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

Philip R. Lane (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:23)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, 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?

Joe Weisenthal (0:35)

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.

Tracy Alloway (0:52)

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 sticky. 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 percent. 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.

Joe Weisenthal (1:51)

Right. 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.

Tracy Alloway (2:18)

Yeah. All of this is a very long-winded way of saying that Europe is facing both cyclical and structural problems or challenges. So I am very happy to say we have the perfect guests 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 Odd Lots.

Philip R. Lane (2:40)

Good morning. It's great to be here.

Tracy Alloway (2:42)

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 R. Lane (3:18)

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 year. So I don't think it's kind of a zero-one, one-day-only type event. It's something we will continually reassess.

Joe Weisenthal (4:24)

Sitting aside, 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, etc. When you think about the eurozone's trading position today, what are the vulnerabilities, and how would you think about the sort of macro effects of how tariffs play out?