Joachim Nagel gives a speech at the Luwig Erhard Lecture in Berlin ©Mark Bollhorst

Nagel: Digital transformation must become an engine of prosperity

Bundesbank President Joachim Nagel believes digitalisation could provide further considerable impetus for growth and prosperity. This, he noted, is an opportunity that was there for the taking. “Digital transformation must become an engine of prosperity, said Mr Nagel, speaking at the Ludwig Erhard Lecture of the INSM (Initiative New Social Market Economy) in Berlin. This can be achieved if digital transformation is approached with openness to new ideas and room for innovative solutions, he reasoned, given the opportunities being created through the use of new digital technologies such as artificial intelligence (AI). To this end, innovative entrepreneurs and a state that provides them with the right framework needed to come together, said Mr Nagel. There were a number of parameters that could be adjusted to make the environment more attractive, he noted. These included having well-developed digital infrastructure and innovation-friendly regulation. Clear rules for the use of data and AI systems and improved access to data for research purposes were important in this regard, Mr Nagel added. 

Market power of large tech players could increase

Mr Nagel also stressed the importance of a suitable regulatory framework for a competitive market. It must limit economic power and prevent the abuse of market power, he said. This poses new challenges in the digital economy, for while there are countless small start-ups and fierce competition, there are also the large platforms of bigtech firms. AI could even increase the market power of the big players, Nagel warned, noting that incumbents had the necessary computing power to process data using AI and to link these data in novel ways. They also possessed large datasets which they could use to train AI models and tailor them to their customer groups. Politicians and competition watchdogs need to be particularly vigilant here, Mr Nagel explained, adding that it was crucial to keep barriers to entry low. 

Digital euro is a logical step

In addition, Mr Nagel called for people’s digital skills to be strengthened. As individual tasks could now be automated in many lines of work, AI was likely to change many job profiles, he said. Mr Nagel cited education and openness to new things as being key factors in ensuring that this transition was seen primarily as an opportunity and not as a threat. However, he pointed out that the government sector should also use digitalisation to become more efficient and effective itself, reasoning that the rigorous digitalisation of administrative processes could pay off twice: Simpler communication and better networks connecting public authorities could reduce the burden on both administrations and enterprises. Mr Nagel told the audience that the Bundesbank, as a central bank, was playing its part in this regard and was committed to making use of the opportunities offered by digitalisation in the field of payments. In this context, he considered the digital euro to be an important and logical step. 

Inflation risks

In his address, the Bundesbank President also touched on the current stance of monetary policy in the euro area. Our tight monetary policy is yielding results, but we must not ease up too soon, he said. On the contrary: key interest rates needed to remain at a sufficiently high level for a sufficiently long duration, Mr Nagel noted, adding that it was not yet possible to say whether interest rates had already reached their peak. With this in mind, he said that the decisions taken by the Governing Council of the ECB would remain strictly data-driven. Addressing participants, Mr Nagel said that there were currently various upside risks to inflation, with geopolitical tensions in the Middle East, for example, having the potential to push up energy prices and make the medium-term outlook more uncertain. Our monetary policy stance must ensure that inflation returns to 2%, Mr Nagel concluded.