Lagarde: AI could lift Europe’s productivity, but its inflation effects remain uncertain

Christine Lagarde, President of the European Central Bank, told the European Parliament on 28 September 2026 that artificial intelligence could raise Europe's productivity, competitiveness and living standards, while its eventual effects on employment, demand and inflation remain uncertain. She described AI as capable of reshaping production processes, business models and economic structures, with effects working through interconnected demand- and supply-side channels over time. She said the outcome depends on firms' decisions, investment and workers' skills, and that the central bank must track these effects when assessing the economy and monetary policy. The speech

More investment, but intensive use remains limited

Lagarde said firms were expected to devote about 10% of their total investment to AI in 2026. AI-related borrowing also accounted for roughly a quarter of growth in credit to firms. Adoption intensity varied considerably: an ECB survey found that, by late 2025, 38% of euro area firms reported at least moderate AI use, while only 7% reported significant use. Lagarde's speech

Higher productivity could help firms produce more with existing resources and lower costs over time. Other things being equal, that could reduce inflationary pressures in the long term. The scale and timing of the effect depend on how widely and deeply the technology is used. The firm survey also distinguishes adoption from investment intended to expand its use. The SAFE survey findings

One ECB staff estimate referenced in the speech suggests that rapid and broad AI adoption could add about 0.3 to 0.4 percentage points to annual euro area productivity growth over the coming decade. Under slower adoption, the estimated effect would be roughly half as large. These are scenario estimates, rather than a report of productivity gains already realised. The estimate explained in the speech

The purpose of AI use matters for jobs

Lagarde highlighted the difference between applications in the workplace. Firms using AI for research, innovation and new products tend to hire more staff. Firms whose main objective is cutting labour costs report reductions in employment. ECB research on hiring examines this distinction. AI and hiring in Europe

She said more than half of workers use AI in their jobs and that, on balance, firms are still hiring. Survey evidence also suggests that firms making significant use of AI are more likely overall to recruit staff during the transition phase. The longer-term question is whether the technology will mainly help workers perform their jobs or replace some tasks and jobs. The outcome could affect incomes, the distribution of gains, purchasing power and demand; the direction and magnitude of those changes remain uncertain. Effects will differ across workers, firms and sectors. Lagarde noted that past general-purpose technologies had not reduced aggregate employment over the long term, while it remained unclear whether AI would follow that pattern. The 28 September speech

Capital, infrastructure and skills need to develop together

Effective AI use requires investment in innovation, computing capacity, data centres and energy. Firms also need to adapt their working processes and train employees. Noting that European investment still lagged behind the United States, Lagarde referred to InvestAI, the Scaleup Europe Fund and EUR 30 billion for AI Gigafactories in the EU. ECB research on digital investment provides context for that gap and for the role of digital assets in the economy. Euro area digital investment, Lagarde's speech

She outlined three priorities: enabling innovation, strengthening critical domestic capabilities, and adopting AI widely and intensively. More integrated markets, access to capital, skilled workers and abundant, affordable energy are part of those conditions. She called for less fragmentation in the Single Market, progress on the savings and investments union and a faster energy transition. AI factories, testing facilities and regulatory sandboxes could help turn research into commercial applications, alongside greener chips and more efficient algorithms. Stronger European capabilities, in line with the Technological Sovereignty Package, should help critical activities continue under different circumstances; the goal is not complete self-sufficiency. Europe also wants a strong position in the global AI value chain for economic and geostrategic reasons. Broader adoption also needs targeted retraining and measures to address skills shortages, together with intensive and effective use. She referred to the AI Strategy and the Commission's forthcoming industrial AI initiatives in priority sectors. Lagarde's speech

Financial risk and the monetary-policy context

She said AI investment activity also depends on financial-market developments and whether risks associated with booming AI funding materialise. Lagarde also pointed to the concentration of stock-market valuations in a small number of AI-related firms and their growing debt financing. A sharp reassessment of these firms' prospects or debt sustainability could reprice financial assets, with effects spreading to European investors and the wider economy. A footnote also notes that US technology firms raising more funds in euro area bond markets could make financing more expensive for other firms and sectors. Lagarde's speech

The speech took place against an energy shock and concerns about inflation. Lagarde described resilient euro area activity, with solid, broad-based real GDP growth in the second quarter of 2026, expected to have continued into the third. Increased government defence and infrastructure spending supported manufacturing, while recovering consumer confidence from spring lows helped services. AI-related activity was visible in digital services, business investment and exports. The labour market remained robust, although employment and labour-force growth were slowing and productivity had gradually picked up. The assessment of economic conditions

Lagarde cited inflation of 3.2% in August, compared with 2.9% in July, and July unemployment of 6.4%. ECB staff projections put economic growth in 2026, 2027 and 2028 at 0.9%, 1.4% and 1.5%, respectively. Projected average inflation for those years was 3.0%, 2.5% and 2.1%. Projected inflation excluding energy and food was 2.5%, 2.6% and 2.3% for the same three years. The 2027 and 2028 inflation outlook had been revised higher than forecasts a few months earlier, mostly because of higher energy prices. Short-term inflation expectations remained elevated, while most longer-term measures were near the 2% target. Lagarde also pointed to upside risks for inflation and downside risks for growth. The speech

She also explained the decision to raise the ECB's three key interest rates by 25 basis points at its meeting earlier that month. The assessment considered the inflation outlook, the transmission of energy-price increases to other prices and wages, and monetary policy's effects on borrowing costs and growth. A notable rise in long-term interest rates since the previous meeting could slow growth and limit energy-price pass-through more than the September projections assumed. She argued for a measured response: the shock was too large to disregard, but there was not yet evidence of it becoming embedded in wages. For AI, the central bank's task is to study its channels of influence on productivity, investment, employment, financial conditions and price stability. In closing, Lagarde stressed that uncertainty about AI should not prevent action to improve Europe's productivity and living standards. Lagarde's speech

In the inflation breakdown, energy inflation reached 14.3% in August, compared with 10.3% in July. Food inflation fell from 1.2% to 1.1%, while inflation excluding energy and food was 2.4%. Nominal growth in pay and benefits per employee slowed from 3.6% in the first quarter to 3.3% in the second quarter. Lagarde said there were no signs at that stage of a material energy-shock response in wages. The distinction between the initial energy pressure and its spread to other prices and wages mattered for assessing the monetary-policy response. The speech's economic detail