The interview was conducted by Jochen Gaugele and Jörg Quoos.
Translation: Deutsche Bundesbank

Does it make you angry if a café or restaurant now only accepts card payments? 

Joachim Nagel: Not angry. It makes me stop and think about how we will pay in the future. 

Cash is on the retreat.

Electronic payment options are growing in number, and cash is less important to young people. But we will continue to be able to pay in cash in future. Cash isn’t going to vanish. Studies show that Germans carry around roughly €100 in their wallet on average. Speaking personally, I also feel more comfortable with cash on me. It gives me security. I am not reliant on electronic payment systems, which can fail on occasion. 

Now the digital euro is set to come. What are the hopes you associate with it?

I am convinced that the digital euro will be a success – it ticks all the boxes. It will let you pay quickly and conveniently using an app on your mobile phone – and offline, too. The digital euro would be legal tender. It will make transactions more cost-efficient for retailers than the existing widespread electronic payment instruments. And privacy will be given maximum possible protection. There is no reason for anyone to be afraid of becoming a “see-through customer” as a result of the digital euro.

How safe is the digital currency from hackers and cyber attacks?

For central banks, too, fending off malicious attacks on their IT systems is an important task. At the same time, we must be aware that there is no such thing as cast-iron 100% security. This is precisely why we are constantly working on optimising our IT security. For the digital euro, we can take more security measures of our own accord than in the case of many other projects. That is because the technical infrastructure will be located in Europe. We at the Bundesbank want to make our contribution to the digital euro; we are playing a strong role here. To that extent, we will therefore see a digital euro with an element of “Made in Germany”. 

How long to go until it is rolled out? 

I am optimistic that we will have the digital euro in four to five years’ time.

How much will the euro be worth by then? How will inflationdevelop? 

There is some very good news on that front: barring a deterioration in the underlying conditions, the inflation rate in Germany will continue to decline this year. Average annual inflation will run at around two-and-a-half percent. In 2025, we will reach our target rate of 2% in the euro area. 

Do you expect prices to remain stable throughout? 

Differences will remain. Energy prices have fallen and are currently moving more or less sideways. Germany has done a good job of coping with the energy crisis. Food prices are no longer rising as sharply. The services sector, including food services, is more difficult. Here, price increases are still relatively high.

How much will it cost to go on holiday? 

Holiday prices over Easter are likely to be higher in general than they were last year. As the year progresses, though, package holiday price increases are also set to ease significantly. All in all, the concerns that inflation is causing us have diminished considerably. 

When will interest rates fall? The European Central Bank’s key interest rate has been at a record 4.5% for months.

The Governing Council of the ECB has adopted ten interest rate hikes – this was appropriate and is yielding results. Granted, the probability has increased as of late that we will cut the key interest rates before the summer recess. But in order for us to take such a decision, we would need to be sufficiently certain that inflation will indeed continue its rapid descent. Incoming economic data in the near future will play a particular role in this regard.

The high interest rates caused the Bundesbank to sustain a record loss of €21.6 billion in 2023. How long will it take until you are able to resume transferring funds to the Federal Government’s budget?

We are a central bank and not a commercial bank. Our mandate is price stability. The losses will be high once more this year and then lower in the coming years. We will report a loss carryforward on the balance sheet. And, once we go back to making profits in some years’ time, we will first reduce the accumulated losses and then stock up our risk provisions. The Ministry of Finance will probably have to wait for quite some time before we can resume transferring profits. 

Let us now turn to the German economy. The large business confederations are sounding the alarm bells and have given a scathing indictment of the Federal Government’s economic policy. Are they that far off the mark? 

Of course, I, too, am not satisfied if the economy only treads water this year. If we take a nuanced view of the situation, we must not overlook the fact, however, that we are coming from a one-of-a-kind situation. Germany, as a large, open economy, was hit particularly hard by the Russian war of aggression against Ukraine – think gas prices. And weak foreign demand is currently a major factor. In the process, we should not forget, either, that the labour market has remained stable. Germany is nearly at full employment.

Do you not attribute the weak growth at all to the poor performance of the “traffic light” coalition? 

In my roughly 20 years in all at the Bundesbank, virtually every business confederation has complained about every Federal Government. I do not want to downplay the enormous challenges. But we should not paint an unnecessarily gloomy picture. Otherwise, nobody will come to Germany and invest here. We are not the sick man of Europe. 

It isn’t just the industry associations that are making their displeasure known. Even the Federal Court of Auditors is castigating the Federal Government’s energy policy. 

Energy policy needs to be readjusted, and that is what’s happening now. People and businesses need a clearer vision of how the energy transition and the challenges it presents will be overcome. For one thing, the expansion of renewable energy sources and power grids needs to advance more rapidly. That’s an area where we have a great deal of catching up to do in terms of infrastructure.

What damage is being done by the train drivers’ and pilots’ strikes?

The longer the strikes continue, the greater the costs to the economy. Wage negotiations, however, are a matter for employers and trade unions. That is one of the strengths of our business location, and that’s the way it should stay. I expect the problems here to be quickly resolved at the negotiating table – that would be in everyone’s best interests.

The “traffic light” coalition has launched a Growth Opportunities Act and Bureaucracy Reduction Acts. Are the measures ambitious enough to stimulate economic activity?

Ambition levels are always a matter for debate. The Growth Opportunities Act, in particular, contains lower tax relief than originally planned. As far as reducing red tape and speeding up processes is concerned, there is still upside potential. What matters now, though, is to actually implement the Growth Opportunities Act. Overall, I would like to see a greater willingness to compromise. We need a strong collective response for Germany as a business location. Only then will Germany stop lagging behind when it comes to growth rates. Unfortunately, there’s another topic that’s stretching us as well. 

What’s that?

Russia’s terrible war of aggression against Ukraine is causing suffering and destruction every day. It has also meant that we are having to expend a great deal of energy on building up military capacities, manufacturing weapons and provisioning ammunition. 

Or becoming “war ready”, as Federal Minister of Defence Boris Pistorius put it. With what funds? 

Unquestionably, we need strong armed forces. The constitutionally enshrined debt-financed special fund is helping to recoup lost ground. At the end of the day, though, ongoing expenditure will have to be funded out of the core budget.

Do you think Germany’s Basic Law needs to be amended in order to loosen the debt brake? 

The Bundesbank has always stressed the importance of sound public finances. The debt brake makes a significant contribution in this regard. However, we could also afford to run up somewhat higher deficits during certain phases without jeopardising stability. In our view, those would be periods when the government debt-to-GDP ratio is below 60%. The additional scope this opens up could then be used to invest in the future. Subject to certain conditions, I can therefore picture a moderate reform of the debt brake. 

General government could make some savings as well – by cutting back on its rampant social spending, say. 

Setting priorities is a matter for politicians. We have to consider all expenditure, whether it’s social spending or spending in other areas of the budget. We might also be able to make savings by rolling back one subsidy or another. 

Can we still afford an early retirement scheme like the one that allows people to retire at 63? 

The inconvenient truth is, unfortunately, that as life expectancy rises, people’s working lives will become longer, not shorter. 

So is retirement at 63 a thing of the past?

We are experiencing a shortage of labour, and that is only going to get worse as the population ages. These constraints will be felt more keenly if we promote early retirement.

What statutory retirement age do you consider appropriate? 

If we are now living longer, the retirement age should also rise, and this in line with a fixed formula. A proportion of the additional years could be spent working, and the rest taken as retirement. This is another area where I am in favour of forward planning. If the ratio of years of retirement to years of work is kept steady, the retirement age could then gradually rise to 69 years by 2070. This would alleviate the shortage of skilled workers and support long-term growth. 

How is the rise of right-wing extremism in Germany affecting its competitiveness? 

Speaking personally as a German citizen, this issue concerns me greatly. That’s why I recently attended a rally for democracy for the first time in my life in Frankfurt am Main. What is more, right-wing extremists are deterring investors and skilled workers from abroad, putting our prosperity at risk. I would urge everyone to take the threat of right-wing extremism seriously. 

Let’s imagine for a moment that the Alternative for Germany, the AfD, comes into power. What consequences would this have for our currency? 

I wouldn’t bring parties into it. If, however, people start spinning yarns about Germany exiting the monetary union or the EU, I can only caution that either of these avenues would be an economic disaster for every one of us. The EU and the monetary union are a cornerstone of our prosperity.

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