Holiday greetings from Sintra

At the ECB’s annual retreat in Sintra, Portugal, Christine Lagarde argued that Europe has become more resilient to external shocks thanks to a stronger financial framework and progress on the green transition.

That resilience is important. But it should also change the monetary reaction function. If external shocks have a more contained impact on the economy, not every inflationary disturbance should automatically justify a restrictive response.

The difference with the Fed is relevant here. The Federal Reserve has a broader mandate: maximum employment, stable prices and moderate long-term interest rates. The ECB’s primary mandate is price stability.

Price stability matters. But in Europe today, the focus should increasingly be on economic activity, credit conditions and employment. Raising rates in response to externally driven inflation shocks, while growth remains fragile and industries such as the German car sector are under pressure, risks being too theoretical.