How the ECB wants to make Europe's economy fit

Christine Lagarde, die Präsidentin der Europäischen Zentralbank (EZB), ist eine Frau des geschliffenen Wortes. In ihre Reden baut sie gerne Zitate großer europäischer Denker ein, zuletzt zitierte sie beispielsweise den einstigen römischen Kaiser Marc Aurel: „Das Hindernis ist der Weg.“ Dass Lagarde trotz ihrer mittlerweile fünf Jahre an der Spitze der EZB an der technischen Sprache der Notenbank eher wenig Freude hat, lässt sich in den Pressekonferenzen beobachten, die sie regelmäßig nach den Zinsentscheidungen der Zentralbank abhält, wie zuletzt am vergangenen Donnerstag. Lagarde liest dann häufig vom Blatt ab – hoch konzentriert zwar, aber ohne jene Leidenschaft, die ihr als Rednerin sonst durchaus zu eigen ist.

Umso erstaunlicher ist es, dass Lagarde in ihren jüngsten Reden einen anderen vergleichsweise technischen Begriff immer wieder mit Nachdruck erwähnt hat. Es geht um den Begriff der Produktivität. In einer Rede mit dem weit gefassten Titel „Die ökonomischen und menschlichen Herausforderungen einer sich wandelnden Ära“, Mitte November in Paris gehalten, wäre es für Lagarde ein Leichtes gewesen, einen großen historischen Bogen zu schlagen, ohne sich um ökonomische Feinheiten zu scheren. Trotzdem schaffte es der sperrige Ausdruck „Produktivitätswachstum“ sogar in den flammenden Schlussappell, den die EZB-Präsidentin an ihre Zuhörer richtete. Europa solle als Gemeinschaft agieren, um sein Produktivitätswachstum zu steigern, verlangte Lagarde.

Es gibt einen Grund, warum sich die oberste Repräsentantin der EZB den Begriff mit Vehemenz zu eigen macht. Aus Sicht der Notenbank ist derzeit kaum etwas wichtiger. Deswegen sprechen Lagarde und ihre Kollegen in jüngster Zeit fast genauso viel von der Produktivität wie von Zinsen und dem Kampf gegen die Inflation, ihrem ureigensten Terrain.

Isabel Schnabel, the German on the Executive Board of the ECB, has once again stood out as a pioneer in the field. The former economics professor is increasingly determining the intellectual debates in the committee, and Lagarde trusts her. Back in February, Schnabel made the lack of productivity her topic for a lecture in Florence. At that time, she warned: “Since 2022, a significant gap has opened up in productivity growth between the United States and the euro area.” Productivity growth has recovered noticeably in the USA, but productivity in the euro area is falling. Schnabel was dismayed to find that even in European branches of American companies, productivity was growing faster than in companies based in Europe. She concluded her remarkable and, from the perspective of European companies, highly worrying analysis with a quote from Nobel Prize winner in economics Paul Krugman: “Productivity is not everything, but in the long run it is almost everything.”

How can this rise of the term, which is astonishing to outsiders, be explained – and why is it the central bankers who are pushing so vehemently for improvements here? Ultimately, creating favorable growth conditions is an essentially political task. An area that the ECB should actually stay out of.

To understand the reasons for the rise of the term, one must start with the basics. The sentence “We all have to become more productive” is part of the standard repertoire in the Sunday speeches of many CEOs. What exactly does that actually mean? To put it simply, productivity measures the work results that an employee's effort leads to in a certain amount of time. So if a cobbler sews a shoe in an hour and another cobbler sews a pair of shoes in an hour, one can determine: the second cobbler is more productive than the first (assuming the quality of the shoes is similar). If the work results of both cobblers improve due to certain circumstances, for example better machines, that would be a general improvement in productivity. The first cobbler might produce one pair of shoes in an hour and the second cobbler might produce two pairs.

The example explains the term. But not why it has become so important for the ECB. This has to do with a special situation that the euro area has never experienced before. In the past, it was usually the case that unemployment rose in economically difficult times such as the current one. Companies laid off employees on a large scale. Of course, central bankers were never publicly happy about this; that would rightly have been seen as unseemly. But in times of high inflation, such layoffs still played into the hands of the central bank.

How come? On the one hand, high interest rates dampen inflation by, for example, discouraging companies from investing, not least from building. On the other hand, it also dampens price pressure when people consume less – for example because they have lost their job and therefore have less money at their disposal.

In Germany too, some jobs are at stake in the economic crisis, as was recently the case in the automotive industry. But word has gotten around in many companies that they could soon run out of staff in times of demographic change. That's why they are cautious about layoffs.

This is the special situation that has already been discussed: “In the euro area, we have almost full employment despite the permanent slump,” states Moritz Kraemer, chief economist at Landesbank Baden-Württemberg (LBBW). In September, unemployment in the euro area was lower than ever before at 6.3 percent. At the same time, collective wages rose by 5.4 percent from July to October compared to the same quarter of the previous year. This illustrates the dilemma the ECB is currently facing: wages are increasing despite economic weakness. The dampening effect on inflation that one could previously rely on is largely missing.

Hence the new focus on productivity growth: improvements here can ease price pressure. This is shown by a small calculation made by LBBW chief economist Kraemer: “For the ECB, even a wage increase of ten percent per year would not be a problem if productivity also increased by eight percent. The price per unit of goods would then rise by almost two percent, which would correspond to the inflation target.”

To illustrate using the shoemaker example: If a shoemaker's salary increases by ten percent, but he produces eight percent more shoes per year, the cost per shoe increases far less (namely by 1.85 percent) than the salary increase would suggest. This is achieved not least through technology. But the EU has not particularly distinguished itself in the use of modern technologies recently.

In her lecture in Florence, ECB Director Isabel Schnabel showed that the productivity of the large euro states has lagged behind that of America since the late 1990s, and at the latest since the turn of the millennium. This applies not only to Germany, but also to France, Spain and Italy. Schnabel attributes this not least to the fact that Europeans have invested less in information technology than Americans. They still have the damage to this day.

Schnabel now emphasizes to the FAS: “Higher productivity enables higher wage growth without endangering price stability.” The study of productivity growth in the euro area is therefore an important part of the ECB’s macroeconomic analysis. A figure from Germany shows why the central bankers' unrest is understandable at this point. In the past decade, the average productivity growth rate in the Federal Republic was significantly less than one percent. So the problem is permanent.

Schnabel points out a second theme in his conversation with the FAS: “Higher productivity makes it easier for us to ensure price stability and makes it less likely that we will have to use unconventional monetary policy instruments such as bond purchases.”

The latter is an important point for central bankers. With today's perspective, they are reluctant to remember the time when the purchase of government bonds became a means of monetary policy under former ECB President Mario Draghi. It is now largely undisputed that the bond purchases helped to overcome the euro crisis in the short term, but were accompanied by serious side effects in the longer term. For example, the line was long held that bond purchases had to be reduced before interest rates could be raised – this proved to be a problem in the years of the inflation surge in 2022/2023.

Schnabel also told the financial service Bloomberg: If the economy stagnates for structural reasons and the central bank then lowers interest rates, there is no scope for interest rate cuts in the event of other shocks.

If new growth forces were developed through more productivity, from the ECB's point of view this would also be a way to avoid previous crisis situations. The ideas that central bankers are proposing to achieve this growth are largely agreed upon by economists: strengthening the European internal market, expanding public investment and creating a unified European capital market are among them, for example.

But is this interference in the field of politics also permissible? Even experts who normally don't hesitate to criticize the ECB don't see this as a problem. Volker Wieland, finance professor at Frankfurt's Goethe University, says: “The central bank can certainly bring technical expertise into the public debate about structural reforms in the member states that can increase productivity growth.” It is hardly surprising that Isabel Schnabel sees it the same way. It is the task of politics to create the framework conditions for higher productivity. “We as the ECB can only emphasize how much economic growth and prosperity are determined by labor productivity.” The exciting question remains how much the central bankers will listen to this.