Interview with Corriere della Serra, El Mundo, Handelsblatt, Les Échos (full-length)

The interview was conducted by Stefan Reccius (Handelsblatt), Dominique Seux (Les Échos), Federico Fubini (Corriere della Sera) and Carlos Segovia (El Mundo).

Is it correct to assume that a rate cut by the ECB in June is nearly a done deal?

Let’s not count our chickens before they’ve hatched. If the Governing Council’s latest assessment is confirmed by the incoming data and our upcoming projection, it is plausible that we are going to see the first rate cut in June. But even if rates are lowered for the first time in June, that does not mean we will cut rates further in subsequent Governing Council meetings. We are not on auto-pilot. The uncertainty surrounding future economic and price developments is still high. That’s why we will decide on a meeting-by-meeting basis. For now, I am satisfied with what we have achieved with our ten interest rate hikes and think we may be ready for a first rate cut.

Do you think inflation is heading sustainably towards the 2% target?

There may well be months where inflation picks up a little, as some prices tend to fluctuate – energy prices in particular. On the whole, I expect inflation to carry on declining towards our 2% target and to reach it in 2025. But we have to remain cautious. We should not cut rates hastily and jeopardise what we have achieved.

The catch-up in wages was a major concern for the inflation outlook. Are you reassured at this point that wage growth is not pointing towards a wage-price spiral?

Wage growth has been rather strong recently, especially in Germany. However, this comes after the purchasing power of wages was significantly eroded by high inflation. Wages are catching up to regain purchasing power, as labour unions are benefiting from a very good negotiating position and a robust labour market. But I am not seeing any signs of a self-reinforcing wage-price spiral. I expect wage growth to moderate as inflation continues to recede. This is only an expectation, though, and one of the factors creating uncertainty. Stronger wage growth may translate into stronger price pressures. We have to keep a close eye on wage growth, companies’ profit margins, and their impact. For now, developments seem to be heading in the right direction.

German chancellor Olaf Scholz has advocated for a rise in the minimum wage to 15 euro. What is your take on that as a central banker?

In Germany, it is up to the independent Minimum Wage Commission to make rules-based recommendations. I will not comment on any proposals at this point.

There are some positive signals from German industry. Are we starting to see some green shoots of recovery in Germany and more broadly in the euro area?

We are indeed seeing some encouraging signals from the German economy. A couple of months ago we were less optimistic, expecting the economy to shrink in the first quarter. Instead, it actually expanded somewhat. Now we are expecting a slightly positive growth rate for 2024. 

How do you see growth picking up?

In Germany, the mild winter supported construction activity. Manufacturing fared a little better as well, but order inflows were still feeble, and we are missing hard evidence of a broad-based upturn there. In the further course of the year, momentum from the consumption side might kick in, as real wages are catching up. As inflation continues to recede, consumption and overall activity are likely to strengthen across the entire euro area.

Unlike the ECB, the Federal Reserve is unlikely to cut rates anytime soon. Should this have any bearing on the ECB’s monetary policy and if so, in what direction?

Our job is to safeguard price stability in the euro area. The inflation story in the United States over the past two to three years has been different because it was more demand-driven. In Europe, supply disruptions played a larger role. We face different challenges and may draw different conclusions. Of course, US monetary policy has spillover effects. For example, the dollar may appreciate, making many commodities and imports from the US more expensive and thus leading to inflationary pressures in the euro area. So there is some indirect impact, for sure. We are watching the data closely. The data and our outlook are what guide our assessments, not the Federal Reserve’s decisions.

Donald Trump, if elected, wants to fire Jay Powell from his position as chair of the Federal Reserve and subject the central bank to much more political control. What do you think the consequences might be for Europe? 

Jay Powell is an excellent central banker and he is doing a great job. I will not comment on the upcoming presidential election in the US. I’m deeply convinced, though, that an independent central bank can best fulfil a price stability mandate. No matter what happens in the US, we in Europe need to do our homework. The global setting has been getting tougher for some time now. In Europe, we have to boost our resilience and upgrade our general economic capabilities so that we are ready and equipped if push comes to shove. In a very special context, Germany learned this lesson the hard way when Russia shut off its gas supplies. This is the conclusion I draw from the last two and a half years. 

So, as much as we should not be dependent on Russia, we should not be dependent on the United States either? 

No, the US is our friend and partner, and I certainly would not compare these two countries, which are completely different. What I want to say is this: economic dependencies have not been on our agenda for many years. But the world has changed in many ways. We may see more fragmentation, maybe even deglobalisation. Therefore, we should focus on ways to make the EU more resilient.

Can you give us a concrete example of how to make the EU more resilient?

The capital markets union (CMU) is a good example. We have achieved quite a lot, but more needs to be done to make Europe much better off. Completing the CMU would help us mobilise capital to address future challenges like decarbonisation and the digital transformation of our economy. Another example would be energy markets in Europe, which are still too fragmented. I don’t think we should count on having much time to raise our current level of resilience. 

Europe is facing pressures from the green transition, defence spending, demographics-related labour market tightness, and deglobalisation trends. Is there a risk that inflation will be structurally higher than the ECB’s target? If so, do you think the ECB should respond by keeping relatively higher rates?

There might be some factors that could put upward pressure on inflation in the long term. For example, diversifying our supply chains and making our economies more resilient comes at a cost: price pressures may be somewhat higher. Another factor could be the labour market. In Germany, we now have a labour force of 47 million people. But despite high immigration levels, this workforce will start shrinking soon as our population ages. That shortage of workers may put upward pressure on wages, costs, and prices. Of course, monetary policy will have to respond to such developments at the euro area level. It’s something we are mindful of.

In how many years will we see euro area interest rates below 2.5% again?

The honest answer I can give is: I don't know. There are too many uncertainties out there. 

French president Emmanuel Macron has called on the ECB to have a broader mandate than mere price stability – a sort of revolution. What do you make of such views?

President Macron is a committed European. I appreciate his passion about the future of Europe. Having said that, you will not be surprised to hear that my focus is on our primary objective, which is to maintain price stability. This is what the people in Europe expect of us – and in my view rightly so. Price stability is the best contribution central banks can make to people’s welfare. Many factors can have an impact on inflation, for example climate change. That’s why we take them into account. But, regarding climate action, the ECB is not in the driver's seat. At the end of the day, climate action hinges on political decisions and is clearly a task for politicians. 

The EU’s new fiscal framework is barely approved and yet, despite high deficits, we see France giving up on its budgetary adjustment for 2024, Italy already calling for “interpretation” of the new rules and Spain approving a pension reform that the Bank of Spain considers very insufficient to balance the books. To what extent are you concerned about the situation of these indebted countries? 

Sound public finances are a prerequisite for price stability in the long term. In the last three years, we have all been reminded of how important price stability is. The heads of states have agreed on the new Stability and Growth Pact. Now the Member States and the Commission have to apply it to bring high debt burdens back down. I hope this has a high priority on the agenda of the new Commission after the European election. In my view, the fiscal situation in some countries has to improve. Fiscal policy should not contribute to price pressures in the euro area. We should avoid a situation where fiscal policy makes it more difficult for the ECB to safeguard price stability. Otherwise, interest rates may need to be higher than in a situation without such a complication. Sustainable deficit and debt levels should be in the interests of any country. 

What are the countries that should improve fiscally in the next 12 months? 

Nice try (smiles). 

Do you fear a situation where deficits and debt get out of control at some point? 

I wouldn’t say that the situation is getting out of control currently. But we shouldn’t forget where we came from. The financial crisis and the sovereign debt crisis are a lesson for us in Europe. They remind us how hazardous things could get if fiscal policies are not sound. I believe all countries are realising that fiscal soundness is an important issue. 

Is Germany hurting the potential for investment and growth by clinging to the debt brake? Given that debt-to-GDP is much higher in other countries, why is the 60% threshold still so relevant for Germany?

Well, the 60% threshold is enshrined in the Maastricht Treaty and remains an important cornerstone of the new set of rules. I see it as an advantage for Europe that its biggest economy is one of its anchors of stability. We at the Bundesbank can envisage a stability-oriented reform of the debt brake. In the event that the debt level falls below 60% of GDP, the reform would allow for higher deficits. This leeway could be used to raise public investment. But in general, I think the debt brake has served our economy well.

This sounds like an overly cautious approach given that the IMF, the OECD and the German Council of Economic Experts (Sachverständigenrat), amongst others, are calling for a reform of the debt brake. Isn’t it time for a more radical reform given the huge investment needs?

I would not call our approach cautious, but smart. The German Council of Economic Experts has made reference to our proposal. Of course, a great deal of investment is needed, and the public sector must set priorities to make its contribution. But we cannot finance everything exclusively with public funds, we have to crowd in the private sector. The capital that we need for the green transformation of our economies and for digitalisation is there. We just have to mobilise it in a better way. One way that could happen is through securitisation.

Has securitisation as a financial instrument been stigmatised in Europe for no good reason since the Great Financial Crisis?

After Lehman collapsed, it became clear that there were certainly good reasons for that stigma because the securitisation label had been used to hide murky financing methods. In Europe, the key vulnerabilities were addressed in the regulation after the crisis. Used properly, securitisation can be a smart, safe and important instrument to distribute risks via financial markets and to mobilise substantial amounts of private capital.

Are you satisfied with the way the European Union’s NextGenerationEU instrument has been implemented? Isn’t it too opaque or too complex?

I wonder why it is taking so long to set up projects that qualify for funding under NextGenerationEU. This is a perfect example of how we in Europe have to speed up and streamline our processes. If you compare it to the Inflation Reduction Act (IRA) in the US, there are many differences. But there’s one issue that stands out: applications are made quickly in the United States, and so are disbursements of funding. Companies can turn their ideas, their projects, into reality. One might conclude that the IRA is powerful on the ground while NextGenerationEU is not. Ideally, we would combine American speed with European aspirations. 

The bonds issued by the European Union are gaining traction amongst investors and some European countries. Shouldn’t this borrowing capacity be maintained permanently to fund a new defence effort or the green transition? 

NextGenerationEU was created to respond to an exceptional situation – to overcome the damage our economies have suffered from the worst pandemic in a century, one that claimed the lives of more than a million people in Europe. The understanding was that common borrowing would be a one-off effort, never a standard tool. Of course, we have to find answers to cope with the challenges of today – the green transition, defence needs. A common European answer can also be legitimate. But it has to be financed properly through the budget. Common borrowing as a standard tool requires a fiscal union, which we don’t have. 

Do we need a fiscal union, then?

It would be up to politicians to create such a fiscal union. And at the moment, I don’t see that happening. For the time being, we should focus on other things instead, such as the capital markets union. And we need the banking union to go hand in hand with that. I know this might not go down well in Germany because it affects the country’s well-established deposit insurance system. The solution could be a hybrid scheme that safeguards the national systems with a second layer at the European level. Completing the banking union that way, on top of a capital markets union, would unlock significant additional value. It would also send a very strong signal that Europe is making progress.

Opinion polls have right-wing populism on the rise in the forthcoming European elections. Does that concern you? Is the EU, and therefore the euro, facing a mortal danger, as Macron says?

People should go and vote in the European elections. The ability to vote freely is a privilege that many people across the world don’t have or are fighting for. What concerns me are anti-democratic tendencies. With respect to Germany, let me say that there are people working against Europe and against our understanding of democracy and a free society. That’s why, for the first time in my life, I took part in a demonstration for democracy, here in Frankfurt in January. The Bundesbank also participated in a public event in support of Europe on 9 May, which I attended as well. A democratic Europe is a precious accomplishment, one that we should fight to uphold. This is something I really care about.

The European Commission is actively considering new tariffs on Chinese EVs. Do you have any views on such a policy option?

It’s clear that there should be a level playing field when we’re talking about trade between the European Union and China. But I am not sure the tariffs announced by the United States last week are an economically sound solution. Tariffs on foreign products tend to make imports more expensive, raising prices at home and hurting consumers. Moreover, China would surely think of ways to retaliate. China is a very important trading partner for the EU, and the EU is important for China. Rules and negotiations might be an alternative to an escalation of tit-for-tat tariffs. 

Do you think Europe is losing the competitiveness battle with the US and China? What should be done?

Let me take Germany as an example. Productivity growth has been sluggish. Demographics and digitalisation are issues. Take the latter, for instance, where there is a risk of falling behind. Cloud computing is a case in point. We do not have a European cloud. Indeed, the digital euro may be our opportunity for the first truly European cloud. So yes, we are in competition with the US and China, and we have to pick up the pace. Unfortunately, I’m not sure if everyone in the European Union is feeling enough pressure to put the pedal to the metal.

Is there too much complacency in Europe?

We are now at a tipping point. How will the European economy evolve over the next few years? We may assume the world revolves around us, but it doesn’t. Let’s consider the growth potential in other regions of the world – India, for example: 1.4 billion people, a growth rate close to 8%, and they have a digital rupee. They have jumped on many digital innovations in recent years. We should take some cues from them. I believe Europe has a wealth of potential. Our rich variety of ideas, backgrounds and perspectives is a real strength. It helps us to find new solutions.

Is the digital euro a big solution? What problem exactly is it trying to solve and where is the added value for consumers?

It's surely not the solution for everything, but it will be an immense step forward for our payment system. Consumers will have an electronic means of payment that is accepted throughout the euro area, that is very cost-competitive and that places a strong emphasis on privacy. At the same time, consumers will have more means of payment to choose from, as we will continue to provide cash. A digital euro will also help strengthen resilience and autonomy in Europe. Indeed, the payment system is part of the critical infrastructure. So, when it comes to digital payment solutions in the euro area, I would like to see Europe in the driver’s seat, not being left dependent on third parties. I’m sure that the digital euro will be a success. When people realise that they will be able to pay anywhere in Europe with the digital euro, they will want to use it.

China is far ahead of the Eurozone with the digital RMB. Are you concerned that the Chinese might use it to expand their influence in Europe?

What worries me the most is the subtle resistance that I feel in Europe to digital innovation in general. We need to reap the benefits brought about by innovation because this will help us to safeguard our welfare and our European way of life. This also applies to central banks. Our mandate remains the same, but our toolkit for fulfilling it is constantly evolving. Of course, we will not give up on cash. This is still our core product. But if the world around us continues to become more digital, then it stands to reason that a complementary product to cash is needed. The digital euro will be that complement. It will enhance the freedom of choice for Europeans. And it will provide the highest possible level of privacy.

The US is proposing a securitisation scheme based on the frozen Russian reserves’ revenue streams, in order to frontload aid to Ukraine. Does that look feasible to you?

Above all, Russia has to stop this unprovoked war of aggression against Ukraine. Whether and to what extent extraordinary revenues from frozen Russian assets are used to provide further support for Ukraine is a political decision. 

We have a possible new merger in Spain in the banking sector. Do you think it is time for a new wave of mergers in the Eurozone or could it undermine banking competition?

I think we have achieved a lot over the last ten years to make the European banking sector more robust and stable. That became quite clear last year, when individual banks in the US and Switzerland wobbled. The European banking sector was not affected in the same way it would have been ten years ago. That was good news. Coming back to your question: as a central banker, I shouldn’t get into any discussion about specific business decisions. If market participants decide that a merger might be a good idea and regulators approve it, then there is no need for further comment on my part. For a central banker, the overall picture of the banking sector in Europe – in terms of capital and liquidity – matters more than the bank-by-bank view. And the overall picture looks good.