The interview was conducted by Christian Siedenbiedel from F.A.Z. and Jakob Zirm from the Austrian newspaper “Die Presse”.

Mr Nagel, Mr Kocher, Goldman Sachs, the investment bank, predicts that the ECB is now going to leave key interest rates on hold for many years if there are no new shocks. Is monetary policy now going to get boring?

Nagel: I am surprised that people venture to forecast the ECB Governing Council’s decisions over such long periods of time. We know from experience that situations always crop up that need to be reassessed. As things stand, the key interest rates are indeed at an appropriate level to ensure price stability over the medium term. ECB chief economist Philip Lane said recently that he doesn’t see any good arguments for a rate change in either direction. I can only second that assessment.

Kocher: I actually think a bit of calm is quite a good thing. That’s not boredom. But I am also sceptical about whether predictions can be made so far in advance. Let’s not forget that during the period of low interest rates, there was an expectation that this phase might go on for years. And suddenly everything changed. What matters is that we, the ECB Governing Council, retain our ability to act, including in response to potential future geopolitical challenges – not that we wish these to arise, of course.

One person who is creating a great deal of geopolitical volatility right now is US President Donald Trump. Assuming a new trade war breaks out, how would that impact on the economy and monetary policy in Europe?

Nagel: Long-term rates in the United States surged higher after new US tariffs were announced for some European countries. When the all-clear was sounded, risk premia did decline again. But it is clear that financial markets are sensitised. Developments like that in the United States always spill over to European markets to some degree. That’s something we need to keep a close eye on in our monetary policy. For Germany, we looked at how much of a damper the US tariffs threatened in connection with Greenland could have put on economic growth. We calculated that GDP growth would have been about 0.1 percentage point lower this year and next. The effects on inflation would be fairly neutral overall. 

Kocher: Needless to say, that’s on condition that new US tariffs don’t cause matters to escalate. The European Union could conceivably have responded with retaliatory tariffs or other, even more severe, measures. That would have meant less growth and higher inflation on both sides. Everyone suffers when trade disputes escalate.

How do you see the road ahead for inflation in Germany and Austria?

Nagel: In Germany, inflation might dip below 2 % for a time. But that should only be for a few months. Over the longer term, the inflation outlook is stable at around 2 %. What is good is that core inflation, which strips out the more volatile prices of energy and food, has now eased markedly as well. 

Inflation in Austria is structurally higher than it is in Germany. Will the country have to accept the fact that monetary policy is geared to the large countries and is actually always too loose for the domestic inflation level?

Kocher: Monetary policy is geared to how inflation evolves in the euro area as a whole. Austria had long spells when its inflation rates were somewhat higher than the euro area average, but also long periods when it was more productive; that ceased to be the case recently. On top of that, there have been one-off effects, like the phase-out of the electricity price brake, which played a significant role in pushing inflation up again from when it was already around 2 % at the end of 2024. For Austria, we are expecting inflation to come in at 2.4 % for 2026 – that is already fairly close to the 2 % target, then. But there is still some work to be done.

What can Austria do to bring the inflation rate closer to the average?

Kocher: We will see rates converge soon. There are a number of policy initiatives. One example is the energy sector reforms to boost competition among energy companies, like making it easier for consumers to switch suppliers.

Nagel: There have always been differences between the euro area countries’ inflation rates. And yet it would certainly be possible to achieve greater uniformity in market structures in the euro area. That would call for further progress on the single market and also a savings and investments union.

There is currently the case of an Italian bank, Unicredit, looking to take over the German Commerzbank. Would that be an important first step?

Nagel: I am reluctant to give advice on such specific cases. 

The fragmentation of stock exchanges in Europe is also an issue. Can we establish the capital markets union without consolidating stock exchanges?

Nagel: Consolidation doesn’t always need to be the prime objective. But you should be willing to give a little ground in order to gain something in return. The European Commission presented a proposal to centralise supervision in the EU in December. That now needs to be negotiated in Europe. 

Kocher: Fragmentation in Europe is indeed the key problem for foreign investment. That concerns many areas: capital markets, stock exchanges, tax law, insolvency law.

Does that apply to central banks themselves as well? If more European integration is needed, then should tasks currently performed by each national central bank individually be transferred to the ECB?

Nagel: The EU is founded on a sound principle: decisions should be made as close to the people as possible, but as centrally as necessary. That principle of subsidiarity applies to central banks as well. We have been following a collective approach from the outset. Take large-value payment operations, for example: a number of central banks provide services such as the TARGET system for the euro area as a whole. As central banks, we have demonstrated that this works well.

So why have we been talking for years about the banking union and capital markets union without seeing much in the way of action?

Nagel: I have often criticised the fact that everything happens too slowly. But a great deal has been going on recently. We have made good progress on the topic of securitisation. In addition, on 12 February there will be a summit of EU Heads of State or Government to prepare decisions on reducing bureaucracy. Things are happening. We just need to be better at getting this message across. In Europe, we are often too self-critical – our glass is almost always half-empty; everyone else’s is always half-full.

Kocher: Yes, it is important for Europe to show some self-confidence. We’re the second-biggest economy in the world.

Nagel: We should not belittle ourselves before the United States.

Can we really make ourselves independent of America? Is it sensible to pursue an autonomy strategy?

Kocher: Autonomy is totally unrealistic in a modern world, including economically. But it is important to consider what we can do to gain more sovereignty. The digital euro is one such project, where we seek to become more independent of non-European payment service providers. At the same time, though, it is also crucial to remain open to partners around the world who want to cooperate with us and engage in trade. That has been Europe’s great strength for decades now, and it will stay that way, too.

Nagel: Federal Chancellor Friedrich Merz underscored that point in his speech at the World Economic Forum in Davos: in a globally interconnected world, autonomy is an illusion. But even so, it is still necessary to invest in certain areas in order to become more independent. In Germany, that’s on the Federal Government’s radar. Amongst other things, it has launched an ambitious modernisation agenda in the field of digitalisation. It is important to tackle the vulnerabilities that Germany didn’t address as it should have over the past years.

Europe is now looking to expand its sovereignty militarily as well. That will cost a lot of money. How will that affect the debt situation in Europe? 

Kocher: The peace dividend that we long enjoyed is now no longer there. That’s not pleasant, there’s no question about that. At the same time, though, there is a clear need to emphasise our sovereignty as well. This means that the conflicts of objectives in public budgets will grow in importance. And that brings us back to capital markets and the capital markets union: we should set up projects like the energy transition or infrastructure building initiatives in a way that allows private capital to be mobilised as well. If Europe is an attractive location for long-term private investment, that will deliver flexibility and ease the burden on public finances.

Nagel: Former Federal Chancellor Olaf Scholz spoke about a “turning point” – that point in time has undoubtedly arrived. In Germany, we are now talking about defence spending that may be far higher than the NATO target of 3.5 % of GDP. A few years ago, people would have said that would never happen. In terms of the budget, that’s a huge challenge. The Bundesbank has formulated a position on this topic which it presented in its plans to reform the debt brake. In the first phase, the chief concern is to put current policy into practice. At the beginning of the 2030s, though, we need to pivot back. From that point on, defence spending should be increasingly financed out of the “normal” budget again. And in a third phase starting in 2036, the Stability and Growth Pact should be restored as the yardstick – that phase would see Germany moving back towards a debt ratio of 60 %. 

Is that 60 % measure really still realistic? Austria has missed that target for a long time now, and countries like France and Italy are well above 100 % in some cases.

Kocher: Sustainable public finances are in the public interest. Otherwise, debt becomes more and more expensive. We see that countries with debt levels above the euro area average are finding it harder to draw up a budget. In some cases, they have trouble funding key spending items.

Nagel: That’s why it is important for 60 % to remain a realistic target. Especially so in Germany, given its role as an anchor of stability for the European Union. If our financing costs surge higher, that would affect financing costs in the other euro area countries as well. The Federal Government’s position, as I understand it – and the Bundesbank’s unequivocal conviction – is that 60 % remains the clear target. 

How much more debt can the bond market tolerate? Are we about to enter an era of generally higher yields?

Nagel: That depends crucially on what expectations are. Bond markets have understood that we are in an exceptionally challenging situation. But they also want to see that fiscal consolidation is not being sidelined. If that can be demonstrated credibly, then I think the impact on interest rates will be manageable. Look at Greek government bonds: Greece still has a high debt ratio, but it is improving – the “story” is intact, see – and interest rate spreads over Germany have fallen significantly over the past three years.

Kocher: Besides credibility, it is also a matter of comparison: another reason that European bonds are not remunerated at higher rates is because debt levels in other parts of the world are rising faster than in Europe. But that makes one thing clear: Europe must remain attractive and sustainable.

How should the consolidation of budgets be achieved?

Nagel: There are different ways for consolidation to take place. If growth can be kickstarted, it will be much easier. If we reduce bureaucracy and further strengthen the European single market, this may support growth. But it is also clear that there are certain areas that need to be tackled – such as the design of the pension insurance scheme, which will increasingly come under demographic pressure over the next few years. Large, expansionary fiscal packages cannot be a permanent solution. 

Will we have to openly state that we cannot continue to finance what has been channelled into social security over the past twenty years?

Kocher: Public spending has risen in many areas. But yes, we have to look mainly at areas where it is seeing particularly rapid growth – pensions, health. That is a social debate that is not easy to have, but is inevitable in the face of demographics. At the same time, there is a great deal of potential for growth. In the field of artificial intelligence, the really big firms are not based in Europe. Yet AI can make us more productive. It is crucial that we act swiftly in applying new technologies safely so that we can reap these productivity gains. 

Nagel: In any case, the solution is not to simply carry on doing what we have always done and hope that things will somehow turn out fine. That won’t work. More growth, more economic dynamism will require strenuous efforts and structural reforms. Germany is ageing. There are not enough workers and the pension system is coming under more and more pressure. That is why the Bundesbank has proposed, amongst other things, linking the statutory retirement age to life expectancy from 2031 onwards. These are unpleasant measures – but if we make them policy, we may also succeed in becoming more competitive. 

How is growth looking in the medium term? The key automotive industry has huge structural problems. How great is the risk to this core sector in both countries?

Nagel: The German automotive industry has a strong position indeed when it comes to AI compared with its competitors. You could imagine that some manufacturers may use this to tap into other business areas as well. And I certainly see positive signals in the latest sales figures. We should not underestimate firms in Austria and Germany: they are used to adapting to new situations. I think that declaring the auto industry is in its final days is premature.

Kocher: One difference between the United States and Europe is that we are often better at constantly reinventing existing companies. The United States is better at letting new firms grow quickly – but these often disappear again. Firms in Europe invest a great deal in research and innovation, and I think that’s one of the most important factors in terms of our competitiveness. 

Nagel: If you look at the situation firms are in, profits are decent overall – in Germany and in Austria. There are structural challenges, but there are also opportunities to gain a stronger technological position. I was in China in the autumn. They have more than 100 car manufacturers, but hardly any of them are profitable. We will see a strong wave of consolidation there. I don’t want to sound too much like I’m wearing rose-tinted glasses, but I’m more confident about our location than many others have been so far. The first signs of a reversal of sentiment are just emerging.

Let’s look at the United States again. Many people are concerned about the independence of its central bank. Is that justified?

Nagel: Yes, it is. The US administration’s attacks on the US central bank are really worrying. If the objective of price stability is taken seriously, I cannot see anything beneficial behind the attacks. We know that independent central banks can make better monetary policy; there are many studies on this. The Bank deutscher Länder – the predecessor to the Bundesbank, founded in 1948 – was the idea of the Truman administration. And it was a cornerstone of the German economic miracle. Now, seeing how the Fed’s independence is being torpedoed touches you right to the quick. And we know Jerome Powell well. He is a magnificent central banker and a thoroughly decent guy.

Kocher: I 100 % agree. After the oil price shock, the United States had inflation rates higher than 5 % over ten years, from 1973 to 1983, because political influence on monetary policy meant that the initial response was not strong enough. Paul Volcker then had to raise interest rates to over 19 % in the early 1980s. That was extremely painful and much more costly than earlier intervention by an independent central bank.

Are there also risks to central bank independence in Europe? Citibank sees a risk in the fact that governments are choosing shorter and shorter maturities for their bonds, thus making them more dependent on the current interest rate level – this could encourage governments to wield more influence.

Nagel: In my experience, central bank independence is deeply anchored in the Eurosystem and is respected by euro area countries.

Kocher: Exactly. The fact that bond maturities are changing a little is more because of a return to some level of normality. During the period of low interest rates, some very long-dated bonds were issued, such as the Austrian one-hundred-year bond. Those were exceptions. The slight decrease in average maturities at the moment is normal – and has nothing to do with independence.

The ECB’s stance is heavily shaped by the conflict between “hawks” and “doves”. What is their dynamic at present?

Kocher: In truth, it depends on how we assess the situation – and that is data-driven. At my first meetings of the ECB’s Governing Council, I had in mind the media’s characterisation of doves and hawks, and I have to say that the statements of individual members were for the most part much more nuanced, in some cases even surprising.

Nagel: There are many points on which all members of the Governing Council agree. In my opinion, this “dove/hawk” dichotomy is given too much weight. Our discussions are very open. But everyone knows that we are making monetary policy for stable prices in the euro area. 

Mr Nagel, a debate has begun in Germany as to whether the Bundesbank’s gold in the United States is still safe in the era of Trump. Could you imagine bringing it to Frankfurt if the situation worsens?

Nagel: We review our storage concept at regular intervals. As part of that, we decided ten years ago to move 300 tonnes from New York to Frankfurt. I have no doubt that our gold is still in safe hands at the Fed in New York. It constitutes foreign reserve assets with a special protection status. 

The Finance Ministers of the Eurogroup have proposed the governor of the Croatian central bank as the new ECB Vice-President. If the Vice-President comes from a small euro area country, does it follow that Christine Lagarde’s successor as President should come from a large country?

Nagel: We have a President who will be in office for more than one and a half years yet. The Heads of State or Government will find the right person at the right time.

But when is the right time?

Kocher: That issue will become relevant next year – and until then, there is no reason to debate the matter prematurely.

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