investments union, expanding access to vital risk capital, and establishing improved conditions for innovative firms to successfully scale their operations across the Single Market.
Inflation Developments and Outlook
On the price stability front, headline inflation in the euro area moved upward to 3.8% in September. This acceleration primarily reflects a sudden surge in energy inflation and, to a lesser extent, concurrent increases in food and services inflation. Meanwhile, core inflation edged up slightly to 2.5%. The broader range of underlying inflation measures remained broadly stable through September, and wages have so far demonstrated no material secondary response to the ongoing energy shock.
Looking ahead, elevated energy prices are projected to keep headline inflation comfortably above the central bank’s target well into the first half of 2027, eventually feeding through gradually to core and food price components. Headline inflation is anticipated to decline following the first quarter as energy inflation subsides, ultimately converging back toward the official target level toward the end of 2027.
The risks surrounding the inflation outlook remain skewed to the upside, driven primarily by geopolitical instabilities, including the ongoing Middle East conflict and Russia’s unjustified war against Ukraine. A more intense or persistent energy shock could trigger stronger indirect and second-round effects, culminating in higher and more entrenched inflation. Additionally, extreme weather events pose a persistent threat to food prices. Conversely, factors such as a sustainable resolution to geopolitical conflicts, a weaker pass-through of energy costs, or more risk-averse financial markets could exert downward pressure on prices.
Monetary Policy Stance
Refining its monetary policy posture in response to these evolving dynamics, the ECB Governing Council elected to raise key interest rates by 25 basis points in September, following a move of the exact same magnitude in June.
The central bank’s interest rate decisions continue to be governed by a structured reaction function resting on three core criteria: a thorough assessment of the inflation outlook and its associated risks in light of incoming economic and financial data; the underlying dynamics of inflation; and the overall strength and efficacy of monetary policy transmission.
The current inflation outlook points toward elevated price pressures ahead, particularly in the short term, given the latest turbulent developments across global energy markets. However, policymakers currently observe no tangible evidence indicating a significant pass-through of energy prices into broader consumer prices and wages beyond what has already been incorporated into official economic projections. Although economic growth has demonstrated resilience, broader financial conditions have tightened significantly, highlighted by a notable rise in long-term interest rates since the Governing Council’s previous meeting. This tightening is expected to moderate future growth and dampen the pass-through of price shocks beyond initial projections.
Evaluating these three criteria collectively, the governing body concluded that the current energy shock is simply too large to overlook or "look through," yet a measured policy response remains entirely appropriate to keep medium-term inflation firmly in check.
In determining future policy paths, the ECB will maintain a comprehensive assessment of incoming data through its established reaction function. In July, the Governing Council finalized the operational features and onboarding procedures for the enhanced EUREP—the Eurosystem repo facility for central banks that was announced earlier in the year. Designed to safeguard the smooth transmission of monetary policy while simultaneously reinforcing the international role of the euro, the facility has already attracted interest from more than 30 central banks over the past six months.
Financial Stability and Emerging Risks
While euro area financial institutions remain on solid ground, sources of risk and systemic vulnerabilities to financial stability remain elevated. Persistent geopolitical tensions, ongoing fiscal challenges, and the operational uncertainties surrounding accelerated AI adoption continue to be causes for significant concern. Furthermore, the widespread concentration of critical third-party technology service providers introduces single points of failure capable of impacting both financial and non-financial institutions alike. The rapid emergence of frontier artificial intelligence models has similarly heightened cyber security risks and operational vulnerabilities across the sector.
Despite these hurdles, euro area banks maintain robust capital and liquidity buffers, exceptional profitability, and healthy, stable asset quality. These fundamental strengths position institutions well to navigate ongoing geopolitical uncertainties while continuing to effectively support lending to the real economy. The strengthening of prudential regulation and supervision implemented since the global financial financial crisis has left the banking sector well-equipped to withstand unfolding economic challenges.
Nevertheless, external shocks could expose underlying vulnerabilities within non-bank financial intermediaries, particularly through concentrated exposures to AI-related assets, which could amplify broader market stress and create systemic spillovers across financial sectors. Moreover, existing bank exposures to non-bank entities and vulnerable corporate borrowers could expose latent funding and credit risks.
Stress within private credit markets has also persisted, with private credit funds reporting ongoing capital outflows and reactivating redemption gates. While private market "semi-liquid funds" that permit investor redemptions are becoming increasingly prevalent—potentially leading to heightened liquidity mismatches down the line—euro area financial institutions currently maintain limited direct exposure to private credit. Consequently, private credit in isolation is presently viewed as an unlikely source of systemic financial instability within the euro area.
Evolution of Payment Systems
As the global economy undergoes a digital transformation, central bank money must similarly evolve to meet the complex demands of a modern marketplace. The Eurosystem remains at the forefront of this evolution, working to embed the stability and ultimate trust of central bank money into digital retail payments and tokenized finance across Europe.
Within the retail landscape, preparations are actively underway to complement traditional physical cash with its digital equivalent—the digital euro—for everyday transactions. The digital euro is expected to stimulate further innovation and competition in retail payments, ensuring that the peaceful coexistence of public and private financial solutions underpins Europe’s strategic autonomy in the payments ecosystem. To lay a robust foundation for a seamless and secure launch, the Eurosystem will conduct a 12-month internal pilot program during the second half of 2027. The formal adoption of the Regulation on the establishment of the digital euro by the end of 2026 remains a crucial milestone for achieving this timeline.
In the wholesale arena, the Eurosystem is actively developing advanced new capabilities to ensure that central bank money can securely settle transactions within the rapidly expanding market for tokenized assets. Pontes, the Eurosystem’s distributed ledger technology (DLT) solution that officially went live on September 21st, represents the foundational first step in implementing a broader strategy to enable a thriving European tokenized ecosystem. This overarching vision will be advanced further through the Appia initiative, which aims to deliver a comprehensive blueprint for the ecosystem founded on common standards, shared network infrastructure, and unified European governance.
International Cooperation and Multilateralism
Concluding her address, Lagarde underscored the vital importance of international cooperation, expressing strong support for the work of global institutions and forums dedicated to preserving macroeconomic and financial stability. She welcomed the recent completion of three major IMF reviews—specifically the Comprehensive Surveillance Review, the Financial Sector Assessment Program Review, and the Review of Program Design and Conditionality—which collectively reinforce the central role of the IMF at the heart of the global financial safety net.
Climate-related initiatives must also remain fully integrated into IMF operations, particularly within core surveillance activities. Multilateral efforts designed to tackle global imbalances provide essential support for the coordination of domestic policy actions required to minimize risks stemming from disorderly economic adjustments. In this regard, the analytical work conducted by the IMF on global imbalances and continuous methodological improvements for assessing external balances provide a robust foundation for these ongoing cooperative endeavors.
