Interview with Financial Times

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Olaf Storbeck on 26 February 2026

3 March 2026

(Two questions added on 2 March 2026, following the events in the Middle East, see bottom of the text)

One defining feature of the euro area economy over the past year has been that growth has been stronger than most people expected. How surprising has this been for you, and what is driving this?

The European economy has been growing in the neighbourhood of its potential. Consumption is contributing, as expected. Government spending is also contributing, again broadly as expected. Exports are essentially a drag. Higher business investment has made the main difference. Investment is ahead of expectations, and the extra momentum is coming from AI and from the green transition, where firms and governments are upgrading their capital stock.

Some people argue that the damage to economic growth during the hiking cycle and from the trade war was less than expected. Do both episodes suggest that Europe’s economic growth, while rather low, is hard to damage?

Let me separate the two episodes: the hiking cycle and, more recently, the trade war.

On the trade war, the analysis has broadly held up. The impact of trade developments has not been very different from expectations. The main difference compared with last April-June is that the scale of the trade war is smaller. At the same time, other factors are at play. Parts of the US economy are doing well. High-end American consumers retain strong purchasing power, so European firms continue to export successfully to the United States, particularly in high-end luxury goods and technology products.

For the hiking cycle, my assessment is that monetary policy tightening worked broadly as expected. But it coincided with a cyclical recovery from the pandemic and falling energy prices, which supported overall GDP. GDP barely grew in 2023 on a fourth-quarter-to-fourth-quarter basis, so the tightening had a tangible impact. However, other forces sustained the momentum, like services, which were still benefiting from the post-pandemic recovery.

Another important factor was the labour market. Labour force participation was higher than expected, and immigration from outside the EU was stronger. The expansion in labour supply helped explain why the European economy continued to grow despite headwinds.

What can we learn from this for the future?

Europe faces a two-sided issue. The rise of China is a first-order issue for Europe’s position in the global economy, particularly in sectors where European firms have traditionally led in technology and pricing power.

Globally, we are still in the early days of AI. The overall impact remains uncertain, but it is clearly positive. Over the next five years, AI’s contribution will be central to economic performance. This goes beyond generative AI – it includes applications in sectors such as robotics, life sciences and materials science.

What do you mean by saying that the rise of China is a “first-order issue” for Europe?

Compared with a decade ago, China’s role in the world economy has changed. A strong Chinese economy benefits the world overall. But there are winners and losers. In sectors where Europe previously led, Chinese competition has reduced European firms’ market share and pricing power. In other sectors, cheaper Chinese inputs benefit European firms.

Textbook theory would suggest that a stronger China should also mean stronger import demand from China. Instead, we have seen China running larger trade surpluses, with exports rising more than imports. There is an ongoing global discussion about rebalancing. Stronger Chinese domestic consumption would make the net impact on Europe more clearly positive.

Does it matter whether an economy is at the frontier of producing AI technology, or is adoption of the technology ultimately more important?

We do not know with certainty how much value producers will capture versus users. There is strong competition among generative AI producers – the US leaders as well as firms from Europe, like Mistral, and China. In the European debate, the key focus should be adoption. That is clearly the most important issue. European firms can play a strong role in developing industry-specific applications that allow mid-sized businesses to benefit from AI.

So if Europe adopts AI well, it may not face a large disadvantage from not producing the core technology?

That remains an open question. It depends partly on licensing fees and other costs charged by core model providers. There is a wide dispersion of possible outcomes. But the lower bound is positive: AI will bring gains. The scale of those gains is uncertain. The distribution between core model producers, intermediaries and users remains to be seen.

But Europe is not necessarily disadvantaged by not being at the frontier of producing cutting-edge AI technology?

Globally, AI firms need customers. Customers will only adopt AI if there are gains.

How imminent is AI’s impact on monetary policy? Some economists argue that there will be a big productivity gain, and interest rates can be lower than otherwise.

It depends on the horizon you’re looking at. In the near term, AI involves investment – for instance building data centres and investing in working out how to use AI in firms. There are also wealth effects via equity markets. People who have exposure through the stock market to the value of the AI firms can maintain higher consumption than otherwise if these share values remain strong. These demand effects may offset productivity gains initially.

Over the next few years, the net effect is uncertain. Over a decade, AI is likely to reduce costs in sectors where it is effective. However, productivity gains may be uneven: in sectors where there are fewer productivity gains, relative prices may go up.

With euro area growth close to estimated potential, do you currently see inflation risks from the economy running at its speed limit?

In 2023 and 2024, growth was below potential. There is still spare capacity, particularly in manufacturing. We would need a period of above-potential growth in order to run that down. Potential growth estimates vary, and labour supply could still expand further in some countries. We are near potential but not clearly above it.

How much slack remains?

There is some slack, but I will not put a precise number on it. Given the flat Phillips curve, small deviations around potential are not the main inflation risk. The main risks come from external shocks, particularly big swings in energy prices and geopolitical events.

The current staff forecasts for inflation predict six quarters of annual inflation below the ECB’s two per cent target. If there were six quarters of above-target inflation, would the ECB be equally relaxed?

We are symmetric in caring about deviations above or below two per cent. When we look at a deviation of inflation from the target, we ask “What’s the origin of it and do we think it’s going to be persistent? Do we think it is going to disrupt expectations?” If the assessment of positive and negative deviations turns out to be symmetric, our response is symmetric. But it is important to be aware that the inflation dynamics might be different. If a downside shock persists, we may drift towards the lower bound. To the upside we could get non-linear dynamics, as inflation might overshoot.

How do you look at the current deviation from the two per cent target?

When I look at the inflation forecast, I see non-energy inflation converging to the target, from above [two per cent] this year. I think that’s a good projection, in particular as inflation is not expected to settle below our target.

What are the main drivers of current inflation?

We’ve had mild energy deflation recently – lower energy prices were a drag on the overall inflation rate. We expect it to go from being mildly negative to being a little bit positive, including owing to the new EU Emissions Trading System (ETS2) in 2028. We expect wage deceleration to continue this year. Food inflation may remain slightly above headline.

If non-energy inflation is so crucial for your assessment, why don’t you put it at the centre of your monetary strategy, instead of headline inflation?

The reconciliation is the medium-term orientation. It’s correct to focus on overall inflation in our communication because that’s what people experience. Saying we don’t care about energy prices would not be a good message. Non-energy inflation is a useful proxy for medium-term trends. Energy shocks are more volatile. They can get big, and if they get big, they will permeate to non-energy inflation as well.

How do you define “medium term”? It is generally understood to mean two to three years. Is that correct?

It very much depends. The medium term is not a fixed time frame. If inflation deviates for too long, then expectations are at risk of de-anchoring. For this reason, when inflation was high, we said we wanted to get it down in a timely manner. We believed it was important to emphasise that.

One way of looking at the ECB’s price stability mandate would be to say “OK, inflation is now back at around two per cent, we still have slack in the economy and expect six quarters of slight undershooting – in theory this could create the case for further cuts.” This is obviously not the way the ECB is looking at the matter. Why?

Most of the time, focusing on the primary mandate also delivers the correct amount of either accommodation or restriction for the growth dimension. The economy is currently growing in the neighbourhood of its potential. Non-energy inflation is still converging from above two per cent, and there was some upside surprise in compensation per employee in the autumn. This is not an environment where I see an argument in favour of taking a bit of risk on inflation. I think where we are now is okay.

Would that assessment be different had we not seen this massive inflation spike a few years ago? Is the ECB scarred by this experience?

I think that we carry two scars. One scar is the chronic, below-target inflation before the pandemic. That is still in the memory bank. And then of course there is a scar of that very costly high inflation episode. There are material risk factors on both sides of the target. Before the pandemic, many people were convinced that inflation was structurally never going to reawaken. People now know it can.

Doesn’t the ECB run the risk of repeating an error made at the start of the inflation spike? Back then, it argued higher inflation was temporary. Now, a similar argument is made for below-target inflation.

That’s a good question and I have a clear answer on that. It’s a question of scale. We’re currently talking about a very small undershoot, and there’s a fundamental difference between large and small shocks. For instance, when we now see falling energy prices, do we think, for example, that airlines are going to cut their prices a lot because their energy bill is lower? Maybe a little bit, but not massively. The pass-through mechanism from energy prices to wider prices in the economy is probably limited as long as the changes in energy prices are relatively small. But we’re continuing to be vigilant, and I think we shouldn’t be dismissive of undershoots or overshoots. But at this point in time, we shouldn’t be pre-emptively saying the shortfall is so big, let’s cut in response.

Additional questions 2 March 2026, following the events in the Middle East

How concerned are you that the military conflict in the Gulf can end the proverbial “good place” for the ECB?

An escalation of conflict in the Middle East has been one of the main risk scenarios tracked by the ECB. Eurosystem staff published a scenario analysis in December 2023 that indicated there would be a substantial spike in energy-driven inflation and a sharp drop in output if a conflict led to a persistent drop in energy supplies and disruptions in regional economic activity. The impact would be amplified if it also gave rise to a repricing of risk in financial markets.

What impact do you expect on growth and inflation in the euro area, and what could trigger a response from the ECB?

Directionally, a jump in energy prices puts upward pressure on inflation, especially in the near term, and such a conflict would be negative for economic activity. The scale of the impact and the implications for medium-term inflation depend on the breadth and duration of the conflict. The ECB will be closely monitoring developments.