BRUSSELS: Europe’s labour market has proved surprisingly resilient in the face of a once-in-a-generation inflation shock and aggressive interest-rate hikes, according to European Central Bank (ECB) president Christine Lagarde (pic).
Employment expanded by 4.1% between the end of 2021 and mid-2025, nearly as much as the economy and roughly twice as much as an established economic rule would suggest, Lagarde said last Saturday in Jackson Hole, Wyoming, where she’s attending the Federal Reserve’s (Fed) annual symposium.
She added that both global tailwinds and domestic strengths helped deliver such an outcome.
“Inflation has fallen sharply, and at a remarkably low cost in terms of employment,” she said in remarks prepared for a panel at the conference.
“By understanding the sources of recent resilience, we can be better prepared for the next shock, whatever shape it may take.”
The ECB – just like the Fed and the Bank of England (BoE) – was forced to raise rates sharply in recent years in response to spiralling consumer prices, and has been in the process of unwinding that monetary tightening as inflation retreats toward 2%.
The central bank’s latest projections show it settling at that level in 2027, and policymakers have signalled that their job may be done.
Officials kept the deposit rate unchanged at 2% in July, and it looks increasingly likely that they’ll do so again next month. Bundesbank president Joachim Nagel told Bloomberg last Friday that there’s a “high bar” for further action following eight cuts to date.
In her remarks for the panel, which also features BoE governor Andrew Bailey and Bank of Japan chief Kazuo Ueda, Lagarde didn’t elaborate on prospects for interest rates.
Discussing the reasons for Europe’s labour-market strength, she argued that policy tightening and the corresponding disinflation coincided with an easing of supply constraints worldwide, a steep drop in energy prices and proactive fiscal policies.
But she also highlighted a delayed response of wages to inflation that supported higher employment, a reduction in hours worked and an expansion in labour supply.
“Looking ahead, it is difficult to say with confidence whether the patterns of recent years will persist,” Lagarde said.
The demographic trend is likely to continue and labour hoarding could persist, weighing on labour productivity, she argued.
But automation and artificial intelligence might also work in the opposite direction.
“The European labour market has come through recent shocks in unexpectedly good shape,” Lagarde said.
“But we should be cautious in assuming that this unique constellation of forces will last.” — Bloomberg
