The interview was conducted by Eric Albert.

Inflation in the eurozone was 2.9 % in July, and in August it was 3,3 %. Does this mean the ECB needs to increase interest rates at its September meeting on September 10?

Currently, inflation is not close to our medium-term target; it stands at around 3 % rather than 2 %. And according to the June projections, inflation will return to 2 % over the medium term only under the assumption of higher interest rates. Accordingly, markets are pricing in a more than 95 % probability that we will raise interest rates at our September meeting, and I would say that the markets understand our reaction function quite well at this point. 

Beyond this September meeting, however, I am cautious about giving any indication of what comes next. Oil and gas prices keep going up and down. Financial markets are very volatile. There is a lot of uncertainty. It is an uncomfortable situation – also from a monetary policy perspective. But the meeting-by-meeting approach has served us well in the past and will certainly do so in the future.

What is the point of a rate hike now? Yes, you are far from the 2 % target, but there is no second-round effect so far, and this is an exogenous shock. Rate hikes will not decrease oil prices ...

My argument here is very simple: inflation is too high, and the probability of second-round effects increases when inflation remains elevated for an extended period. Take the wage negotiations next year – when trade unions see that inflation has strayed from the 2 percent target, they might ask for bigger pay rises to compensate.

But doesn’t hiking rates risk slowing the economy?

Our mandate is to achieve price stability, and price stability benefits everyone. All in all, the euro area is proving to be rather resilient towards all the geoeconomic headwinds we are facing. In Germany, but also in the euro area as a whole, second-quarter growth turned out stronger than expected. In Germany, export numbers were pretty strong, and manufacturing orders are okay. Growth in Germany is still not very high, but based on the first two quarters, we are on track for roughly 1 % growth this year, which is quite a bit better than our June forecast.

On financial markets, long-term interest rates have increased significantly over the last few weeks, particularly in the US. How does that complicate your actions?

It definitely does not make the situation easier. Market participants are now demanding higher yields globally because they are confronted with a lot of uncertainty. We at the ECB Governing Council take these developments into account. The best we can do is to focus on our job: ensuring price stability in the euro area.

One way the German government is trying to reboot the economy is through public spending. The famous “debt brake”, that made too high a deficit unconstitutional, was de facto removed in early 2025 and a massive fiscal stimulus was launched. Was it the right decision?

Indeed, the fiscal package is massive, but we acknowledge the reasons for it. We emphasize that using the package for additional investment and increasing defense capacities is crucial. As fiscal sustainability has to be ensured, debt financing cannot be maintained indefinitely at current levels.

Does it mean that there have actually been years of under-investment in Germany?

Yes, there was under-investment for more than a decade. We have to acknowledge that. The public sector didn't sufficiently prioritize infrastructure, digitization, or defense. This lesson has been learned. Given past omissions, you cannot fix the current situation with a balanced budget. That meant the government had to spend money, and it must be accepted that the deficit ratio will go up for a certain time.

The current spending must be a one-off. Once the program is complete, spending, for instance in the defense budget, will have to be financed by current revenues again. 

With Trump’s tariffs and China closing down, does Germany need to rely more on domestic growth and on the European Union?

I think that both the euro area and Germany can benefit a lot from more European growth. Europe has to become stronger and much better economically integrated. Savings, investment, banking, energy markets: in all these areas, more integration will help make Europe stronger.

That is essentially what the report written by former ECB president Mario Draghi two years ago said. Is it being implemented?

Important first steps are being taken, but progress is not moving fast enough. Take the supervision of financial markets: we have 27 financial markets supervised by 27 national authorities. I am in favor of giving the European regulator (ESMA) a much stronger role to make it easier for investors to access European markets. Looking at Europe as a whole, we are still a very complicated place to do business. From time to time, on a bad day, Europe’s slowness can be a bit frustrating. Politics is already complicated at the national level, but it is even more complicated at the European level. And yet it is well worth the effort.

In his report, Mario Draghi also proposed a huge investment plan – now estimated at 1.2 trillion euros per year. Three-quarters would come from the private sector, but the rest would come from public investment, including eurobonds. Are you in favor of eurobonds?

As a tool to finance national budgets, I have never advocated for eurobonds – definitely not. On the contrary: More European debt would imply less national debt. There is no such thing as a free lunch. Under narrowly defined conditions, a safe asset should be targeted for a specific purpose, such as defense. In that direction, we in the ECB Governing Council made a proposal in February supporting safe assets – meaning common European debt that investors can buy – while preserving proper incentives for prudent fiscal policies. It should not be used as an excuse to avoid stabilizing national budgets or fulfilling European Union rules. 

Nevertheless, contrary to the German government, you support the principle of eurobonds for specific purposes. Why do you think defense is the right area?

I share the conviction that we should not create leeway for fiscal spending. I am not advocating weaker fiscal discipline. But when it comes to common goods defense is the most obvious area because every country in the European Union shares the same interest in living in a safe region that can defend itself. In times of deep strikes and cyber warfare, national security, in my view, is a common European public good. In addition, it could strengthen the international role of the euro and thus contribute to greater European strategic autonomy, also in the financial realm. 

So when you see France and Germany failing to build a military aircraft together, don't you despair?

I was definitely not happy when I heard that the joint project fell through. But perhaps there were misunderstandings from the beginning: the user requirements on both sides for this “Superfighter” were completely different. I hope that this specific failure was an outlier. There are many other defense projects where we can work closely together. Cooperation in this regard is far from over.

As president of the Bundesbank – often seen as a very conservative institution – you have taken unusual positions. You supported the suspension of the debt brake in Germany and you are backing eurobonds. Why?

We acknowledged the extraordinary situation with respect to European security. We did not want to abolish the debt brake, but we suggested a reform to make it more fit for purpose. When I took stances like this, my intention from the beginning was to position the Bundesbank at the heart of Europe. I am convinced that this is the most effective approach. The Bundesbank is a renowned institution with an outstanding track record, and we have a reputation for being highly reliable. But the world has changed dramatically. Are the old recipes still working? Some are, yes; others are not.

How worried are you from rising nationalism across Europe? In Germany, the AfD is gaining traction; in France, the National Rally might come to power ...

In a climate like this, we have to be more outspoken. There are people in Germany who claim to be patriots yet propose leaving the euro. I must point out that Germany has prospered immensely from the euro – as have France and the entire euro area. Moving in a direction to dismantle it would be irresponsible and extremely dangerous, and the outcome would be self-defeating. I am genuinely concerned that people in Germany – and elsewhere – are considering such a path.

Christine Lagarde’s term ends in October 2027, and she hasn’t ruled out leaving earlier – perhaps at the beginning of 2027. Are you a candidate to replace her?

I have said this before, and it is still true now: Everyone at the Governing Council table can be considered a highly qualified candidate. And there are also strong candidates outside the Governing Council who are capable of doing the job. Ultimately, it will be decided in the political arena.

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