The interview was conducted by Tim Bartz.

Mr Nagel, the euphoria surrounding the topic of artificial intelligence is gradually giving way to fears that the speculative bubble could burst. Are we on the verge of a stock market crash?

Imaginations are running wild in the market as far as the medium-term earnings outlook for large tech firms is concerned. In addition, the fact that this euphoria is concentrated in a small number of firms creates concentration risk. Two things need to be kept in mind.

These being?

AI is a disruptive technology, and it is unclear who exactly will benefit from it and how much they will earn. Also, investors need to sufficiently diversify. It ought to be clear to everyone that valuations can also fall.

All the same, the big AI firms are earning billions.

That’s true, but the prices are also a bet on profits staying high or continuing to rise. We have seen in the past that such expectations don’t necessarily work out. As central bankers, this is something that we keep a close eye on.

Are you surprised at how well the stock markets, especially in the United States, digested Donald Trump’s drastic tariff announcements on 2 April, “Liberation Day”?

After Liberation Day, we were not far off a major crisis in the financial markets. For one thing, investors were questioning the safety of US assets. Equity markets have bounced back strongly, though.

Why is that? And how healthy is it that several companies are driving US equity market performance near enough all on their own?

When it became clear that the tariff disputes would probably be resolved, investors’ risk appetite returned. There is a lot of confidence, but also a lot of liquidity in the market. It seems that many investors, even individual ones, still see great return potential – especially in the US equity market – and accept the risks involved.

So are we prepared for a new financial crisis?

Europe learned lessons from the financial crisis and tightened the rules for banks. This was shown when Credit Suisse collapsed in 2023 and US regional banks were rocked. What matters to us is that taxpayers do not have to step in again. Irrespective of this, we have proposed easing certain requirements for banks, such as reporting obligations.

The US Administration wants to drastically pare back financial supervision and regulation. It’s a tempting idea for Europe’s banks. German financial supervisors fear a “race to the bottom”. It sounds like the template for a crash.

Competitive deregulation would be the wrong way to go. This was demonstrated back in the 1980s when US financial markets were deregulated and many financial institutions there subsequently collapsed. Europe has good reasons to stick to its banking regulation.

Pressure from the banking lobby on politicians and supervisory authorities is growing, including in Europe.

But financial stability is also a locational advantage, especially in uncertain times. We Europeans mustn’t let ourselves be intimidated, even if it is sometimes uncomfortable.

How concerned are you about the boom in private credit funds, the volume of which is now estimated to exceed US$1.7 trillion? They borrow money from pension funds, insurance corporations, foundations or family offices in order to lend it to firms, bypassing traditional banks. Many funds are located in tax havens, are unregulated and lack transparency.

I am actually concerned about the gold rush fever in some segments. This market is opaque and has the potential to cause unrest in the financial markets. We need an improved international database so that we can better recognise and identify the risks in this sector. In Germany itself, the sector is small, but in Europe it is growing and should be monitored closely.

Is the Federal Government doing a good job?

I don’t give out grades. I was also surprised by the size of the debt-financed fiscal package for defence and infrastructure, and it has set itself ambitious targets with this. What matters now is to directly address the challenges.

Unrest is brewing in the economy because the conservative and centre-left coalition government isn’t getting enough done.

It’s true that impatience is growing. There are many good reform proposals, and we cannot waste any time. That said, it takes time for initiatives to get underway and take effect. Modernisation, digitalisation and cutting red tape are arduous tasks. There are a lot of things that are now being tackled. If Germany is to become more competitive, it will require a massive amount of effort from the private and public sectors.

Nevertheless, Germany is stagnating.

Yes, but the fiscal package is set to increasingly stimulate economic activity as of 2026. We will expect growth of 0.7 % then, followed by over 1.0 % in 2027. I see that the government urgently wants to improve the competitiveness of businesses and make progress in Europe.

In 2023, you said in a SPIEGEL interview that you believed we would overcome the dip in growth in 2024. This has not happened. Did you miscalculate?

Obviously, we underestimated the extent of the structural problems. In addition, developments in the United States have contributed to a significant increase in uncertainty in global markets.

That’s easy for you to say. In addition to tariffs, businesses are also having to grapple with the significantly weaker dollar – that is to say, a stronger euro that is making their exports to the United States even more expensive.

We need to distinguish between dynamics and levels when it comes to exchange rates. The euro has actually appreciated markedly this year. The Japanese, with their weak yen, find it much easier to export to the United States. At the same time, the dollar exchange rate, which is currently sitting at around €1.15, is not far from its historical average.

Germany’s business model – cheap energy from Russia, military protection from the United States, China as a sales market – is broken, tariffs and the weak dollar aren’t helping and the government appears aimless. How bleak is the situation?

The times are challenging, especially for the automotive industry. But we Germans mustn’t underestimate our ability to adapt. And we need to represent our interests more emphatically.

Are you thinking of higher tariffs?

Not first and foremost. China, for example, supports a rules-based global trading system and should be held to the system’s standards on issues such as subsidies, market access or the use of supply chains as a means of exerting pressure. We Europeans need to work harder to ensure compliance with these rules.

How?

By making our arguments more clearly. We are not without hope. We have a large industrial base and, with 450 million people, we are the world’s third largest market. Of course, we would be able to play our trump cards better if European integration had advanced further.

When speaking to the SPIEGEL in January, you advocated loosening the debt brake. The new government has done this and released funds in the trillions. And it wants to overhaul the rules for the debt brake. Does this not lay the groundwork for new debt to mount?

Quite the opposite. Further reform of the debt brake is right and necessary. In its current form, it cannot safeguard sound government finances or the EU rules. We have presented a revised proposal. The current borrowing limits would initially remain in place so that the major challenges can be overcome in a targeted manner, including by increasing debt. Starting in 2030, the deficits would then be gradually reduced. Lastly, a reformed rule would enter into force with which we could facilitate investment and establish guardrails for government debt to be brought back down towards 60 % of gross domestic product (GDP).

By when?

Under our proposal, debt is likely to rise to around 75 % by 2034 and decline steadily from 2034 onwards. It will probably take decades to reach a level of 60 %.

We will both be well into our retirement by then. At least.

That’s true, but we wanted to present a balanced, stability-oriented and growth-friendly proposal.

Some critics will think your proposal is not conservative enough, whilst others will see it as too abrupt.

That’s what makes it a balanced proposal.

What about the anticipated defence spending of just over €200 billion per year, which the government has exempted from the debt brake? Will that stay the same?

No. Under our proposal, the exemption would be rolled back gradually from 2030 and would expire in 2036. That doesn’t mean defence spending will then have to fall. But after a transitional period, it will have to be financed via the regular budget again.

Either way, Germany will have to foot the bill for a huge volume of additional spending. Won’t this increase the risk of inflation?

Looking at the construction sector, which a certain amount of the additional expenditure is earmarked for, I do not see any significant inflation effects because the order situation is weak. On top of this, enterprises are likely to increase their capacity precisely because of the multi-year nature of the fiscal package. Unless external factors intervene, inflation won’t cause any problems.

If the ECB, which is pressing ahead with the plans for it, has its way, you might be able to use the digital euro to pay at the supermarket from 2029 onwards. However, the rapporteur at the European Parliament recently spoke out in favour of a private sector solution – an embarrassment for the ECB.

I don’t understand why there are doubts about the benefits of the digital euro. Not only will it make us less dependent on US payment service providers; we will also offer better data privacy than private digital payment media. No one need worry that their data will be used to make a profit. Central banks will provide the necessary infrastructure through their data centres and their own cloud. Commercial banks that issue the digital euro will receive fees from merchants and be able to use the Eurosystem’s infrastructure free of charge. What’s the problem with that? I even have another argument to put forward.

Which is?

Europe has the chance to become more independent. If someone were to pull the plug on us in the payments system, people would accuse us of having failed to take action.

Something that can’t be ruled out with regard to the United States?

We should be prepared. Unfortunately, the issue of European sovereignty is not understood in some quarters.

What are the arguments against private sector solutions?

Of course, people can also use private systems to make payments. But when it comes to the digital euro we are talking about central bank money, the “twin” to cash. That’s the fundamental difference. The solution the US Administration prefers instead is for private sector providers to issue stablecoins backed by the dollar. Stablecoins like this could also be used more in Europe. But is that something we want?

In China, the United Kingdom and elsewhere, digital currencies have been a flop so far. In the United States, the Genius Act even prohibits the Fed from developing a digital dollar.

I am sure that the digital euro will catch on. When Bulgaria joins the euro area in 2026, there will be 21 euro area countries. The fragmented payments landscape means that our next logical step is to provide our single currency in digital form as well.

You’re only concerned about protecting the sovereignty of central banks against private sector providers.

I’m concerned about protecting monetary stability. There is still ample room for payment service providers to develop private sector innovations. And looking at stablecoins backed by US government bonds – what would happen if a crisis suddenly caused investors to sell off stablecoins? Private issuers would then have to frantically sell government bonds. This would pose a further risk to financial markets. Besides this, many stablecoin issuers are partly domiciled in unregulated countries.

Trump and members of the think tank at the Heritage Foundation are flirting with politicising the Fed and ultimately even abolishing it. How dangerous is that?

Trying to weaken central bank independence is never a good idea.

We would have been surprised if you had said the opposite.

After the war, the United States gave us an independent central bank – and thus a cornerstone of the “economic miracle” – in the form of the Bank deutscher Länder, which was the Bundesbank’s predecessor. That’s why I am all the more concerned about what is happening in the US. Because the more independent a central bank is, the more effectively it can keep inflation under control.

Do central banks need to take a stronger stance against populism?

Some economists occasionally tell us that we should focus on our mandate, which is to control inflation. But the situation is different than in the 1970s or 1980s. Financial markets are more closely linked, and political developments pass through more rapidly. We mustn’t narrow our focus too much.

What exactly do you mean by that?

Part of our mandate is to advise the Federal Government. In our analyses, I have to take into account issues that indirectly affect price and financial stability: the consequences of population ageing, the immigration of skilled workers, climate change, or borrowing to fund defence spending. As far as populism is concerned, especially when it comes from the far right: I personally always emphasise how important a market economy and democracy are for our society.

ECB President Christine Lagarde’s term of office will come to an end in 2027. Would you be interested in the job? You wouldn’t even have to relocate.

In principle, every central banker on the ECB Governing Council probably has the right skills to take over the top job in the Eurosystem. And external candidates with other profiles are also contenders for the role.

Europe has always had major reservations about your predecessors based on their rigid stance towards monetary policy.

From the outset, one of my objectives was to embed the Bundesbank firmly into the Eurosystem. I think I have succeeded in doing this.

In any case, as ECB President, you would no longer have to deal with the multi-billion-euro project to renovate the Bundesbank’s Central Office, which the Federal Court of Auditors criticised in its 2024 report.

This criticism was based primarily on the original plans, which are now outdated. The current members of the Bundesbank’s Executive Board and I have significantly reduced the scope of the renovations.

Will the Bundesbank ever move back into the landmark building that everyone knows from television?

The Executive Board will decide on this in the first quarter of 2026. Whatever the outcome of the decision, cost-effectiveness and safety will be the crucial factors.

Mr Nagel, thank you for talking to us.

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