The interview was conducted by Frank Wiebe and Leonidas Exuzidis
Translation: Deutsche Bundesbank

Mr Nagel, in the words of the UK magazine “The Economist”, Germany is once again – as it was just over 20 years ago – the “sick man of Europe”. Indeed, growth here has recently been below that of other major euro area countries. What do you think now needs to be done in order for us to catch up?

The current situation cannot be compared with the situation back then. It is true that we slid into a technical recession in the winter half-year and that economic developments since then have not been satisfactory. The COVID pandemic, high inflation and then Russia’s war of aggression against Ukraine have left their mark. But: we expect the picture to brighten up again next year. For instance, the labour market remains very robust and is in a much better place than at the end of the 1990s. Germany is not the sick man of Europe. I think this is a misdiagnosis, and one that can resonate all too easily with many. We should display more self-confidence.

The criticism is about Germany’s business model: too heavily geared to traditional industry, insufficiently innovative, too slow.

Compared with other countries, Germany is doing well on the whole, not only with regard to employment and debt sustainability. The country has demonstrated its ability to adapt time and again. Who would have thought one year ago that our gas supply would get us through the winter so well? And we have not only large industry but also many small and medium-sized firms that are champions in their markets. We should not allow the “Made in Germany” brand to be played down. Germany’s economic model is not “on the way out”. But it needs to be updated. 

How?

Our economic model undoubtedly faces great challenges. Just think of demographics, digitalisation, decarbonisation and the need to make international trade relations more resilient.

What is your take on the Federal Government’s plans, referred to as the Meseberg 10-point plan?

I see promise there, but there is still much to be done. This is obvious with regard to the energy transition and digitalisation. Now the points need to be put into action quickly, such as the desired reduction in bureaucracy and the possibility of declining-balance depreciation of investments, which is designed to incentivise firms to invest in their future viability. The faster pace in Germany which the government announced has to get into gear. 

Does German industry need artificially cheaper industrial electricity?

No. In the long run, across-the-board subsidies do not help but, instead, contribute to structural deficits becoming entrenched and to the opportunity for the necessary change being missed. Short-term measures to cushion the extreme price spikes we saw were the right thing to do. If industry is to adapt quickly, however, price signals should not be fundamentally undermined. Firms have to face up to the challenge of higher prices. Now is the time to get to grips with structural change. 

So from your perspective Germany is in a relatively good economic position. In your view, is this assertion also a reason for lobbying in the Governing Council of the European Central Bank (ECB) for further interest rate moves in order to fight inflation? Some economists are warning that excessive tightening of monetary policy will unnecessarily damage economic activity.

I do not bring a national agenda to the ECB Governing Council. The euro area as a whole is what counts. Since the summer of last year, we have raised interest rates nine times. The currently relevant policy rate, the deposit facility rate, is now at 3.75%, and the main refinancing rate stands at 4.25%. As recently as one year ago, in a survey of economists, hardly any of the respondents expected us to raise rates to 3%.

That would be a reason for now initially waiting for the effects of these increases to unfold, which always involves a significant time lag, instead of putting economic activity and the labour market under unnecessary strain.

To a degree, we have made good strides in the fight against inflation. However, we are still far from meeting our inflation target. Given the exceptionally great uncertainty following the pandemic and during the Ukraine war, taking decisions from meeting to meeting in a data-dependent manner has proven highly successful. 

Core inflation, which strips out highly volatile food and energy prices, stood at 5.3% in the euro area in August according to the initial estimate. And headline inflation, which incorporates the prices of all goods in the basket, was at the exact same rate ...

Which goes to show clearly what a stubborn beast inflation is: our mandate is price stability, which corresponds to a medium-term target inflation rate in the euro area of 2%. 

So will there be an interest rate hike at the forthcoming meeting?

We will discuss this on 14 September, including on the basis of the new projections that will then be available. 

An alternative to further increases would be to communicate that interest rates will remain high for some time to come.

The ECB Governing Council currently follows a data-dependent approach in its monetary policy decisions. That would not be consistent with enshrining a level of interest rates for longer. However, it would also be wrong to bet that rates will subsequently be quickly brought back down again after peaking.

Which of these options do you feel more closely aligned with?

For this question, I would prefer to stick to the data. We must keep interest rates, for as long as necessary, at a level that will contain inflation.

How much of a consensus exists on these issues on the ECB Governing Council?

There are, of course, diverging assessments; anything else would be surprising. However, the nine interest rate steps taken to date clearly show that we are able to agree on decisive joint action.

What role do wage developments play? Do you fear a sustained wage-price spiral?

I currently do not fear such a thing. Inflation-adjusted, i.e. real, wages in Germany remained more or less constant in the past quarter, after having fallen significantly beforehand. Prices picked up significantly long before that. I would therefore prefer to speak of the danger of a price-wage spiral. In this environment, it is understandable that the trade unions have a good bargaining position for wage demands, especially as the labour market is more robust than many had expected just last year.

But isn’t there a danger that the higher interest rates will put firms under pressure, which means that unemployment will go up anyway, with a delay?

Some sectors have used inflation to put up their prices sharply and thus improve their profit margins. That contributed to inflation. However, unlike before, many firms are more intent on retaining their staff owing to demographic developments and the shortage of skilled labour. The number of job openings is still high. I am therefore not overly concerned about unemployment at the moment. 

Particularly in Germany, the ECB has very often been criticised for responding far too late to rising inflation. Would a faster response have brought prices under control more quickly?

There is little point in debating that issue after the fact. As the incoming President of the Bundesbank, I joined the ECB Governing Council at the beginning of 2022 and then did everything in my power to support the shift towards a tighter monetary policy stance. This applies not only to the interest rate increases but also to the reduction of the Eurosystem’s holdings of securities, as that reduction is also helping to raise interest rates and cool inflation.

What role falls to fiscal policy in the fight against inflation? Lately, Federal Finance Minister Christian Lindner has often stressed that excessive government debt should also be avoided because it drives up prices. Do you share this view?

Yes, I share the view of the ECB Governing Council and international organisations: if the government increases spending and thus strengthens demand, that, taken in isolation, drives up inflation. I believe that fiscal policy in Germany has, for the most part, managed the crisis well so far: it provided extensive support during the COVID-19 crisis. But now it is important to take a step back and return to a rule-based fiscal policy. That will also lighten the burden on monetary policy. 

In the medium term, do we need to consider raising the current inflation target of 2%?

No. The Governing Council of the ECB agreed only two years ago on the current definition of the target as part of its strategy review – and for very good reasons. It would also erode confidence in monetary policy if we changed our target precisely when we were failing to meet it.

Let’s turn to another topic: the digital euro. When will it be up and running for the general public?

The Governing Council of the ECB will decide in October whether we are going to enter the next phase of preparatory work. This is an important step forward. Furthermore, a legal framework for the digital euro will need to be developed. Even if everything goes smoothly, it will be another four to five years before the digital euro arrives in our wallets.

And does anyone actually need it at all? We can all make contactless payments already.

It would be a bit odd if, in an increasingly digital world, the central bank continued offering the government-issued currency only in analogue form. The world is becoming more digitalised, so we will too. But l would add that banknotes are not going to be scrapped; the digital euro is a useful addition to cash.

But what is the added benefit?

One major advantage will be widespread availability as part of a European solution – both in-store and online. The financial sector could then achieve a genuinely pan-European reach for payments. For example, through well-honed options based on the digital euro, such as automated payments on the internet of things.

There are also reservations within the sector, though. In a crisis, deposits could very quickly be withdrawn and converted into digital money – faster than cash can be withdrawn. That would jeopardise the stability of the financial system.

That is one reason why ownership is to be set at a maximum amount per person.

€3,000 was the amount under discussion at one point.

In my view, that would be a reasonable amount, but no decision has yet been taken.

If the limit were to be exceeded because, for instance, someone is sent digital money, the idea is for the excess amount to be automatically rebooked to the account. Isn’t it an odd approach to have money backed by the central bank immediately being converted into a bank balance?

I don’t find it odd. Even today, when people receive cash which is more than they would usually have in their wallets, many of them pay it into their current accounts. The digital euro is primarily intended as a means of payment, not for storing value. There will be clear rules on this.

Turning to a very long-term topic: when will the Bundesbank’s plan to renovate and expand its headquarters in Frankfurt be complete?

With good reason, the Bundesbank’s Executive Board has decided to change the plans for our future headquarters: they will be considerably smaller than envisioned before the pandemic. This is mainly due to the fact that our employees can now work from home for up to 60% of their working hours. So we simply don’t need as much space any more.

And when will you move back to the old building?

I am confident that this will happen whilst I am President.

Mr Nagel, thank you very much for the interview.

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