Lagarde warns Europe's growth depends on migrant labour as political backlash builds

Christine Lagarde used the Federal Reserve's annual symposium in Jackson Hole, Wyoming, to deliver a message that sits uncomfortably with the political mood across much of the continent she helps govern: the eurozone's post-pandemic recovery would have been far weaker without foreign workers, yet the very governments that benefit from their labour are moving to shut the door.

Speaking on Saturday to an audience of central bankers and economists, the president of the European Central Bank laid out numbers that contradict the prevailing narrative in several national capitals. Employment in the currency bloc expanded by 4.1% between the final quarter of 2021 and the middle of 2025, nearly matching the increase in gross domestic product over the same period. Foreign workers, who made up roughly 9% of the total labour force in 2022, contributed half of that employment growth.

The arithmetic of recovery

The ECB's calculation is blunt. Without the inflow of migrant labour, Lagarde said, "labour market conditions could be tighter and output lower." She singled out Germany and Spain as the clearest examples. Germany's GDP would be about 6% lower today without migrant workers, a figure that translates into hundreds of billions of euros in foregone output. Spain's strong rebound from the pandemic, she added, "owes much" to the same source.

These are not marginal contributions. The eurozone has absorbed a sequence of shocks since 2021: the energy crisis triggered by Russia's invasion of Ukraine, the steepest monetary tightening in a generation, and a cost-of-living squeeze that pushed real wages negative for an extended period. Through all of it, employment kept rising. The ECB's argument is that migrant labour provided the flexible buffer that allowed firms to expand production without generating the wage-price spiral that central bankers feared.

The demographic backdrop makes the arithmetic harder to ignore. The eurozone's native-born population is ageing rapidly. Birth rates have been below replacement level for decades. At the same time, workers across the bloc have negotiated shorter hours, earlier retirements and more flexible conditions. The result is a structural labour supply gap that migration has been filling, quietly and at scale.

Politics pulling in the opposite direction

Lagarde did not pretend the politics are favourable. Net immigration pushed the EU's population to a record 450 million last year, according to Eurostat, but the political response has been a tightening of borders. Germany has reintroduced controls at its land borders. Italy has struck deals with Albania and Tunisia to process asylum claims offshore. France, the Netherlands, Sweden and Denmark have all moved to restrict family reunification, tighten asylum criteria or reduce quota numbers.

The driver is electoral. Far-right parties have made gains in almost every national parliament and in the European Parliament, where they now hold enough seats to influence the legislative agenda. Their core demand is lower immigration. Mainstream parties, fearing further defections, have adopted large parts of that platform. The result is a policy environment that is becoming actively hostile to the very inflows the ECB says are necessary.

"Migration could, in principle, play a crucial role in easing labour shortages as native populations age," Lagarde said. "But political economy pressures may increasingly limit inflows." The phrasing was careful, but the warning was clear: the economic logic and the political logic are on a collision course.

What the numbers actually show

The 4.1% employment expansion since late 2021 is striking because it occurred while the ECB raised its deposit rate from minus 0.5% to 4% in the space of just over a year. In previous cycles, that magnitude of tightening would have produced a sharp rise in unemployment. It did not. The unemployment rate fell to a historic low of 6.3% in mid-2024 and has barely moved since.

Part of the explanation is the composition of the new jobs. Many of the roles filled by foreign workers are in sectors, hospitality, construction, logistics, personal care, where vacancies were already high before the pandemic and where native-born workers have been unwilling to accept the hours, conditions or wages on offer. Migrant labour did not simply add to the workforce; it filled specific gaps that domestic supply could not.

There is also a fiscal dimension. Most foreign workers in the eurozone are of prime working age. They pay taxes and social contributions while drawing relatively little in pensions or healthcare. The OECD has estimated that the net fiscal contribution of recent migrant cohorts is positive in almost every member state. That matters for countries such as Germany and Italy, where the dependency ratio, the number of retirees per worker, is deteriorating faster than almost anywhere else in the developed world.

Germany and Spain: two models, same dependence

Lagarde's decision to name Germany and Spain was deliberate. They represent different migration models. Germany's post-2015 intake was dominated by asylum seekers from Syria, Afghanistan and Iraq, many of whom arrived with limited language skills and formal qualifications. Integration has been uneven, but the sheer scale, more than two million people, meant that even a modest employment rate added hundreds of thousands of workers.

Spain's recent inflow has been different: largely Latin American migrants who share a language and, in many cases, professional qualifications. The employment rate among this group has risen faster than among any other cohort. Both countries, however, now face political backlash. Germany's coalition government has accelerated deportations and tightened the skilled worker visa. Spain's minority government depends on parties that demand stricter border controls.

The ECB's 6% GDP figure for Germany is an estimate derived from a counterfactual model: remove the migrant workers who have entered since 2021, assume no replacement by native-born labour, and calculate the output loss. Critics will argue that native workers would have filled some of the gaps, or that automation would have accelerated. But the magnitude of the estimate, roughly €240 billion at current prices, suggests the adjustment would have been painful and slow.

The productivity puzzle

There is a deeper question that Lagarde touched on only briefly. The eurozone's productivity growth has been anaemic for two decades. Adding more workers raises total output, but it does not necessarily raise output per hour. If the growth model depends on ever-larger inflows of labour, it is a model with an expiry date.

The ECB's own research shows that migrant workers are over-represented in low-productivity sectors. That is not a criticism; it reflects the structure of demand. But it means that each additional worker adds less to GDP than a worker in a high-productivity sector would. Over time, a strategy that relies on labour quantity rather than quality hits diminishing returns.

Lagarde acknowledged this indirectly when she noted that "shifting worker preferences", shorter hours, earlier retirement, demand for flexibility, are also constraining supply. The implication is that migration has been a substitute for the difficult reforms that would raise participation among older workers, women and the long-term unemployed, and for the investment in skills and technology that would lift productivity.

What the ECB can and cannot do

The ECB has no competence over migration policy. That rests with national governments and, to a limited extent, the European Commission. What the central bank can do is frame the economic consequences of the choices politicians make. Lagarde's speech was an exercise in that framing: here are the numbers, here is the trade-off, decide accordingly.

She also signalled that the ECB's models now incorporate migration flows as a variable in potential output estimates. That is a technical change with real consequences. If the staff assume lower migration, potential growth is revised down, which in turn affects the calibration of monetary policy. A lower potential growth rate means a lower neutral interest rate, which means less room to cut when the next downturn arrives.

The next downturn may not be far off. The eurozone grew by just 0.3% in the second quarter of 2025. Germany contracted. France stagnated. The manufacturing sector has been in recession for nearly two years. If migration flows slow as governments intend, the labour market buffer that absorbed the last shock will be thinner when the next one hits.

A question of time

Lagarde closed her remarks with a note of caution. The labour market has emerged from recent shocks in "unexpectedly good shape," she said, but that resilience should not be taken for granted. Demographic decline, political backlash and shifting worker preferences "still threaten the eurozone's resilience."

The tension is not new. European policymakers have known for decades that the continent's workforce would shrink. They have also known that migration is the only rapid lever available. What has changed is the political cost of using it. In 2015, Angela Merkel could say "wir schaffen das" and survive. In 2025, a chancellor who said the same would likely be out of office within months.

The ECB's contribution is to put a price tag on that political choice. Six percent of German GDP. Half of the eurozone's job growth. A record population that is still not enough. The numbers will not settle the argument, but they make it harder to pretend there is no trade-off.