© Laurent Antonelli – Blitz

At a speech at the European Stability Mechanism (ESM) in Luxembourg, Bundesbank President Joachim Nagel touched on topics including the upcoming interest rate decision by the Governing Council of the ECB on 12 December and the German economy, amongst other things. Attendees included Pierre Gramegna, Managing Director of the ESM; Gaston Reinesch, Governor of the Central Bank of Luxembourg; and Yves Mersch, a former member of the ECB’s Executive Board. At this stage I would have no objections if we were to continue to reduce our policy rates, the Bundesbank President said in his speech. The disinflation process is proceeding largely as currently projected, he noted, and markets already expect a further rate cut. 

However, he is reserving his final judgement until the Bundesbank’s new macroeconomic projections are available for December and he has had a chance to make up his mind concerning the potential future risks surrounding inflationary developments. In any case, I caution against lowering the degree of restriction too hastily, Mr Nagel added. Interest rates should converge slowly and at a measured pace. Mr Nagel also believes that there is currently no significant risk of inflation undershooting the Eurosystem’s target, which would require the Eurosystem to become expansionary in the near future. The Eurosystem’s inflation target is 2 %.

The Bundesbank President also addressed the factors and, in particular, uncertainties that shape future price developments in the euro area. In this context, he described the results of various Eurosystem staff analyses. Topics studied included the impact of energy prices on the inflation outlook. These prices, Mr Nagel said, will therefore be examined in detail in various scenarios in the forthcoming Bundesbank projections.

Germany can change 

© Laurent Antonelli – Blitz

In his speech, Nagel also addressed the state of the economy in the euro area and, in particular, Germany. He said that the competitive position of German industry had deteriorated and growing foreign markets had not provided growth impulses as they had done in the past. Industry was under significant pressure to adapt to changing structural conditions, both domestically and globally. 

The outlook for the German economy was also discussed in an interview with the Financial Times, in which Mr Nagel said that 2025 was likely to be another year of weak growth for Germany. The current outlook for Germany is “more complicated” than at the start of the 21st century, when unemployment was much worse. There was no geopolitical fragmentation and world trade was growing strongly, said Mr Nagel. And the current forecasts did not even take into account the potential impending decisions of the new US administration: If you put major increases in tariffs on top of current forecasts, the economy might broadly stagnate for even longer.

Nevertheless, the Bundesbank President also expressed cautious optimism during the interview. Past experience shows that when Germany is feeling the pain, Germany will change. Mr Nagel pointed out that the German debt-to-GDP ratio had fallen significantly and was approaching the level of 60 % set by the EU’s stability and growth pact rules. In his interview with the FT, Mr Nagel also broached the topic of a possible reform of the debt brake, ideas for which the Bundesbank first floated in April 2022. Such a reform would foresee a moderate and stability-oriented modification of the debt brake if the debt-to-GDP ratio is under 60 %. In the FT interview, Mr Nagel stressed that German debt was approaching this ratio. In this context, a distinction could be made between consumption expenditures and investments “to get more leeway on the structural investment side”.