The interview was conducted by Heike Jahberg.
Translation: Deutsche Bundesbank

Mr Nagel, you’re the President of the Bundesbank and a member of the European Central Bank’s Governing Council. As a central banker, your primary task is to keep prices stable. When you see supermarket prices these days, are you satisfied with your performance?

Central bankers are never completely satisfied. But when I look at what we have accomplished on the monetary policy front, I’d say it’s certainly quite respectable. We have played an instrumental role in lowering inflation. That’s something we all notice when we do our shopping.

Do you go shopping regularly?

Yes, I usually do the weekend shopping for my family. The prices of certain products, such as milk and cheese, have indeed fallen somewhat compared with last year, but they’re noticeably up on their pre-pandemic levels. Also, there are still some goods and services whose prices are continuing to rise significantly. All in all, though, inflation in the euro area and in Germany has fallen to 2.5 % in June. That means it is converging towards our target of 2 %. Things are moving in the right direction.

Two years ago, inflation was running at more than 8 %. That scared many people.

What we experienced two years ago, in the post-pandemic world, was an exceptional situation – one that was then exacerbated by Russia’s war of aggression. Since then, our monetary policy response to the challenges has been decisive and fairly robust. 

When you say “robust monetary policy”, you mean the European Central Bank raised the key interest rates ten times. In June, you lowered policy rates again for the first time. Is the pendulum swinging the other way now?

The ten interest rate hikes between July 2022 and September 2023 were the right thing to do. Inflation is on the decline. And we expect it to hit our target of 2 % by the end of 2025 at the latest. The rate cut in June was consistent with that outlook. I was happy to agree with the move, as were almost all my colleagues on the Governing Council.

Will we see the next rate cut in July?

We’re not on auto-pilot when it comes to interest rate cuts. That is, our decisions will be data dependent. And that means we reassess our stance at every Governing Council meeting. In doing so, we remain cautious. Core inflation, which excludes highly volatile energy and food prices, is still running at a relatively high 2.9 % in the euro area. 

The IG Metall trade union is currently calling for a 7 % wage hike, and there were already a great many high pay deals last year. Aren’t the higher wages pushing up prices again?

I don’t get involved in wage negotiations. The pay deals are a response to the high inflation rates observed in the past years. This makes it all the more important for both management and labour to expect low inflation rates again in the future. For that to happen, we need to press ahead towards our goal of price stability. We on the ECB Governing Council have demonstrated over the past two years our ability to take action in a very collaborative, very forceful and very European manner. That’s something I am proud of.

In Europe, however, we are seeing a shift to the right. Many euro area governments are now headed by right-wing populists. What does that mean for your work?

My task is to help shape monetary policy for the euro area. I firmly believe that the best way to solve many of the major challenges we are facing in Europe is together. We need more Europe, not less. Isolationism is not the answer. We benefit from international investment and skilled workers, and we shouldn’t be deterring either. 

The German economy isn’t exactly flourishing: economic output stagnated last year.

It’s true that Germany is experiencing difficulties navigating the path towards digital transformation and the transition to climate neutrality. Demographic developments aren’t making things any easier. Economic growth is still subdued at present, but is slowly regaining momentum. I am against talking the country down. Some people say that Germany is the sick man of Europe, but that’s not true. German enterprises are highly innovative. The general trend for orders in industry appears to be stabilising, and consumption is likely to pick up again soon. Germany could become a true turnaround story, by which I mean a success story, if a concerted effort is made to address and resolve structural problems. 

Where does this desire to talk Germany down come from?

We Germans sometimes have a tendency to carp and moan. In other countries, people focus much more on the positive. Germans often talk their own country down as a business location. Yes, we have problems, but we also have great opportunities. In the past, the German economy and its workforce have repeatedly shown that they can adapt to changing conditions. For example, we have largely moved away from Russian gas – faster than many expected. 

The CDU has criticised the high level of the government’s social spending, saying that we’re living beyond our means. Is that true?

I won’t comment on what political parties are saying here. However, we at the Bundesbank analyse social policy and public finances in Germany. Our expectation is that, in an ageing society, we will be unable to maintain prosperity without making changes. For example, once the “baby boomer” generation retires, the workforce will decline. At the Bundesbank alone, 40 % of our staff will be entering retirement in the next ten to twelve years.

Was it a mistake to introduce early retirement at 63?

The option to retire at 63 encourages early retirement. However, given Germany’s demographic outlook, it is important that we mobilise the labour force. It also seems reasonable to me to take rising life expectancy into account when setting the statutory retirement age. This may be politically unpopular, but I think reforms are unavoidable here. 

Many pensioners might continue working if it was worth their while.

We should consider making it easier for pensioners to continue working while receiving their pension, if they wish to do so. Essentially, we have to ensure that whoever wants to work is able to work – by expanding childcare provision, for instance. Immigration plays a key role here, too: without it, we won’t be able to bridge the shortfall of skilled labour. For that reason, Germany must remain attractive to foreign skilled workers. The European Football Championship is a perfect example of Germany’s hospitality as we speak. 

Are you a football fan?

Yes, I enjoy watching football. My favourite club is Karlsruher SC – as a fan, you’ve got to be able to suffer every now and then. What I love about the Euro 2024 is that people from all over the world have come together to celebrate joyfully and peacefully. My wish is for Germany to be a cosmopolitan country and also to be perceived as such, both during and after the Euros.

Do you think that is in jeopardy?

Abroad, I am often asked “What is happening over there? Can we still invest in Germany?” When the secret meeting on “remigration” came to light I, like many others, took to the streets and joined a demonstration for the first time in my life. 

The AfD is also scoring points on topics that affect you. The party is framing itself as a defender of cash. Is cash in danger of being abolished?

No, quite the opposite. Our mandate is to provide cash, and we will continue to do so in the future. Cash is still the most widely used means of payment for Germans, although its use is gradually declining. The Bundesbank will remain firmly committed to cash in the future. Nevertheless, it’s true that the world is becoming increasingly digital, and digital payment media are becoming more important. I see this during my weekend shopping: more and more people are paying by card, smartphone or smart watch. This is another reason why we in the Eurosystem are working to ensure that, in future, we will be able to provide not only euro cash, but also the digital euro.

How would that work in practice?

You would have an app on your mobile phone with a digital wallet. By accessing the wallet, you could then pay at the checkout using your mobile phone. However, you could also use the digital euro to shop online or send money to other people. The whole process will be fast and cost-effective, and most importantly, the digital euro will enable us to pay anywhere in the euro area. All that plus the greatest possible protection of privacy.

But I can already use my mobile phone to make cashless payments.

As well you should. However, we often use international card payment systems for this purpose. That leaves extensive data trails. I want everyone in Europe to be able to pay using a single, European payment system – be it in a beach bar in Italy or when shopping online in Finland. And with the highest data protection standards. 

When will the digital euro be introduced?

If things go well, four years from now.

In addition to cash, Germans also love gold. The Bundesbank has a fair bit of that stashed away. Is it true that you have the second largest gold reserve in the world?

Yes, we have the second largest gold reserve after the United States, at around 3,350 tonnes. More than half of that is in Frankfurt. The rest is held partly in the custody of the Bank of England, but mostly at the US Federal Reserve in New York.

Don’t you want to sell even a little of it? The Finance Minister could use some money for his budget.

On that point I must disappoint him. Apart from small quantities for the usual collector coins, we do not sell any of our gold. Gold is an anchor of trust and has a high symbolic value, especially for the general public. And when I look at the long-term development of the price of gold, it doesn’t seem like such a bad idea for us to continue keeping our gold in the vault. 

In the past, finance ministers were able to rely on the Bundesbank to make a profit and transfer that money to the treasury. This year, this will not be the case; the Bundesbank is posting a loss of € 21 billion. Did you make bad business decisions?

We are not a commercial bank. Although we are thrifty, our task is not to make profit, but to guarantee price stability. When inflation was too low, we bought low-interest bonds for monetary policy reasons. But interest rates have now risen, which has caused losses on our balance sheet. The Finance Minister will therefore probably have to manage without a Bundesbank profit distribution for a number of years. In future, however, there will be profits again. The Bundesbank’s balance sheet is sound.