Eurozone inflation fell to 2.4% in December 2024, but ECB chief economist Philip Lane cautions that services inflation and uneven growth persist. A “middle path” on interest rates and structural reforms is crucial for stability.
The eurozone has made substantial progress in reducing inflation, yet ensuring it stabilises at the 2% target without hindering economic growth remains a critical challenge, according to Philip Lane, the European Central Bank’s chief economist.
In an interview with Der Standard on Monday, Lane highlighted that inflation dropped to 2.4% in December 2024, down from a peak of 10% in late 2022. Despite this significant progress, he cautioned that structural factors in services inflation must be addressed to sustain this success.
“We have made significant progress in terms of bringing inflation down, not all the way to 2%, but close”, Lane said. “We had a decline in energy prices, which ultimately brought down overall inflation. That is not going to continue.”
Why the ECB must take the “middle path” on rates
Lane underscored the importance of carefully calibrating interest rates to balance the competing goals of controlling inflation and supporting economic activity.
“We need to ensure that interest rates follow a middle path”, Lane said. “If interest rates fall too quickly, it will be difficult to bring services inflation under control. But we also don’t want rates to remain too high for too long, because that would weaken the inflation momentum in such a way that the disinflation process would not stop at 2% but inflation could materially fall below target. That is also undesirable.”
The ECB reduced its key interest rate from 4% in June 2024 to 3% in December. Lane confirmed that markets do not expect rates to remain at 3% but declined to specify where rates would ultimately settle, noting that the direction for policy was clear.
Regional disparities in economic growth
While inflation is moderating across the eurozone, growth remains uneven.
Lane highlighted stark differences between member states, with some countries, such as Spain, demonstrating robust economic performance, while others, such as Germany and Austria, struggle.
“Some EU countries are growing at solid levels – Spain is the most visible example among the larger countries”, Lane said.
“But for the countries where there is a shortfall, we need to understand the reasons for this. Some countries are more reliant on manufacturing, which is facing challenges globally. The car industry, in particular, faces major challenges. But energy-intensive sectors have also seen a big impact from the Russia-Ukraine war.”
The case for structural reforms
Lane referenced Mario Draghi’s report on enhancing the eurozone’s competitiveness as a roadmap for boosting long-term growth without relying solely on fiscal expenditure.
“A key topic is accelerating reforms”, Lane said. “It’s about ensuring that the European economy is sufficiently integrated, that we have a domestic market large enough for the biggest companies to be able to grow fast enough.”
Lane pointed to fragmented industries, such as energy and telecommunications, as sectors that could benefit from deeper integration. Expanding markets for goods and services, he said, would also strengthen the region’s resilience against external shocks.
External factors and medium-term outlook
Lane also acknowledged global influences, including the slowdown in China’s economy, which is dampening export prices and creating disinflationary effects.
However, he expressed confidence in the ECB’s ability to maintain its inflation target in the medium term.
“We should be able to achieve a medium-term inflation rate of 2%, if monetary policy is set correctly and downside pressures do not emerge”, Lane said.
Balancing stability and growth
With eurozone growth projected at just 1.1% in 2025, Lane emphasised that economic growth and price stability are not mutually exclusive.
“We don’t have to bring the euro area into a recession to achieve our goal of price stability”, he said.
As the ECB navigates this challenging landscape, its focus on fostering structural reforms and maintaining a balanced monetary policy will be crucial to ensuring long-term economic resilience.
