Monetary Policy in Testing Times: Power Politics and AI
Ladies and gentlemen,
Good morning, everyone. It is a pleasure to be here at the Citi Macro Forum to discuss the economic outlook and the challenges facing monetary policy in exceptionally testing times.
Slide 2. Europe is resilient – but under geopolitical and technological pressure
Let me focus on three themes today. First, the resilience of the European economy in the face of geopolitical shocks.
Second, the opportunities and challenges created by the AI revolution.
And third, the implications for euro area monetary policy and the longer-term prospects of Europe and Finland.
The common thread is that Europe must navigate pressure and opportunity at the same time: geopolitical instability on one side, and rapid technological change on the other.
Slide 3. Euro area growth remains durable
Europe has shown considerable resilience during a period marked by extraordinary uncertainty. In September, the ECB revised its growth forecast for the euro area upwards. The euro area economy is now expected to grow by slightly less than one per cent this year and by around one and a half per cent in each of the following two years.
Defence spending and infrastructure investment provide support to demand. Consumer confidence has gradually improved. And signs of increased AI-related activity are becoming visible in investment, digital services and export performance.
The outlook is nevertheless marked by uncertainty. The conflict in the Middle East and volatile energy prices remind us that resilience cannot be taken for granted. Importantly, the European economy has not stood still. Businesses and households have demonstrated capacity to adapt.
At the same time, Europe can benefit from a structural transformation that may prove even more consequential in the long run: the transition toward cleaner and more secure energy systems. Finland provides one example of this transformation, with electricity production now 96% fossil-free.
Slide 4. Finland’s growth outlook has improved
Speaking about Finland, our growth outlook has substantially improved.
The Finnish economy has benefited from stronger exports, which have been the main driver of growth this year. Growth prospects have improved compared with earlier forecasts, supported in part by the data centre boom, which is drawing new investment to Finland and strengthening demand for clean electricity, digital infrastructure and related services.
Slide 5. AI adoption can lift Europe’s productivity
The current wave of AI innovation is already influencing investment patterns around the world. Large-scale investments in data centres, computing power, software, digital infrastructure and skills development are creating new sources of economic momentum. AI is boosting innovation and is emerging as an important driver of global growth.
For Europe, the decisive issue is not only who invents the technology, but who adopts it widely and productively across firms and industries.
Historically, Europe has often been strong in scientific knowledge and technological capability, but less successful in scaling innovation. The opportunity before us is therefore one of adoption and implementation. Investments in human capital, skills, digital infrastructure and reliable energy supplies can enable Europe to convert technological advances into stronger productivity growth and greater competitiveness.
Of course, technological revolutions are rarely smooth. Rapid innovation can lead to misallocation of capital, valuation corrections and financial market volatility. These risks must be managed carefully, but the underlying technological transformation will in any case continue.
Slide 6. The energy shock keeps inflation above target
In the euro area, inflation remains above target, mostly due to higher energy prices. Importantly, however, inflation is currently not broad-based. Wage growth remains moderate, and the second-round effects have thus far remained limited. At the same time, upside risks have increased, requiring vigilance and a steady commitment to price stability.
For central banks, this environment presents a difficult balancing act. Monetary policy cannot produce more oil, reopen shipping lanes or resolve geopolitical conflicts. But it can ensure that temporary shocks do not become permanently embedded in inflation expectations and wage-setting behaviour. The credibility built by central banks over recent decades remains one of the most valuable public assets we possess.
Slide 7. Europe faces three strategic tests
This brings us from the cyclical outlook to the structural agenda. Europe’s resilience today must be converted into strategic capacity for tomorrow. I would highlight three tests.
The first is security. Europe must take greater responsibility for its own defence and reinforce cooperation in security-related investments and procurement.
The second is energy resilience. We need an energy system that is competitive, sustainable and less vulnerable to external shocks.
The third is productivity growth. Europe's long-term prosperity depends on stronger innovation, deeper capital markets, investment in human capital and the removal of unnecessary barriers that hinder entrepreneurship and technological diffusion.
Monetary policy alone cannot solve these challenges, but it can provide a stable foundation upon which these solutions can be built. The role of the ECB is to provide that steady hand amid uncertainty.
Let me conclude.
Power politics is testing Europe’s resilience. Artificial intelligence is testing Europe’s capacity to innovate and adapt. The challenge for policymakers is to preserve stability while enabling and boosting transformation.
If we respond with unity, investment and sound policy, Europe can turn this testing time into a decade of renewal and prosperity.
Thank you, and I look forward to our discussion.