RegStream

Interview with Piero Cipollone, conducted by Federico Fubini9 January 2025

The major European economies seem to be going through a structural crisis affecting industry and they are losing ground to the United States. What’s going on?

I wouldn’t want us to be barking up the wrong tree. Do we really want to compete with China on manufacturing costs? According to some studies, even if we levied tariffs of 100% on Chinese cars, we still couldn't win on price. Moreover, even the United States produces fewer cars than Europe today.

So what’s the point?

Let’s look at the sectors that explain the productivity gap between Europe and the United States and that weaken us competitively against China, namely technology and finance. It’s not enough to adopt the solutions developed by others, it’s also important to be able to compete in those sectors. If a European company adopts high-tech solutions like artificial intelligence, it will produce more for the same amount of labour input. But this increase is unlikely to be transformed into greater added value. In fact, it is usually a US big tech monopoly that provides these solutions to European companies, and it will probably be the one that benefits from the increase in physical productivity by raising the price of the service it offers, which pushes up production costs and reduces the added value for European firms.

Do you mean that we should innovate more in Europe?

Based on the number of patents, Europeans and European universities are not lagging behind the United States. However, our inventors and producers end up going there. In recent months we have seen some of our leading innovative firms move to the United States and benefit from the size of its product market, the scale of its financial markets and US venture capital. In Europe we are losing the frontier technology and the scalability race, we think too much in defensive or national terms. That’s why we started to lose ground with the rise of the internet at the end of the 20th century and the next rung on the ladder could be artificial intelligence.

So what’s the solution?

Europeans are just as capable. But we have to bear in mind that in the current wave of innovation, the marginal cost of the product is zero. For those who develop new software, for example, increasing the supply from one customer to one billion customers is in many respects free. So if there is a very large target market – such as the United States or China – that operator will grow a lot, and very quickly. That’s where Europe’s problem lies: we do not have a complete single market for goods and services, or for capital. The International Monetary Fund estimates that fragmentation within the European Union is equivalent to tariffs of 44% on goods and 110% on services.

So defending the established industrial excellence of European countries is a rearguard action?

To be able to do this, we need to innovate and combine tradition with innovation, investing and moving away from a mercantilist mindset. While we complain about the euro area’s loss of competitiveness, we have a current account surplus of around 3% of GDP. This means that, in net terms, we invest €435 billion less than we save in the euro area. If we invested that 3%, we would have half the funds estimated by Mario Draghi to implement his plan and we could protect Europe’s future as a productive base.

Are you referring to investments of €800-900 billion a year?

The money is there, as are the universities that produce the bright minds and the ideas. It’s a matter of knowing how to use the depth of our internal market to do what they do in the United States. We have not yet accepted that individual European countries no longer have the necessary scale to challenge world leaders. It reminds me of the situation in Italy in the 15th century: while the French, the Spanish and the English were building great unitary states, Italy remained divided into so many small regional units and despite its expertise, wealth and culture, it lagged behind. Today, the solution lies solely with us, as Europeans.

At the ECB are you still surprised by the weakness of the euro area economy?

Since June, staff have revised down their projections for GDP three times. Between 2024 and 2026, the cumulative revision is for almost 1 percentage point less of GDP. And the current estimates only partially take into account the uncertainty surrounding future US trade policy, which is encouraging many players to sit on the fence.

Do you have any forecasts about what Donald Trump will do?

It’s difficult to quantify the precise impact because we don’t know in detail how he will implement his programme. And as I said before, it is precisely this uncertainty that could hold firms back, and it is certainly not good for investment and consumption.

Is that the reason for the current weakness of the euro area economy?

Actually, the biggest surprise for us has been the slow recovery in consumption. We expected it to be faster, but households are saving instead.

Why is that?

The average disposable income of households has grown, but the contribution from labour income has been relatively small. Interest income, dividends, rents, stock market returns and real assets have grown. These are sources of less liquid income that does not go directly into people’s pockets and are held mostly by wealthier households. Some groups of lower-income households that saw a reduction in their wealth and had to dip into their reserves to maintain their standard of living during the pandemic and the energy price shock are now trying to reduce their debt levels and rebuild their savings.

And what about investment?

Investment fell in 2024 and will see only a small increase over the next three years. In a context of weak demand and high uncertainty, firms are hesitant to invest. At the end of our projection horizon in 2026, investment as a share of GDP is seen to be below the levels recorded in 2023, despite major public investment – related to national recovery plans, for example. But how will we bring artificial intelligence into factories and offices if we don’t invest? That’s why I’m saying that keeping demand low to try and protect ourselves from future inflation shocks is, in my view, counterproductive at this point in time. A further erosion of our economic potential would increase inflationary pressures rather than reduce them.

What should the ECB’s monetary policy do?

In my opinion it shouldn’t try to guard excessively against possible future inflation shocks. It should seek to help the economy reach its potential, but without forcing it, because that could drive up inflation expectations. However, running the economy below potential weakens it and reduces the scope to react to shocks when they occur. Having a higher “speed limit” for the economy, with real GDP growth consistent with its potential and wage growth consistent with productivity gains, helps to address future problems related to price dynamics with less stress.

Will the recent increases in natural gas prices have an impact on inflation?

Our December projections already assume gas prices in 2025 will be 25% higher than the average for 2024. A gradual decrease is projected in subsequent years. Futures prices currently appear to indicate slightly higher prices over the coming months. In March we will update the projections and assess the impact on inflation over the medium and longer term.

Will the freezing of Russian reserves denominated in euro cause some emerging countries to lose trust in the euro as a reserve currency?

The euro accounts for about 20% of international reserves, while the euro area has a share of around 12% in world GDP. This means that the euro is recognised as having a greater intrinsic value than the euro area’s share in the global economy. But we have to ensure that the euro continues to be used in international transactions and as a reserve currency.

Is this one of the reasons why the ECB is working on the digital euro?

The digital euro has an internal dimension and serves to reinforce the strategic autonomy of the euro area. Payments are a good example of a sector where we don’t make the most of Europe’s scale but depend on foreign firms – US firms today and maybe even Chinese firms tomorrow.

With digitalisation marginalising cash (today it is used in just over 40% of transactions), European citizens no longer have a means of payment that is universally accepted across the euro area. We are at the forefront in defending the freedom of anyone to use cash whenever they want to, within the limits of the laws of each country. But faced with the expansion of online commerce, which today accounts for around 36% of transactions in value terms, European citizens need to be given the additional option of using a digital form of cash that is simple to use and that allows payments to be made throughout the euro area. Otherwise, we will continue to be dependent on foreign payment service providers for any purchases made with cards and mobile phones. Today when we use a card, two times out of three we use the services of a non-European operator. This dependency is often reflected in higher fees borne by the merchant and ultimately by European consumers.

What are your thoughts on stablecoins?

In future a digital euro will allow us to safeguard the use of our currency – and therefore our independence – including with respect to stablecoins, which are currently mainly based on the US dollar. In addition, the digital euro will provide European firms with an infrastructure that enables them to offer not only traditional services, but also more innovative ones based on “conditional payments”, throughout the whole of the euro area. For example, European banks could develop solutions that offer automatic digital reimbursements to citizens if a company is late in providing a service. The ability to compete more strongly on the European market thanks to the infrastructure provided by the digital euro and the associated innovations in products and services, would strengthen European firms and put them in a position to offer their services in the rest of the world too, as their peers from other jurisdictions do today. This would be another way to safeguard the role of the euro.