Looking ahead, the June 26th Eurosystem staff projections see real GDP growth at 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028. Staff now expect domestic demand to be weaker than they projected in March as the war has dented confidence and higher energy costs are weighing on real incomes. At the same time, household balance sheets remain solid overall and consumption should continue to be the main driver of growth. Investment should also be supported by firms spending on new digital technologies and government spending more on defense and infrastructure.
The war is likewise pushing up inflation, which rose to 3.2% in May from 3% in April. The main driver of inflation since February has been rising energy inflation, which was above 10% in both April and May. In May, inflation excluding energy and food also increased to 2.6%, partly reflecting the initial indirect effects of higher energy prices. And you have that pretty well established in the inflation documentation that you have in your two pages if you have had a look at it.
Reflecting this energy spike, inflation expectations over shorter horizons have risen well above the levels seen before the outbreak of the war in the Middle East. But the public does not currently expect high inflation to be lasting. Most measures of longer-term inflation expectations stand at around 2%, supporting the stabilization of inflation around target in the medium term. And that's the third graph that you have on the first page of the documents that we have sent you.
We are confident that with appropriate monetary policy action, inflation will return to target. The Eurosystem staff projections foresee headline inflation at 3% in 2026, 2.3% in 2027, and 2% in 2028. But the outlook remains uncertain with upside risk to inflation and downside risk to economic growth. The peace agreement in the Middle East is welcome, but the situation remains fragile with the risks of setback or possibly re-escalation.
The full implications of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects. This uncertainty is reflected in the broad range of outcomes for inflation and growth in the alternative scenarios prepared by staff in the context of their projections and published on our website, and that include a milder scenario, an adverse scenario, and a severe scenario.
So, in line with our commitment to ensuring that inflation stabilizes at our 2% target in the medium term, as you indicated, Madam President, we decided to raise the three key ECB interest rates by 25 basis points at our last June meeting. The decision to raise rates, fully considered and discussed, is robust across the scenarios prepared by staff, the milder, the adverse, and the severe. Meaning that in all scenarios, a rate hike was warranted.
Recent developments have remained within the range of scenarios considered. With this decision, we remain well positioned to navigate the uncertainty caused by the war, and we will, of course, closely monitor developments and follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission. And we are not pre-committed to any particular rate path.
Let me now explain in more detail how our monetary policy strategy guides us in an environment shaped by frequent supply shocks, and how it supported us in the decision that we took in June. The latest shock emerged suddenly and developed rapidly, but it did not find us without a compass. Our 2025 strategy assessment focused precisely on how monetary policy should respond in an environment characterized by higher uncertainty and more frequent supply shocks, as you indicated, President, in the last 4 years in particular.
Our strategy is designed to ensure that we can continue to deliver price stability under such conditions, and it rests on three principles. And those principles have guided our reflections and our decision-making. First, we must carefully assess the nature of the supply shock, its size, persistence, and propagation. Monetary policy cannot lower energy prices directly. The Central Bank cannot reopen the Strait of Hormuz. Let's be clear.
But it must assess the extent to which higher energy costs spill over into other prices, what we call the indirect effects, and risk triggering second-round effects through wages and price setting. Both the size and persistence of the shock are critical. Small and short-lived shocks typically have limited effects beyond the energy component. But as shocks become larger and more persistent, their impact can increase in a non-linear way with stronger and more widespread effects on prices and on wages.
The macroeconomic environment also plays a key role in how the shock propagates. When demand is strong, remember 2022, for instance, firms may find it easier to raise prices. When labor markets are tight, workers may be in a better position to bargain for higher wages. These dynamics are more likely to become relevant when inflation is already elevated.
Compared with previous inflation episodes, however, at this stage, the current shock appears to be smaller in magnitude and occurring in a different context. During the previous episode, the economy was emerging from the pandemic, which had created significant macroeconomic imbalances, including supply chain disruptions, and highly accommodative monetary and fiscal policies to support recovery. In contrast, at the onset of the current shock, inflation was closer to target, if not at target, and monetary and fiscal policy were no longer highly accommodative.
This suggests that the pass-through may be more limited thus far. The risks remain if the shock intensifies or persists. But this does not mean that we can be completely complacent. After the high inflation period of '22 and '23, price and wage formation may be, we don't know yet, we're not seeing it, may be more sensitive to new shocks. The memory muscle is better trained.
Second, we do not only focus on the baseline. We also focus on the risks around it. In an uncertain environment like this one, policy cannot rely solely on the most likely path for the economy. As a result, we place strong emphasis on the risks surrounding the baseline and where appropriate, we use alternative scenarios to assess how different shocks configurations could affect the outlook. And you have a clear description of those shocks, which is the last graph on the second page where you have all three scenarios, the milder, the adverse, and the severe. Both in that it applies to GDP and to inflation.
The non-linear effect of supply shocks also make this essential. When they become larger, more persistent, we can see disproportionately greater deviations from our inflation target. The scenarios that we have been using since March to assess the current shock are a key tool of capturing these risks and guiding policy decisions at a time of high uncertainty.
Third, our policy response be tailored and graduated. In line with the medium-term orientation of our strategy, the appropriate response to a deviation of inflation from target is context-specific, taking into account its source, size, and persistence. So, there are three broad cases that we should consider. If the shock is small and temporary, short-lived, it can in principle be looked through. I've heard that many times. Why didn't you look through? Well, if the shock gives rise to a sizable, but not too persistent overshoot of our target, a measured adjustment of policy is warranted.
If, however, inflation is expected to deviate significantly and persistently from target, our response must be appropriately forceful or persistent to prevent self-reinforcing dynamics arising and the risk of inflation expectations de-anchoring. This is the framework which guided the decision that we took in June. For now, we are in the second case. The shock is too large to look through without jeopardizing our target. But, we see no evidence yet of de-anchoring of inflation expectations or second-round effects that would warrant a more forceful policy response at this stage.
This graduated approach requires us to remain agile, and by proceeding meeting by meeting and staying data-dependent without pre-committing to a particular rate path, we can adjust our response as the shock evolves and ensure that it remains proportionate. So, to conclude, supply shocks are becoming more frequent. The ECB is well equipped to meet this challenge. Our updated strategy provides a clear framework to assess shocks, manage risks, and calibrate our response. It allows us to respond proportionately to the shock we face and to remain anchored to our medium-term objective of price stability.
But monetary policy cannot fully offset the impact of such shocks. Strengthening structural resilience, especially in the energy sector, will be essential to reduce the euro area's vulnerability to external supply shocks. Finally, before taking your questions, I would like to very specifically thank all of you, but in particular the rapporteur, the shadow rapporteur, and this committee, Madam President, for the progress made on the single currency package. This is an important milestone in moving the digital euro project forward and anchoring it firmly in the democratic debate. This is a matter that I have personally been engaged in for the last six and a half years, soon seven, and I'm delighted to see that it's coming to fruition in this so important arena of democratic debate. Thank you very much.
Thank you, President Lagarde. Thank you for all these explanations that were needed, and I will now open the Q&A session, and we would start with Markus Ferber for EPP. You have 1 minute and a half for the question, and then there is a follow-up that is possible, if you want, of 1 minute. The floor is yours, Markus.
Ja, vielen Dank, Frau Präsidentin, und für den Beschluss vom 11. Juni, die Zinsen zu erhöhen. Ich glaube, das war das richtige Signal, aber ich mache mir auf der anderen Seite Sorge...
Thank you very much for your encouragement on the monetary policy decision that we took last week. And you are right in saying that it's a signal, but it's also, in my view, the right analysis of the data that we received, the projection that we have for the inflation outlook, the risk surrounding our projections as well, and the inflation outlook, the underlying inflation as well, which is a good indication of where we're heading. And in view of all that, I think, and I agree with you, that that decision was warranted. And as I said, is robust across all scenarios that we have produced.
You've mentioned our revision of both GDP and inflation, and you're right that we revised downward, in particular for, well, downward for GDP and upward for inflation. 0.8 for GDP, which is, you know, it's not trivial. I would not call it stagnation. And I think that because it's a Eurosystem decision, we got the best brain of all the NCBs when it comes to projecting the economic result and the expected output to have a good proposal that canvasses the entire Eurosystem. But we did revise downward a little bit. We were at 0.9 in March, we are at 0.8 in June, and the projection in terms of GDP are also revised. 1.4. Sorry. I'm looking at my scenario, which is the wrong way to look at things, of course. But anyway, we've revised slightly down on both '27 and maintained that at '28. Inflation, same thing. We had to revise upward, as I said, 3% for '26, 2.3 and then 2% in '28, which brings us back to the medium-term target that we had.
So, in view of all that, you mentioned one of the instruments that we have available in order to address issues if they were to arise. And I would just like to mention that this instrument, TPI, which we engineered in previous time, is predicated on a number of criteria, on a certain number of conditions, and is certainly not intended to address the fundamentals of an economy and the necessary restructuring that need to happen. So, we have, I think, all the tools needed in order to address any developments in the euro area, but each of them applies to a particular set of circumstances, and each of them obeys a number of criteria, which will be observed by the governing council having the discretion to identify and diagnose the situation. And we will do so if and when it is needed.
No, what I said is when we have a projection for '26 coming from the whole Eurosystem at 0.8, it is not stagnation of our economy. And I think, you know, I don't mean to brag about our wisdom, but I think that we need to examine our numbers with a lot of scrutiny because the Irish numbers, with all due respect to Ireland and the Irish economy, but for all sorts of reasons and the international activity of international companies, these numbers in a way distort a little bit the actual fundamentals of all member states, including Ireland for that matter. So, we do calculate on the basis of the modified domestic index, which has been produced a few years back under the leadership of Philip Lane as governor of the Bank of Ireland, which I think reflects more accurately the activity in the euro area.
Thank you. SN, the Hon. Mr. Fernandez.
Muchas gracias, chair. Bienvenida, presidenta. El tema que nos ha traído hoy aquí, los shocks sobre la oferta, el actual derivado de la crisis en Oriente Medio, pero el anterior derivado del inicio de la guerra en Ucrania y tantos otros, han consolidado una opinión en Europa sobre la necesidad de mejorar la autonomía estratégica, de reducir nuestras dependencias sobre terceras jurisdicciones. Y esto afecta también a la política comercial de la Unión Europea y como digo a toda la agenda de autonomía estratégica en la que la Comisión y los colegisladores estamos trabajando. La cuestión es que reducir dependencias para ser menos vulnerables puede tener también algún impacto sobre el nivel de precios internos o incluso sobre la inflación. Podríamos tener un mundo menos volátil, que es lo que estamos sufriendo ahora, pero la autonomía estratégica y la producción local de bienes y servicios que adquirimos fuera podría tener también algún impacto sobre los precios.
Thank you very much for your question. As I tried to explain in my introductory statement, our objective, our mission, our mandate is price stability, and we have defined it in our strategy review initially in '21, and then again in '25 when we updated, we've defined that price stability objective as the 2% medium-term target that we are constantly reviewing and analyzing on the basis of, you know, inflation outlook, underlying inflation, and the dynamic of monetary policy transmission. So, we regard that as our mission, and I don't think that we are looking at trade-offs, so to speak. We are looking at whatever is going to have an impact on price stability. So, if for instance, if growth was to stagnate, or if sovereignty was going to be undermined, we have to analyze that in respect of what impact it has on price stability. That's how we take it into account.
But for sovereignty to be affirmed and defended, price stability is what we can deliver. Custody of the currency is what we can deliver. Making sure that the payment infrastructure, making sure that in the digital age our currency is solid, this is our duty. But there are multiple other priorities and tasks that we cannot deliver because it is not our mission, it is not our mandate. And it falls within the remit of other authorities in the executive branch, in the parliamentary branch. And I very much hope that this is taken very seriously because it's going to matter a lot in the future.
I fully agree with you. My question is don't you think that the strategic autonomy agenda or the new trade policy that we are implementing in Europe could have any impact on prices? This is my question. Yeah, the strategic autonomy agenda, the necessity to review our trade policy, all of these elements, will they have any impact on prices? And in that case, is the ECB thinking about or trying to calibrate or understand how these policies taken by other institutions could affect price levels? Thank you.
On that particular item, it's unclear. So, we do not have, you know, a final and conclusive analysis of whether that acquisition and defense of sovereign autonomy or on the contrary lack of sovereign autonomy is going to be having a disinflationary or inflationary impact on us. So, we are looking at that carefully. We're trying to analyze it to understand better what the impact will be, but for the moment it's unclear. And I think I'll leave it there and hopefully we can clarify that. The sort of intuitive conclusion is that the lack of sovereignty and therefore, you know, sort of being in the hands of other price determinants would likely be inflationary. But I think we have to get under the hood of that in much more analytical way than I'm doing it now, but that's the intuitive response.
Thank you. For PFE, Occo Zilstra.
Thank you, Madam Chair. That was very well pronounced. I'll continue in Dutch. Mevrouw Lagarde, de ECB verhoogde de rente in de eurozone dus naar 2,25% na een lange periode zonder verandering. Ik persoonlijk had een hoger renteniveau ondertussen al verwacht en eigenlijk ook wel een beetje toegejuicht. Maar dat komt waarschijnlijk doordat u beschikt over data die ik niet heb. En dan bij mij roept het de vraag op, welk renteniveau door de ECB als natuurlijke rente wordt gezien, waarbij de hoogte niet stimulerend, maar ook niet remmend op de economie is. Kunt u daar iets over zeggen? Maar mijn vraag is ook wat breder. Jarenlang hebben overheden kunnen profiteren van uitzonderlijk lage rentes. Maar nu de rente weer dichter bij historische gemiddelden ligt, wordt zichtbaar dat veel Europese landen kampen met hoge schulden, te hoge schulden. België en Oostenrijk kregen recent dan ook een kredietrating verlaagd. Bovendien hebben overheden te maken met structurele uitdagingen rond de betaalbaarheid van pensioenen bijvoorbeeld, waar we het op dit moment hier ook over hebben. En zijn omvangrijke investeringen in defensie afgesproken. Mag ik u vragen hoe zorgelijk u die combinatie van factoren over de houdbaarheid van de overheidsfinanciën in de eurozone vindt? En ziet u een risico dat er politieke druk gaat ontstaan om de rente laag te houden, juist in het oog op de houdbaarheid van de overheidsfinanciering. Dus de hoogte van de natuurlijke rente, de houdbaarheid van overheidsfinanciën en eventuele politieke druk. Dankjewel.
Well, thank you very much for your question. And you tackle clearly one concept which is the R-star, the neutral rate, this sort of ideal point where monetary policy, hence interest rates, neither stimulate nor restrict the activity. And this is that sort of wonderful moment which you can never really assess because it's predicated on the absence of shocks. And we are just moving from one shock to the other as one of you I think identified ever since, you know, 2014, the initial invasion of Crimea by Russia and then thereon we've been moving from shock to shock.
However, economists are very attentive and try to do the best job they can to identify the area where we assume that the interest rate is as neutral as possible. And that range has been identified by the staff of the ECB as being in between 1.75 and 2.25. That was the reference until recently where as a result of multiple factors affecting our economy it was possibly argued that this upper range was closer to 2.5 than to 2.25. Does that make a difference and should we as a result consider that inevitably there is a path as a result of this ECB staff analysis? I don't think so. Because we do not actually use that R-star point or even range to necessarily decide the monetary policy decision that we make. We look, we apply a reasoning and a stance that I have tried to describe in my introductory statement, and it's on that basis that we make decisions.
But, I think I have tried to address your question of the R-star as well as could be, and it's what you said about pension and about, I don't know if you mentioned productivity, but it's clearly one point that would have an impact. These elements we constantly take into consideration, and staff does this analytical work on a regular basis. Do you want a follow-up?
Can I please... Thank you very much for the explanation. I gather from your point of view that at this moment we're not past the situation of stimulating the actual economy. With regard to the amount of public debt, are you worried? That was my final question. Thank you.
There is one element of my response on the previous point that I would like to come back to because you said, 'What is your favorite rate?' or something like that. My favorite one is the one which actually keeps the medium-term inflation at 2%. Because that's the objective we have, and that's how we define price stability. So, whatever is the interest rate applicable that will actually deliver is the one that I would favor myself. Now, the issue of public debt is something that obviously is of concern to the Commission, to the member states in how they define their debt sustainability and how they define the service of their debt. And you know, I should not be ever either fiscal dominated or financially dominated and we should focus at the ECB on price stability as an objective.
Thank you, ECR Giovanni Crosetto.
Grazie Presidente. Presidente Lagarde, lei ha definito l'aumento di tassi di interesse non come una decisione drastica, ma come un semplice segnale. Io le vorrei chiedere a chi è rivolto precisamente questo segnale. Glielo chiedo perché l'aumento dei tassi di interesse come principale obiettivo quello di frenare l'inflazione attraverso una riduzione della domanda interna, andando quindi a ridurre consumi e richieste di credito. Ci sono due motivi che mi portano a dirle che l'aumento dei tassi è stato un errore. Il primo è che questo aumento dell'inflazione è dovuto a fattori esterni, legati principalmente all'aumento dei prezzi dell'energia che tra l'altro non si sono ancora diffusi al resto dell'economia. Il secondo è che questo aumento dei tassi di interesse rischia di indebolire ulteriormente l'economia europea, già duramente provata dagli effetti della guerra. Lei Presidente Lagarde di fatto ci sta dicendo che la BCE vede un rischio inflazione superiore al rischio di una bassa crescita o stagnazione. E questo di fatto in linea con un mandato incentrato solo sulla stabilità dei prezzi che non tiene in considerazione crescita, competitività e quindi occupazione, come invece giustamente fanno i suoi colleghi americani della Federal Reserve. Le vorrei infine chiedere come commenta l'accusa di incoerenza di una politica restrittiva da parte della BCE nel momento in cui la Commissione europea...
Thank you very much and I think you have described part of the rationale behind the decision that we took last year and the decision to increase rates in general. Because the impact that we have in order to deliver price stability and fight inflation is by either dampening demand and/or anchoring or re-anchoring inflation expectations. And when we see the risk of possible de-anchoring of inflation expectations at all levels and however measured either by markets, by surveys or by consumers themselves, it is very important that we make those decisions so that we do not have to necessarily dampen demand as much as we would have to if we didn't pay attention to inflation expectations.
So for the moment as I have said in my introductory remarks, we have seen some de-anchoring of inflation expectations particularly at consumers levels in the short term. So if you look at the charts that you have, if you look at the one on the right side of the first page, you have the inflation expectations and you see that when you compare the February and the April expectations, you see that it has moved up for the first year, a little bit for the three years, and virtually not for the five years. Those are elements that we pay close attention to. And whether it is this one is obviously an indication for the short term, but that's often the case when there is a rise of prices that the expectations of the consumers is hiking up.
What matters to us is the longer term expectations, and that one has been broadly unchanged either by market measures or by survey measures or by consumer measures. So, this, you know, I just wanted to come back to that because it's a really important component in the assessment that we do of the impact of our decisions. I think I will again say what I mentioned. When we see inflation HICP, which includes all the components of the basket, including energy and food, move up in the way it has from the 1.9% that we had in February to 3.2% in May, and more importantly when we see that core inflation, taking out energy and food, is also moving up, particularly propelled by services, which went from 3 to 3.5% in short order, then we have to be very attentive, and we think that we have to take measures, particularly if in the meantime we see that growth, which we have revised a little bit by 0.1, is holding.
And when we see that the financial sector is solid. And that brings me to the comparison with what we have seen in 2008, in 2011, and in 2022, where we had different set of circumstances. Midst of a financial crisis, 2008-2011, when interest rates were hiked, in the midst of an energy crisis, and 2022, when it was not a pure supply shock, you had a mixture of supply and demand, and a fiscal and monetary situation that was vastly different. So, I hope I have explained to you a little better the context in which we have taken our decision, which we believe is, as I said, robust across all scenarios, better one than baseline, but also worse one than baseline, bearing in mind that at the moment, given the reduced uncertainty, we are probably in between base and milder.
I think my first response to your question is that I do not think that, as currently decided, our monetary policy is restrictive. As simple as that.
For Renew, Ludovic Orban.
Thank you, Madam President. I broadly share the assessment you gave us when we have supply shocks, weak economic activity, and huge uncertainty. And even I would add two more hurdles. One is that you mentioned that you are having your reaction function based on the nature of the shocks. I'm even not sure about the nature of the shocks, whether these are temporary, persistent, big, small. You know, it's these are times of high uncertainty. And also the second hurdle I wanted to mention is that also the effectiveness of monetary policy is lower in this environment. Since we are watching the World Cup right now in football, I want to mention the famous Maradona theory of interest rates, which means that if you can somehow shape the expectations of the private sector, then there is no need to make abrupt changes because you know, you can have a kind of a pre-commitment, which in the current environment is impossible. So, therefore, even for shaping the expectations of private players is very hard. So, I have two questions related to that. The first one is that you mentioned energy prices, but I'm a little bit concerned also about food prices because of the fertilizers. And the second question is this uncertainty lowers the potential output because, you know, it's much harder to invest in an uncertain environment. Do we have a kind of an estimate of the potential growth in the Euro area? Is it declining because of this uncertainty? Thank you.
Well, thank you so much for your assessment of our reaction function. I don't suggest that we need the hand of God to deliver, but maybe Maradona can give us a little bit of a push in the right direction here. I completely agree with your analysis of the nature of the shock, which in the climate of uncertainty and almost daily changes is difficult, and that's I think the reason why we need so much the scenario analysis that we have produced and that we have published and that are available and are I think reasonably clear to understand, and they really test our decision across different sets of energy prices, length of the shock, and repercussion within the economy. So, that I completely agree with that.
So, energy prices, as you will see in the scenarios, they are of a different level. They last for a period of time. They return to pre-war levels or sometimes below that, depending on the scenarios. And all in all, what we are seeing now is a significant decline since the war alleged peace agreement memorandum of understanding. And we've seen a decline of 17% for energy, for oil, 18% for gas, increase of electricity prices, but there has been a significant impact of the announced memorandum of understanding between the United States and Iran. Having said that, we are still significantly above pre-war levels by a range of about 30% certainly on oil.
Food prices is more complicated. And when you look at the food prices now, food prices have declined in the last couple of months. And it's counterintuitive because we would have thought, conventional wisdom would dictate that because of the impact on the price of fertilizers, a significant amount of which goes through the Strait of Hormuz, the result would have been an increase in food prices. And you could also deduct from the impact of El Niño that we would also see increased food prices. This is not yet the case. And we believe that the impact on food prices is likely to take a bit longer and we are likely to see that in the course of '27 more than in the course of '26, but we have to be very attentive to that. In fact, food inflation decreased actually to 1.9% in May '26.
On investment, we are seeing a stabilization of investment. Investment had been on the rise. We're now seeing a flattening of investment, particularly from the private sector, less so from the public sector, notably because of the investment in defense and infrastructure. Thank you.
Thank you. Follow the green, has Muslim raisin.
Thank you so much, President. In our committee we are currently discussing on how to strengthen the global role of the euro. We are working on a report there and we will have an event later, but I would also like to get your assessments on this already in our monetary dialogue today on what your view is on the state of play when it comes to the global role of the euro. You have earlier called for the creation of a common euro denominated safe assets to deepen the EU's capital markets and this is also one of the topics we would like to address with our report. So, what I would like to hear from you is on what kind of steps do you see to establish this and also in general a bit more on the current state of play on the global role of the euro and also on how the euro can be strengthened in the economy and the monetary world, which is a bit different than it had been some years ago.
Well, thank you so much and thank you for taking a clear interest in the international role of the euro. For those who don't know, we have an event...
Later today at the House of the Euro, at which we will debate with you notably, but also with Valdis Dombrovskis, Commissioner Dombrovskis, the international role of the euro and how it is characterized, what are the components, what are the missing components, where do we need to do more work.
So, I think in each and every area we have to do what is necessary, and we as central bank for the euro area, we look at what is within our remit and what we can do. We do so with in the background of our mind the attributes of a sovereign currency which plays an international role. The facts first. The euro represents a little over 20% of the currency reserves held by national central banks around the world. It has been more or less stable since 2019. We did not take a hit at the time of the crisis, or if we did, we recovered, but we are not really much where we are in 2019. The other major currencies are number one the US dollar, still of course, although slightly declining. And other currencies, including in particular the RMB, which has slightly increased in both reserves, but also by other measurements. And one component has increased as well, most recently, is the volume and the value of gold as reserve in the reserves of the national central banks. I think this is not the only account by which you measure the solidity and the international pattern of a currency. You have to also measure how much invoicing is done in a currency, how much issuance is done in a particular currency, and that gives an idea of, you know, how strong a currency is.
It's also obvious to us that to strengthen the international role of our currency, we need several attributes that have nothing to do with monetary policy. I think where we can play a role is by being a strong institution, by being an independent institution, by respecting the rule of law, and inscribing our action within those parameters. We also have the responsibility to provide enough liquidity so that those in need of euros in order to avoid fire sales, for instance, that would be damaging for the proper transmission of our monetary policy, have access to plenty of liquidity. And it's in that context that we enlarged and redefined the role of our repo lines in euro, which will become effective in the new format, new framework, as of July the 1st. But other elements are necessary. A clear international trading network, a strong defense, predictable policies by other actors. And all of that is outside the remit of the central bank. But from our perspective, we try to do the best we can in order to respond to the demand in terms of liquidity, the demand in terms of safety and security, and reliance on the institution. Thank you.
Thank you. You follow up?
Yes, very briefly, just because I think in some of your statements in the past, you have been even more clear on what kind of instruments we need to see. I don't want to quote them, but I just would like to ask you if you think, or your assessment is that we are doing enough to strengthen the role of the euro, or if you would like to wish a little bit more ambition when it comes to some of the things we are debating right now.
Well, as we both know, it's a strong attribute of an international currency of reference to have a deep and liquid market that includes treasury bonds, like the US treasuries for instance, and that we do not for the moment satisfy that requirement. When you look at what is common debt issued at the European level, it's 1 trillion as opposed to what would be the international issuance of treasury bonds, which is much more than that, obviously. Under what conditions this could happen? What criteria? What attributes? What guarantees? What moral hazard containment and all of that is something that obviously other parties than the European Central Bank should have to decide. But, it's an important step. Yeah.
Thank you, Madam Chair. Madam Lagarde, the IMF warned recently that several Euro area states are heading towards debt of 130 to 140% of GDP within a decade. So, markets actually do not care why the Maastricht limits are breached, whether it's defense, health, or anything else. The debt is debt. And meanwhile, Brussels keeps banks loaded with government bonds through the NSFR quick fix. The EU froze its liquidity rules below the Basel standard, so that demand for state bonds would not fall, and our borrowing costs stay low. The banks once again treat sovereign bonds as always safe and liquid, which the last crisis proved they are not. This tightens the dangerous link between fragile states and banks. And on top of this, the EU is reviving securitization, the ABS market, which is the very instrument at the heart of the 2008 crisis. So, together, this looks similar to the conditions before the last crisis. I know fiscal policy is not your mandate, but the ECB's asset purchases have repeatedly made it your concern. So, my question is, how do you assess this combination, reviving ABS, freezing Basel through the NSFR, and the escalating debt of member states. Thank you.
Thank you very much for your question, which I'm going to use to actually address a point which is under debate, which will come to you at some stage I'm certain, and that is the issue of changes, of improvements on the financial scene and in the financial sector, which is often presented as simplification, and which in our view is necessary as long as it does not undermine the resilience of the financial sector. And trust me, we will be very attentive to all proposals, and there are some very interesting ones underway at the moment. But obviously they should not undermine the resilience of the system. We have lived through 2008, we have experienced the trauma that can result from a financial crisis, and this is not something that we should consider lightly. As a result of which obviously simplification should not be equal to deregulation. Nothing that it's important that this be reminded. Thank you.
Yes, thank you. So, let me develop my question further. The EU's energy and sanctions policy here, it's in practice a partial self-embargo. So, combined with the instability in the Gulf, it points to lasting pressure on energy prices and therefore persistently higher inflation. That leaves you little room for new quantitative easing, and at the same time the rising debt of member states may soon demand the opposite. A new ECB program to keep it afloat. So, the ECB ends up in a sort of a stalemate, unable to do quantitative easing of inflation, but pushed to act because of debt until the monetary will no longer works. So, Madam Lagarde, how do you intend to avoid being trapped in a similar scenario?
Well, thank you so much, but I don't think that I agree with the premise of your own scenario. When you say that we will have lasting pressure on energy prices, this is not what we anticipate. We flag various hypotheticals in our scenarios, and in particular if you look at them in the adverse and the severe scenario, we look at prices and we try to anticipate that. This is not the baseline, certainly. This is not the mildest scenario, and as I've indicated earlier, we are seeing ourselves now between the baseline and the mildest scenario. So, we don't anticipate that. If you look at what the experts in terms of energy, in terms of reserves are telling us, they expect or fear more of an abundance of energy in the future than restriction and increase of prices as a result. But, we have to be prepared for all scenario. I mean, that's a point where I agree with you. And under the circumstances, we also believe that the best response in the face of what we have, this energy shock, its persistency, its size, and its possible diffusion throughout the economy, the best response that we have is the interest rate. So, we're not looking at anything else at the moment. We have plenty of tools in the toolbox, but what we're looking at is the interest rate. Thank you.
