Key Takeaways: Europe is pivoting from export-led growth to a domestic investment model. The ECB's large, diverse council is a source of strength, not inertia. Completing the Single Market and capital markets union is critical, with models like Schengen showing how flexible integration can work.
There is perhaps no greater question in political philosophy than whether history is shaped by individuals or by the forces that carry them. In the history of economic institutions, the evidence points both ways. Laws and mandates matter, but so do the people who serve them.
This was the core theme of a major speech by European Central Bank (ECB) President Christine Lagarde, who argued that Europe's future hinges not just on its rules, but on the conviction to enact them. While acknowledging familiar critiques of European indecision, she painted a picture of an EU at a turning point, capable of decisive action.
The ECB's Model: Diversity as Strength
Europe has often been accused of lacking decisiveness, entangled in its own procedures. However, Lagarde defended the EU's unique structure, using the ECB as a prime example.
With 27 members, the ECB’s Governing Council is the largest monetary policy committee among major central banks. One might expect inertia, but Lagarde outlined three distinctive strengths:
- It makes the ECB harder to influence. A decision forged from 27 perspectives is more difficult for any single government to pressure or reverse.
- Diversity is an asset in uncertainty. Different national perspectives form a natural distribution around forecasts, mapping risks no single decision-maker can.
- It does not come at the cost of speed. The ECB launched a €750 billion pandemic programme within days and executed its fastest-ever rate hiking cycle.
This model shows that Europe's size and diversity, often seen as weaknesses, can be reconfigured as institutional resilience.
A Historic Shift: From Exports to Domestic Investment
For over a decade, the euro area relied heavily on external demand for growth, running persistent trade surpluses. Lagarde declared this model has run its course, presenting two fundamental problems in today's world.
- External demand is less reliable amid trade tensions and global imbalances.
- It meant exporting European savings abroad while facing massive investment needs at home in security, energy, and digital infrastructure.
A shift is now underway. Recent growth has been driven entirely by domestic demand, with net exports acting as a drag. Geopolitical needs and macroeconomic interests are aligning:
- Government spending on defence and infrastructure is rising.
- Private digital and AI investment has surged by almost 20% since 2020.
- Projections show investment could account for 40% of euro area growth between 2026 and 2028.
This rebalancing is also improving relations with trading partners, as the current account surplus has fallen significantly.
Europe's AI Advantage: Applying Tech in the 'Real' Economy
The key question is how stronger demand translates into sustained growth. The answer lies on the supply side and Europe's readiness to adopt new technologies.
While Europe may not lead in developing frontier AI models, the larger economic prize lies in applying them across the wider economy—especially in complex physical systems and manufacturing.
Europe starts from a position of strength here:
- Almost half of EU manufacturing firms already use AI and big data, compared to less than a third in the US.
- European manufacturers are also ahead in robotics deployment (55% vs. 36%).
- Europe's industrial base, sometimes seen as a legacy, may be its most important asset for the AI age.
This potential is not lost on investors. Sentiment has flipped from deeply gloomy in late 2024 to increasingly positive, with AI-related deals accounting for over a third of European venture capital investment last year.
Unlocking Scale: The Schengen Model for the Single Market
The final piece is turning Europe's size into scale. Lagarde highlighted that the Single Market remains deeply fragmented, especially in services and capital. However, "small changes in policy can unlock very large gains in growth."
Crucially, methods of decision-making are evolving so that those who want to move ahead can do so. Lagarde pointed to several examples:
- Using enhanced cooperation for EU budget support to Ukraine.
- Approving the Mercosur trade deal by qualified majority, bypassing national vetoes.
- Setting a deadline for the capital markets union, with a clear message: if all 27 cannot agree, a smaller group will press ahead.
"This is not a break with Europe’s past. On the projects that have mattered most, Europe has found a way. The euro began with 11 countries. Schengen began with five. In each case, those who moved first created a centre of gravity that then attracted others."
This 'Schengen model' of flexible integration—where a vanguard group moves forward, creating a template for others—is presented as the blueprint for overcoming unanimity paralysis on critical projects like the capital markets union.
Conclusion: Can Europe Act Without a Crisis?
Lagarde concluded by returning to the theme of institutions versus individuals. She argued that precisely because of its complex structure, Europe has innovated to move forward.
The pressing question is no longer if Europe can act in a crisis—the pandemic and war in Ukraine answered that. The question is whether it can act with the same resolve on its longstanding structural weaknesses, even without the pressure of an emergency.
Her answer is a confident yes, not out of optimism, but because "the cost of not acting has finally become impossible to ignore." The path involves strengthening domestic demand, leveraging technological adoption, and finally completing the Single Market—using the proven, pragmatic integration model that built the Schengen Area itself.