The interview was conducted by Georg Meck and Thomas Tuma. 
Translation: Deutsche Bundesbank
 

Mr Nagel, how certain can we be that our money will not lose any more value in 2025?

The good news is that even though inflation in Germany will remain slightly elevated throughout next year, we will hit the target level in the euro area as a whole in the course of 2025, and will reach it by 2026 in Germany.

… you mean an inflation rate of around 2 %.

Precisely. In the euro area as a whole, we will reach the target level defined for price stability in 2025.

You said inflation was “a greedy beast” when purchasing power was eroding at double-digit rates at times. Has the monster been slain now?

The beast has at least been tamed. We now have inflation well under control. Core inflation – that is, inflation excluding heavily volatile food and energy prices – is currently still around 2.7 %, but will trend further downwards. We are now also seeing signs of easing when it comes to wage agreements. Wage pressures are subsiding throughout the euro area. 

You don’t expect any major wage increases in the new year?

No, I don’t. If you look at the most recent pay rounds, they are on a more moderate path. 

So then the ECB can continue to cut interest rates?

The Governing Council of the ECB can continue to normalise its monetary policy. We will remain cautious, however. All in all, we are operating in an environment of great uncertainty. We are currently dealing with a huge amount of geopolitical upheaval. More than I have ever experienced before: the war in Ukraine, the conflicts in the Middle East, economic policy tensions and potential trade disputes, to name but a few.

How fast and how low can rates drop in 2025, after the four interest rate moves in 2024?

We on the Governing Council decide that from meeting to meeting depending on the incoming data. This approach has worked for us so far. We can certainly take the interest rate level a little lower; in the first half of 2025, we may reach a “neutral” level without risking an increase in inflation.

Yet people have the opposite impression: everything is becoming more expensive, starting with butter at the supermarket.

I myself always do the shopping on Saturdays and have the same experience as a consumer, not just with butter, but also pasta, potatoes, bread rolls and some vegetables. The price level is clearly higher than before the pandemic, both for supermarket products and for energy. Far from everyone has seen their income rise on the same scale. However, we central bankers primarily look at how the price level changes compared with the previous year. In that respect, we are now in a much better position.

What will President Trump mean for Germany and Europe?

To be completely honest, I don’t know yet. We’ll have to wait and see what happens after 20 January and what remains of all the noise surrounding the election campaign. If the tariffs Donald Trump has threatened and retaliatory measures in response to them were actually to be put in place, major economic losses and higher inflation would be likely around the world – including in the United States itself. But there are also economists on the Trump team who should really know better. 

One thing is certain: the US’s gigantic mountain of debt will continue to grow. When will that present a danger for the stability of the global financial system?

The financial markets have so far managed to stomach the debt. The United States still enjoys a high level of creditworthiness as a debtor. But it must also be in Washington’s interest to not shoulder excessively large deficits and to not let the debt ratio rise further.

The cryptocurrency Bitcoin is already reaping massive benefits from Trump. Its price has shot up since he won the election; is that the signal for us small-time investors to get in on it?

Just hearing Bitcoin referred to as a “cryptocurrency” gives me goosebumps.

Why is that?

Because Bitcoin isn’t a currency, it’s a speculative instrument. Look at how its price fluctuates, that should give pause to anyone looking for a sound investment, let alone a means of payment! As a central banker, all I can do is advise caution. 

You don’t see Bitcoin shaking off its dubious reputation and becoming established? Even bankers who previously condemned it are now trading with it. In four years, its value has gone up by a factor of sixteen.

That doesn’t change my scepticism. The hype reminds me of previous speculative bubbles. You always have to ask yourself: what is the substance? With Bitcoin, all there is behind it is a mathematical algorithm, nothing else; there’s no authority like a central bank, no real equivalent value, not like shares, say. That’s something that every investor needs to be aware of. 

Have you ever invested any money in crypto yourself?

No, I haven’t. As a central banker on the Governing Council of the ECB, my investment options are subject to strict rules. But even as a private individual, I would not invest in crypto assets.

2025 will be the year of the digital euro, according to the ECB – what makes it different to Bitcoin? And what exactly is the point? We can already make digital payments using smartphones and cards.

The crucial difference compared with crypto is that the euro is a currency, backed by central banks who are guardians of stability. The first advantage of the digital euro is the cost of making payments. Card payments always involve fees for the retailer, you see. The digital euro will offer a cost-effective alternative. This can also indirectly reduce prices. For you as a customer, it also means that your data and privacy are protected. And you can use the digital euro anywhere in the euro area.

What people worry about is that the ECB will lay bare our lives and our wallets.

The suspicion is unfounded. We in the Eurosystem will not be able to see who has paid for what. And incidentally, our servers for the digital euro are located in Europe and not anywhere in the United States or Asia. One thing this does is make us more resilient. Other providers won’t be able to simply pull the plug on us.

Germans’ reservations are rooted in a deep-seated fear that the ECB will one day take their cash away. 

Definitely not. Let me make one thing clear: cash is here to stay. The ECB is just as committed to this as the Bundesbank. Even if a growing number of customers in Europe are paying by card, smartwatch or mobile phone, cash is and remains one of our core products. That’s why we are also giving thought to the design of future euro banknotes at the moment.

They will no longer feature stylised architectural motifs?

Maybe they will also feature something else for a change. 

Politicians like Helmut Kohl as the chancellor who reunited Germany and paved the way for the euro?

It doesn’t necessarily have to be politicians. Europe has produced famous scientists and cultural figures who would be excellent choices to appear on the euro banknotes.

Are you thinking of historical figures such as Leonardo da Vinci or Hildegard von Bingen?

You are already two steps ahead of where we are in the redesign process. We haven’t made any decisions yet. But we are certain to find excellent motifs for our six banknotes – from the €5 note up to the €200 note.

In your view, how great is the risk of the euro area breaking up if individual euro area members’ fiscal restraint continues to crumble? 

I’m not worried about there being an end to the euro. 

Once France has amassed double the amount of debt permitted under the Maastricht Treaty, some economists believe it could face a scenario like the one in Greece over ten years ago. The difference here is that the sums are out of control. We wouldn’t be able to bail out the French.

This isn’t something that gives me sleepless nights. It is important that all Member States follow the fiscal rules that have only recently been reformed. And I assume that this will be taken seriously. 

The risk premia such as those on French government bonds are a clear warning sign. 

Without passing comment on specific countries, financial markets currently indicate that the euro area is considered stable. Of course, economic data, debt levels and deficits are reflected in risk premia. These send an important message to fiscal policy. Financial markets and fiscal rules complement each other here.

What about the political risk to monetary union if nationalist parties such as the AfD gain traction and demand an end to the euro?

I see this the same way ECB President Christine Lagarde does: anyone who subscribes to such schools of thought would do well to remember where we come from as a Union and as individual states. We all enjoy a much higher level of prosperity today than we did 30 or 50 years ago. Exporting nations such as Germany are the main beneficiaries of the Community – in terms of corporate revenue and jobs, but also price stability. I consider calls to withdraw from the EU or the euro area to be highly dangerous. Anyone who preaches such messages is playing with fire.

And how dangerous do you think the economic conflict with China is?

The People’s Republic remains a highly important trading partner for Germany – despite all the disagreement on key political issues – and accounts for around 9 % of our total foreign trade. It is therefore right and proper to operate in compliance with the established rules of world trade. 

Even so, Brussels has imposed punitive tariffs on state-subsidised electric cars from China.

Things need to be fair in world trade, which we all have a great deal to thank for. China, too, has to heed this. The EU tariffs were a response to unfair subsidies in China for battery electric cars.

Has the tariff message from Brussels been received in Beijing?

I think so.

But you would not support a decoupling – that is to say, a gradual departure – from the Chinese market?

That cannot be in our interests. Globalisation, world trade that is as free as possible – that is good for the prosperity of us all.

What does it mean for our welfare if there is no government and we are living with uncertainty until the Bundestag elections at the earliest?

The caretaker Federal Government will not pass much in the way of far-reaching laws, that’s true. A great deal of willingness to reform could be seen in many measures. I can only hope that a new Federal Government – no matter what it looks like after 23 February – will quickly take action. We have no more time to lose. Germany’s weak growth has now become entrenched. According to our latest Forecast for Germany, we are still expecting only minimal growth of 0.2 % for 2025. That is almost stagnation – not something that anyone wants.

What do you hear about Germany in your discussions with central bank colleagues from other countries?

They are keeping a close eye on our situation.

In a mocking or mournful way?

With concern. There are many countries that are heavily dependent on trade with us. One central bank colleague recently put it like this: “When Germany has a cold, we get the flu.” As Europe’s largest economy, I believe this gives us a responsibility. We need to address the challenges with reforms. This will also enable us to reduce the uncertainty that is currently impeding economic growth.

Yet you have always rejected the description of Germany as the “sick man of Europe”.

And I absolutely stand by that. When that term was coined around the turn of the millennium, our country was, amongst other things, battling high unemployment. Today, we tend to take great pleasure in doing ourselves down. Yet we still have many strong businesses and great economic strength. But there are, of course, factors hampering growth, such as bureaucracy or high corporate taxes compared with other countries.

For those of all stripes who pin their faith on the state, the debt brake is the source of all evil. Can it – must it, even – go?

No. The debt brake has stood the test of time. Still, it is permissible and possible to adapt it to today’s circumstances. We have made proposals on this that would open up greater scope for action, particularly when debt ratios are relatively low. They also allow especially important tasks, like investment, to be prioritised. 

To put it plainly, priorities need to be set. Money for defence and infrastructure improvements makes sense; new welfare handouts aren’t such a good idea. Your social democrats see things differently.

What do you mean by “your social democrats”?

Well, you’ve been a member of the SPD for a long time now.

Believe me: I am a central banker through and through. I have always been very well able to separate my office from my party membership.

Your calls to raise the retirement age to 69 certainly won’t have made you any friends in the party. That isn’t an idea the SPD would come up with.

As a country, we need to tackle demographic change, which is going to involve major labour shortages and increased numbers of pension recipients. It is a matter of linking the retirement age to life expectancy. Our proposal envisages dividing the additional years of life expectancy from 2031 onwards: on the one hand, people should work for longer and, on the other, they should draw a pension for longer. 

Are you feeling the effects of demographic change here at the Bundesbank, too?

Of course. Over the next twelve years, around 40 % of our employees will retire. As this will coincide with a shortage of skilled workers, it will be no simple matter to replace them. Incidentally, we at the Bundesbank were warning decades ago about this problem, which affects our society as a whole.

So, what to do?

The number of those who generate wealth is shrinking. Then you can try to plug the gap with skilled workers from Germany and abroad …

… which hasn’t really worked so far.

Of course, Germany also has some catching up to do on the integration of immigrants. But we shouldn’t do everything down here, either. In any case, I found the recent reporting on Syrian migrants, who are now considering returning to their home country, very enlightening. If they did, we would suddenly be missing thousands of doctors and nurses. So yes: we need qualified migrants.

What else?

Increased productivity – including through the use of technical innovations such as artificial intelligence. And, precisely because life expectancy is rising, a longer working life. 

At present, boomers are still more likely to be enticed into early retirement.

With demographic change in mind, one should think long and hard about whether to promote early retirement. It is probably inevitable that contribution rates to the pension insurance scheme will rise further down the road. I believe there is much to be said for limiting this increase. Higher employment also supports our tax revenue and the finances of the other social security funds, which are also facing great pressures because of demographic developments. We have presented options for a gradual adjustment of the retirement age – as have other national and international institutions, incidentally. This should be openly discussed. 

The “traffic light” coalition has stumbled over many issues; how much responsibility does it bear for the current woes?

A number of mistakes have certainly been made. But it has to be said: the framework conditions for German politics and society were changed drastically by the events of 24 February 2022 …

… when Russia first launched its attack on Ukraine.

The attack presented the Federal Government with a huge challenge. This kind of debate about our prosperity would not be necessary if Russia had not invaded Ukraine. There would still have been pressure to reform, though. 

Finally, we’d like to hear your tip: who will be the next Chancellor? Would you still bet against Friedrich Merz?

As a central banker, I won’t be making any predictions about that. Politicians have to set a reliable operational framework and provide guidance. This sounds easier than it is, but it is vital to the well-being of Germany as a place to do business. 

© Focus. All rights reserved.