Bundesbank boss: “Germany is not the sick man of Europe”

There will be economic growth again, says Bundesbank President Nagel in an interview with the ARD financial editorial team. What economic consequences the situation in the Middle East has – and how the inflation target should be achieved.

ARD financial editorial team: The situation in the Middle East is incredibly dynamic and the conditions are catastrophic. This also has a lot to do with economics. How do you assess the current situation?

Joachim Nagel: Given the dramatic things that happen there every day, it is sometimes difficult to make an economic classification. But the time will surely come. We have to do this in order to assess the economic implications of the extent to which these geopolitical conflicts ultimately have ripple effects on the economy.

But one thing is clear: uncertainty in this form is usually not good for economic processes and is therefore also relatively bad for growth prospects. But as I said, it is still too early to ultimately make a final economic judgment.

Theme Energy security in focus

ARD financial editorial team: This region is also a region full of raw materials – Qatar is mentioned here again and again. On the other side, Iran. There are repeated threats to close the Strait of Hormuz. That would have dramatic effects, for example on energy prices. Is this a situation that you as the Bundesbank are dealing with?

Nail: You have to think about things like that. Maybe you shouldn’t speculate too much about it. But when it comes to energy, it shows once again how important it is to have a broad base when it comes to energy sources. Diversification is clearly what is necessary in order to remain economically resilient in the future.

Of course, as monetary politicians and central banks, we look at things like this and think about how we could react if necessary. But I can tell you one thing: If it were necessary, we are positioned to respond to it.

“No one is free from personal concern”

ARD financial editorial team: October 7th was a turning point: the terrorist attack by Hamas on Israel. What is the mood like on a day like this when you meet with your central bank colleagues?

Nail: I think no one is free from personal concern when it comes to Hamas’ terrorist attacks and solidarity for Israel, for the people, for the victims. This is also reflected in a meeting like this. And it’s important too. But in the end we have to come to a monetary policy judgment. I think we have shown with the decisions of the last two years how the Governing Council of the ECB has ultimately lived up to its responsibility to create price stability.

ARD financial editorial team: Monetary policy is an important issue. You have a very important tool in your hand. Plus fiscal policy. In such situations, despite all your independence, do you move closer to the state?

Nail: Monetary policy has a clear mandate: price stability. We are an independent institution, and that’s right. This is a clear dividing line between monetary responsibility and fiscal responsibility. Monetary policy has done its part and fiscal policy has helped to stabilize the situation significantly over the last difficult 20 months. At this point I can say that this dichotomy, the division of these responsibilities, worked very well.

Two percent target firmly in sight

ARD financial editorial team: We have been seeing falling inflation rates for some time. On the other hand, we will now have to spend more on security. Maybe we’ll produce more at home again. All of these are factors that are causing inflation to rise again. How optimistic are you that we will reach the two percent target in the foreseeable future?

Nail: The important message first is that inflation is falling. This means that monetary policy is working, and that is a good message. If you can still remember: last year we still had double-digit inflation rates. Now the inflation rate has fallen just below four percent. The important core inflation rate – i.e. adjusted for energy and food prices – is still above four percent. We are still a long way from our two percent target, but the direction is right.

Monetary policy will continue to be robust in keeping inflation at two percent. There are still factors that also present upside risks. You have pointed out a few that are of course closely related to geopolitical developments. What are energy prices doing in the Governing Council? We have decided to make new decisions from meeting to meeting, based on new data. And that is certainly the right approach in the current situation, which is characterized by a lot of uncertainty.

“The signs are better for 2024”

ARD financial editorial team: Let’s talk about the economy. Germany is a rich country and the most populous in Europe. And yet there are the first people to say: It’s the sick man of Europe again. How come?

Nail: I certainly cannot share these Cassandra calls. Germany is not the sick man of Europe. It is certainly the case that 2023 is not a good year in terms of economic growth. But it is also not a year in which we will be in a severe recession. The signs are better for 2024. There will be growth again.

There is currently a phase in which there is great uncertainty, interest rates are rising and the economy is slowing down as a result. This is part of the process to also bring down inflation. We have structural issues in the area of ​​demography. We certainly have a lot to do when it comes to the digitalization of this country. But I would put it positively: There is also potential for Germany if these issues are addressed, so I am not worried about the outlook for the German economy in the next few years.

Digital Euro offers many new possibilities

ARD financial editorial team: Now there is one more topic we want to talk about: the digital euro. Many banks and payment service providers are wondering why he should actually come? There are enough digital ways to pay.

Nail: Our entire world is becoming more digital. The economic world is becoming more digital. In this respect, it is actually only understandable and logical that central banks will offer a payment instrument for this purpose. In the future this will be the digital euro. This will create many new opportunities for citizens. For example, when you pay somewhere, the question will no longer be: Which electronic payment method should I use to pay? No, they will then have a payment instrument, the digital euro.

Merchants no longer have to ask themselves where to go when it comes to payment service providers. And I think that’s a very big relief. It will be faster and it will be cheaper. And I believe that we can convince everyone of this – including the banks, who sometimes look at it a bit skeptically. In the end they will also say: This is a good decision if we can pay with a digital currency in the euro area.

ARD financial editorial team: Thank you very much, Bundesbank President Nagel, for the interview.

The interview was conducted by Markus Gürne, ARD financial editor.