The Interview was conducted by Martin Pirkl.

Translation: Deutsche Bundesbank

Ms Mauderer, the German economy will probably contract again in 2024. What makes you optimistic that economic growth will pick up again in the next few years?

Growth in Germany is definitely too weak. The problem cannot be minimised or sugarcoated, either. It’s also not a temporary phenomenon. Germany has structural weaknesses which now need to be resolved so that we can return to a growth path. What makes me hopeful is that we still have a solid foundation on which we can build. We have sound government finances. Our AAA rating is the envy of many. We have a stable democratic system, good educational opportunities for our people and stable social security systems.

All the same, the Bundesbank just recently capped its growth forecast for 2025 at a mere 0.2 %.

Structural deficits that took many years to build up cannot be resolved within the space of a few years. The impetus we require from both the government and from firms will need time to take effect. Germany’s potential growth was 1.5 % back at the start of the millennium, and has now fallen to 0.4 % according to Bundesbank estimates. Impetus is needed for both labour and capital as factors of production in order to generate growth in each.

What levers are there for labour as a factor of production?

We have high participation by women in the labour market, but almost 50 % of them work part-time, which is a very high rate. The labour market is missing out on a great deal of potential there. One key lever we could absolutely use to increase women's working hours is expanding childcare options. But more flexible working times and the option of working from home some of the time would also help. However, we ultimately also need a new mindset in our society. Here in Germany, unlike in France, mothers of young children who return to full-time work often have a bad image still. Other levers for the labour market are taking in more skilled workers from abroad and gradually adapting the retirement age to life expectancy.

All of that would increase the number of hours worked in Germany. Another option is to make working hours more productive. How can AI help with that?

It is absolutely vital that Germany and Europe invest heavily in AI. For one thing, analyses indicate that AI can lead to productivity gains. For another, AI can be used to create innovation. In Germany, we have an environment in which a great deal of knowledge is generated. When it comes to applying for patents, Germany is number one overall in Europe and number five in the world. But when it comes to translating knowledge into innovation, we have plenty of room for improvement.

Why is that?

First, research and development by firms results in disruptive innovations less often in Germany than in other countries. Second, we have barely any venture capital. German start-ups needing more financing in order to achieve economies of scale often obtain that capital from the United States or potentially even from Asia. That’s a first step away from Germany and Europe. We mustn’t let that happen. And third, we have an ageing population which is less innovative on the whole.

Why is that?

Constant technological change means that knowledge gained during education and training remains up-to-date for a shorter and shorter window of time. So we also need to rethink our approach to continuing professional development. For employees, the narrative shouldn't be that they have shortcomings so they have to take professional development courses. Instead, undergoing training should be seen positively, as a way of growing, of being open to new developments. 

Another issue besides AI that will radically change the economy over the next few years is climate change and the necessary transition towards greater sustainability. How good is Germany’s position in the development of green technology?

China is investing heavily in cleantech. But the United States have also done a huge amount of catching up. The Inflation Reduction Act (IRA) in the United States has led to a lot of very successful investment in renewable energy. Our economy in Europe needs to stay on the ball when it comes to green technology and cannot be deterred by the fact that underlying sentiment about ambitious climate policy used to be more positive. Climate change doesn’t care about politics, it keeps progressing. So it’s only a matter of time before demand for products like cleantech grows. It is therefore smart to view it as a growth market.

Do we need more funding in Germany and the EU for investment in green technology?

What’s even more important for firms is planning certainty and reliability in regard to future framework conditions, especially in climate policy. There are already a great many funding programmes. The question we need to ask is how quickly can firms access these funding pots. I’m talking about bureaucracy. And another question is how much transparency there even is for firms about which funding programmes are an option. 

Could it be useful to use artificial intelligence here, to reduce bureaucracy?

We don’t even need to bring AI into this. Just starting basically with digitalisation is enough. The possibilities presented by existing technologies are not being tapped sufficiently in either the private or the public sector. That’s one of the reasons why productivity is also so low in Germany.

You are not only First Deputy Governor of the Bundesbank, but have also been Chair of the international Network for Greening the Financial System (NGFS) since January 2024. Its aim is to improve risk management in the financial sector with regard to climate change and to support the green transformation of the economy. What was your most surprising insight during your first year as NGFS Chair?

We’ve carried out a lot of macroeconomic analyses this year. Although I have been dealing with this topic for many years, I was surprised by the extent of the negative consequences of climate change on economic growth. According to a recent NGFS study, if the current climate policy is maintained, global economic output is expected to be 15 % lower by 2050 compared to a hypothetical scenario without climate change. The actual extent of climate-related damage is likely to be much higher still, as the models do not yet take into account high higher sea levels, climate tipping points or socioeconomic factors such as climate-induced migration. We are currently not able to quantify these factors, but this is likely to change in the coming years.

What impact will climate change have on inflation, a metric of particular importance for central banks?

For the Deutsche Bundesbank it is very important that we interpret our mandate narrowly. Our mandate is price stability, we work to ensure financial stability and are responsible for banking supervision. Unfortunately, climate change represents an increasingly significant financial risk that we cannot ignore. On the question of the impact of climate change on inflation, i.e. whether price pressure will increase more or less as a result, there is currently no clear answer. Current studies point to possible inflationary pressure as a result of increasing food and energy prices. Above and beyond that, more frequent extreme weather events such as droughts or flooding may increase the volatility of prices and output.

And how, in turn, is the green transformation of the economy likely to impact inflation?

Upward pressure on prices is possible, particularly in the shorter term, but this depends in large part on the specific climate policy measures. In the medium to long-term this inflationary pressure is likely to ease as economies become decarbonised and innovations lower the costs of reducing carbon emissions.

You’ve just mentioned the increasing financial risks posed by climate change. Is the financial sector taking these sufficiently into account?

Climate risk stress tests are being carried out in Europe, but also worldwide. A large proportion of international supervisory authorities base these tests on the NGFS scenarios. Financial institutions are additionally starting to incorporate these climate risks into their risk models. But there is still room for improvement.

The existing climate risk stress tests are criticised in part for being too granular and not very real-world-based. What is the NGFS planning to do to address these methodological weaknesses?

The scenarios being used tend to have a time horizon up to 2050 at present. Our aim is to additionally provide scenarios with a time horizon of three to five years. If a board member’s contract runs for three to five years, then that is the relevant time frame for that manager. The fact that climate-related risks and the opportunities of the green transformation are also not given greater consideration by large parts of the population is in large part because people live in the here and now.

What advice do you have for banks and companies concerning sustainability reporting?

What really helps banks, but above all real economic players, is demonstrating how they will deal with climate change and the specific climate policy measures, i.e. which path they intend to take to gradually achieve more sustainable production. Investors will look increasingly closely at these transition plans going forward.

Let’s move from climate policy to geopolitics. Geopolitical tensions are increasing, not only due to Donald Trump’s election victory in the United States. Is multilateralism undergoing a crisis?

All industrialised countries, but also many emerging market economies, benefit from multilateralism. This narrative has not lost any significance. As First Deputy Governor of the Deutsche Bundesbank, I have the privilege of attending the meetings of the G7 and the G20. The G7 has grown together strongly again in recent years and has gained in importance. As for the G20, things are more difficult due to the geopolitical situation. But it has to be viewed positively that the G20 states continue to sit at one table and speak and negotiate with each other.

At other organisations too, such as the WTO or the World Bank, states continue to engage in talks. However, these organisations used to be more effective. Are significant reforms needed that also give the global south more influence?

Generally speaking, I can say that the global south must be given – and has been given – more influence. For this reason it was also very important to me to integrate these countries more strongly into the NGFS and give them shared responsibility. That is why I encouraged Fundi Tshazibana, Deputy Governor of the South African Reserve Bank, to become Vice-Chair of the NGFS. Beyond the NGFS, too, the influence of the global south is increasing. This can be seen, for example, in the chair of the G20, which was most recently held by India and Brazil prior to the current incumbent South Africa.

Let’s take a look at Europe. In Germany, there will be elections at the end of February. In France, Prime Minister Michel Barnier had to vacate his post at the beginning of December after around three months in office. How much are you worried by the political turmoil in the two largest economies in the eurozone immediately before Donald Trump becomes US President again?

First I would warn against speculating about extreme scenarios of potential US policy. The governments of the world would nevertheless be well served by analysing various plausible scenarios and being prepared for which of the announcements are actually implemented. Second, as the Bundesbank’s Executive Board member responsible for markets, I keep an eye on developments in the financial markets. When the break-up of the coalition was announced, it was essentially a non-event for the market. This shows that the financial markets continue to see Germany on solid foundations. Investors have confidence that Germany will continue to act as a stability anchor and that it will regain economic momentum at some point.

You mention market reactions. Were you surprised that the collapse of the government in Paris did not send risk premia on French government bonds even higher than they did?

Forgive me for not commenting on specific countries. But the markets keep an eye on political and economic developments over the longer term and are constantly preparing to adapt to any new circumstances. It can generally be said that sound government finances, like we have in Germany, are very helpful in this regard. They calm not only the markets but also society at large.

There is a lot of debate in Germany about possibly modifying the debt brake. Do you see any scope for this?

Sound government finances are elementary. That said, the Bundesbank takes the view that a minor reform would still be consistent with sound fiscal policy – with the emphasis on “minor”, though.

In your opinion, what are the three most pressing issues that the incoming Federal Government will need to address next year?

Promoting economic growth should be the new government’s top priority. We need economic growth to maintain our level of prosperity. We also have values that we quite rightly uphold on the international stage. But we can only defend these globally if we have political clout. And political clout is closely tied to economic strength. That is why it is so incredibly important that we keep turning this lever and get Germany back on a growth path.

And what are the two other issues?

Preserving peace is a topic that moves people and ought to be an essential policy element. Third, the government should focus on the social security system, above all pensions.

With respect to pensions, should the future German government place more stock in the capital market?

Funded components are needed for all three pillars. In Sweden, around 2.5 % of contributions to the statutory pension scheme are placed in an investment fund. With this model, you need to look carefully at the short-term and long-term effects on the budget. The Netherlands is a good example of how to incorporate funded components into occupational retirement provision. Looking at private pensions, a draft bill had been on the table in Germany, one with major parallels with the UK and Japanese models. The idea here is that people pay into tax-subsidised private pension schemes that invest in shares or other capital market products. There is also a growing group of people in Germany who would like to save for old age via the capital market. The more people who save a good amount in private pensions, the less pressure the social security system will come under. This is one reason why targeted government subsidies for funded components in the third pillar would also be important.

You mentioned a growing group of people who would like to save for old age via the capital market. At 17.6 %, though, the percentage of Germans invested in the stock market remains low by international standards.

The share of people who have capital market products here in Germany is comparatively low, that is true. But this share is steadily increasing. It is encouraging to see that well-educated people under 40, in particular, are developing a greater affinity for saving in the form of stocks and shares. And these are the people who are particularly focused on saving for retirement. They are aware that they need to build up a financial buffer for old age, and that sound capital market products are generally better at this over the long term than a savings account.

Is it because of conversations in their personal lives and on social media, or also because of what is being taught in schools, that more and more younger people are coming across the topic of funded pension provision?

Financial literacy is being given far too little attention in schools, unfortunately. At the Bundesbank, we offer a lot of financial literacy resources. And we can see that Germany needs to do much more here. Up to now, people have largely had to become financially literate on their own initiative. If they come from a family setting where wealth formation is never discussed, they are much less likely to address this topic.

Which is increasing economic inequality in Germany.

Yes, it perpetuates social status and minimises the chances of social advancement and the chances of building up one’s own wealth. What we really need is for lessons on financial topics to be given to school pupils, apprentices and trainees, and university students – to give people a basic understanding of financial issues before they receive their first big paycheques. It would also be good for larger firms to provide financial literacy training to their employees as well. For small and medium-sized enterprises, that is possibly too big of an ask.

In Germany, they do say that talking about money is not the done thing. Does something need to change at a personal level, too, perhaps, in order for people to have a greater awareness of the issues of financial literacy?

Yes, similar to the attitude to working mothers I mentioned earlier, we need to change society’s mindset on this issue as well. In addition, it could help to supplement our statutory pension scheme with funded components. I like to cite Sweden as an example here. For 25 years now, the country has been channelling a portion of pension contributions into equity-based products. The form in which this model could be transferred is certainly debatable. However, it has meant that investments on the stock market have simply become a talking point among the general public. Sweden also has one of the highest rates of listed small and medium-sized enterprises in Europe. This shows how turning one small lever can effect great change. And to end on a positive note, I am optimistic that we will put Germany back on a growth path in the next few years if we turn the right levers together.

© Börsen-Zeitung. All rights reserved.