The interview was conducted by Felix Kiefer and Christopher Ziedler.
Translation: Deutsche Bundesbank

Mr Nagel, as President of the Bundesbank, it’s your job to ensure price stability and keep enough money in circulation. What means of payment do you yourself use?

I used to mostly pay in cash. But I am also making more and more payments without cash, usually by card or phone.

That puts you right in line with the current trend. Contactless payments are on the rise. Do you still even have any cash in your wallet?

Unusually, none at all today, but I will be withdrawing some at an ATM later on. Otherwise, I always have somewhere between €70 and €100 in my wallet, like many people in Germany do.

Then you would not have been able to buy a gas cylinder in Berlin after the major power failure there. There were instances where people had to resort to paying with cash because there was no electricity to power the card readers. Many people are wondering whether we’re equipped to face crises like that.

That emergency in Berlin made it very clear that payment systems are part of the critical infrastructure. I can assure you that we at the Bundesbank are very well equipped to cope with such crises. 

How?

Our branches ensure that the whole of Germany is supplied with cash, each in a 75-kilometre radius. They all have emergency power generators. More than 100 colleagues work in the large branches, and there are about 40 in the smaller ones. Even if one branch fails, we can supply cash all over Germany in the event of a crisis.

And if a physical or digital attack takes place, have you got a plan ready and waiting?

There is not just a schedule; we regularly run scenario-based crisis management exercises. I’ve also got a satellite phone in case there is a network failure. Everyone at the Bundesbank knows what to do in a borderline situation, such as how we go about providing cash. The supply of cash is an important topic. And yet we need not be reliant on traditional cash in critical situations.

How do you mean?

The power failure in Berlin, and also the large-scale security breach at a major US payment provider last August, make it abundantly clear that we could really do with the digital euro. As a digital twin alongside cash, mind you, not instead of it. Whoever wants the digital euro will have it in their digital wallet on their mobile phone – at all times. Payments will even be possible when you’re offline – that is, not connected to the internet. The digital euro will make us more independent and more resilient.

Many people worry about their data, especially in times when cyberattacks are on the rise. Are you also seeing those attacks in payments?

The Bundesbank’s IT systems alone see more than 5,000 cyberattacks every minute. Over a full year, that makes two-and-a-half billion cases that are repelled by the Bundesbank’s firewall. It’s a constant battle. We’re doing everything we can to make our IT systems as secure as possible and have taken a whole range of protective measures.

What measures exactly?

They go from security-screened personnel and protected IT systems all the way to cyber defence and business continuity management. In the payments space, the Bundesbank has become a kind of IT service provider, playing a key role for the entire Eurosystem alongside other central banks. For instance, there are going to be three major data centres for the digital euro: in France, Italy and Germany.

But will they be safe enough?

No one can guarantee that nothing will ever happen. But we have the highest security standards.

That uncertainty is adding to the broad economic crisis. The situation in the business community is already being described as “disastrous”, as the head of the Federation of German Industries put it recently. Is he painting too bleak a picture?

I don’t want to sugar-coat anything here: There is a need for action, for example in terms of labour costs or red tape. But I’ve long pushed back against the idea of putting gloomy labels on Germany, like calling it the “sick man of Europe”. It’s true to say that the past five years have been shaped by the pandemic, Russia’s war of aggression and the trade conflict with the United States. Many constants from the past are no longer there. It would be wrong to ignore that backdrop, and we shouldn’t needlessly talk Germany down. The substance is far better than we often think it is. Some outspoken critics fail to recognise that many measures take time to work. There are some situations where a little more patience with politicians certainly wouldn’t go amiss.

In comments about the current pace of reform at a Bundesbank conference last autumn, you yourself said: I’m slowly running out of patience.

I count myself as one of the more impatient people. At the same time, politicians have made some progress. The fiscal package launched in March was a major step that surprised me. I am now counting on as much of that funding as possible going towards infrastructure and digitalisation – that is, being invested in the future. And then there is also the ambitious agenda to modernise bureaucracy and press ahead with digitalisation. Now it is a question of the implementation. This is the bar against which the Federal Government will ultimately be measured.

In a Monthly Report, you accused the Finance Minister of misappropriating much of the special fund to plug gaps in the budget and pay for election handouts. Is the effect fizzling out?

I wouldn’t go that far; a great deal of the money will be channelled into additional investment. That will strengthen growth. The Bundesbank’s recommendation, though, is to focus more on additional infrastructure. That would be an even better way of advancing Germany as a business location. Government and parliament can do the fine-tuning here during implementation.

What is the fallout from Germany engaging in large-scale borrowing but spending just a fraction of that money on future-proofing the economy?

Germany can afford to run up significantly more debt for a time and continues to anchor stability in Europe. That’s also how our European neighbours see it, incidentally. If Germany is doing well economically, that stands to benefit our European neighbours as well. Countless people ask me about the fiscal package. We’re getting a lot of plaudits for it. But that’s a snapshot. We also need to use that fiscal package purposefully and, looking ahead, get back on a path to sound public finances by reforming the debt brake.

When?

Our proposal to reform the debt brake recommends that a transitional phase should be followed by a consolidation phase starting in 2030. Defence spending, in particular, should be increasingly financed through the regular budget again. At the same time, the rules should continue to allow for debt-financed additional investment. Germany will then also have to get back to complying with the EU’s regular debt rules. I think we have tabled a balanced proposal that is geared to stability and could provide a sound basis for a compromise.

This much borrowing for defence probably would not have been needed if Russia had not invaded Ukraine and US President Donald Trump had not called NATO’s security guarantee into question. On top of all this, how severe is the economic damage that his tariff policy is causing?

Trump’s tariff policy is harming everyone. The biggest losers are consumers from countries in which the high tariffs are gradually showing up in consumer prices, so above all in the United States. For Germany, I cannot yet say exactly how much the tariffs are hurting economic growth. Especially since the conflict can flare up again at any time. It’s safe to say, though, that foreign trade with the United States has already suffered a heavy blow. As with Brexit, it will take time for the full magnitude to come to light. 

On the other side, the Chinese are putting a huge squeeze on Germany’s automotive sector with their highly subsidised electric vehicles. Would you say China is playing a good or a bad role for us right now?

Both at the same time. China’s economic power is ambivalent for us. For many businesses, China remains an attractive market; and if it weren’t for Chinese imports, many consumer goods simply wouldn’t be available, or not at the same price. But we shouldn’t be naive as far as our car sector, say, is concerned. Before one of our core industries falls victim to aggressive industrial policy, we need to do more to protect it. Politicians are alert to this, and rightly so. Europe also needs to stake out its red lines on China and stick to them. 

Should German Chancellor Friedrich Merz be clear about these lines during his upcoming visit to China?

The Chancellor himself knows how best to tackle the issues together with our European partners.

Europe has made quite a fool of itself recently in its search for partners other than the United States and China. The EU-Mercosur agreement has been signed, but now the European Court of Justice is to be asked to rule on it after all. What fallout will this have for the German economy?

It’s a setback, but Mercosur is going to happen, I’m certain of that. Even implementing part of it on a preliminary basis would already be an important step.

Shouldn’t Trump’s tariffs also have positive side effects because jittery investors might see the euro area as a safer place to invest? Has this actually happened?

Yes. From talking to bankers, businesses and market observers, I know there is greater interest. Many institutional investors are broadening their bases and diversifying their portfolios. The euro area would be even more attractive if we were to cut red tape and establish an attractive investment union. As part of this, we urgently need to simplify EU financial market regulation, which runs to around 95,000 pages. We do ultimately need to make progress on these issues because Europe is being presented with a huge opportunity. The turbulent events last April, when the safe-haven status of US bonds was temporary called into question, were a wake-up call for many investors.

US monetary policy has been in even greater turmoil since Trump’s administration ordered federal prosecutors to open a criminal investigation into Fed Chair Jerome Powell. As a fellow central banker, what did you make of that?

It was absurd. I know Jerome Powell well and think very highly of him. The monetary policy he sets for the United States remains excellent, and he is a thoroughly decent person. The political attacks on him have shaken me to the core because after the Second World War, it was the United States that taught us the importance of an independent central bank. In 1948, the United States laid the foundations for the Deutsche Bundesbank by establishing the Bank deutscher Länder in Frankfurt am Main.

Are you seeing attacks like those on the independence of the Fed in Europe, or are you afraid they might happen?

No. All governments in the euro area have made it clear that they are committed to independence. The difficulties that Türkiye’s central bank is facing and the persistently high inflation rates there are probably enough of a cautionary tale. Of course, though, I am seeing political currents that are calling into question Europe’s process of unification with the euro and the European Central Bank. Ultimately, it comes down to the public. Independent monetary policy relies on public support. 

And yet you would be prepared to face such attacks and take over the reins at the ECB from Christine Lagarde in 2027. Why?

That’s not a question that’s currently on the table. As I already explained in another interview, all members of the ECB Governing Council would essentially be eligible for this role. 

Before the euro was introduced, the Bundesbank wrote that monetary union would be a “common destiny” for Europeans. Has Germany ever grasped how fundamental this step towards integration was?

I have worked in finance for 27 years. And to this day, the euro is still much more than just a currency for me. It represents the belief that deeper cooperation and closer integration within Europe equip us best to face major challenges.

Do you sometimes still catch yourself converting the currencies in your head – thinking, “that pound of butter costs six marks”?

The first thing I bought with the newly introduced euro coins was a wheat beer for €3.80. I was a bit surprised at the time because before that, it used to cost around five or six Deutsche Mark – but definitely no more than seven. But we left the Deutsche Mark behind almost a quarter of a century ago. I have been calculating and thinking in euro alone for a long time now. The euro is a success story – one that we will continue to write.

© Tagesspiegel. All rights reserved.