Lagarde Warns EU Growth Model Eroding Amid Global Trade Tensions

European Central Bank President Christine Lagarde has sounded a warning about the continent's post-war growth model, saying it is 'eroding' and unlikely to return to its former form. Speaking at the World Economic Forum's International Business Council in Geneva on Wednesday, she identified three pillars that had historically driven Europe's growth: expanding global trade, manufacturing supported by access to cheap energy, and a stable rules-based global order underpinned by a U.S. security umbrella.

All these pillars are weakening today, Lagarde said. She noted that more than 2,500 trade restrictions were implemented globally last year alone, with the U.S. imposing tariffs on European goods including steel. The U.S.'s pullback from leading Western security is also adding pressure to the European economy, she added.

Lagarde warned that as global order erodes, capital flows into Europe are at risk. She said that economic dependencies can be weaponized and perceptions of deterrence weaken when there's a threat of conflict, causing firms to invest less and weighing on output and consumption. The ECB president also issued a warning about the AI revolution, saying Europe cannot afford to miss out like it did with the first digital revolution.

Lagarde pointed to 'encouraging signs' that European firms are investing in AI but said questions remain as to whether they can create conditions for that investment to spread and scale. She proposed a range of measures, including an optional EU-wide corporate legal form and capital market reforms, to help European companies grow at home and boost productivity.