We could be on the verge of a global economic turning point, Bundesbank President Joachim Nagel said in an interview with the weekly newspaper “Die Zeit”. Uncertainty about the US economic and fiscal policy stance, proposed tariffs, and potentially increasing geopolitical fragmentation pose a major risk in the medium term, according to Mr Nagel. He firmly believes that “[i]n this situation, we need more Europe, not less” and urged EU countries to dismantle barriers in their common market.

US tariffs pose threat of welfare losses in Germany

According to the Bundesbank President, the import tariffs threatened by US President-elect Donald Trump could prove very painful for the German economy. “If the tariff plans are implemented, it could easily cost us one percent of economic output in Germany,” Mr Nagel told “Die Zeit”. Given that German economic growth will be below 1% in the coming year even without US tariffs, he continued, economic output could actually slip into negative territory.

Collapse of three-party coalition government driving up uncertainty

In addition to Donald Trump’s election as US President, the collapse of the three-party traffic light” coalition is giving rise to uncertainties and challenges for Germany. “[O]ur country is facing a huge need for action. We need to get things moving as quickly as possible, Mr Nagel said. He believes the growth initiative that has yet to be adopted is taking things in the right direction in many respects. “Businesses, households and financial markets want reliability, especially when it comes to decisions about things like investment, where they’re making a longer-term commitment.” A clear message is important here, Mr Nagel commented.

Nagel in favour of raising retirement age

One of the main reasons for Germany’s economic weakness, according to the Bundesbank President, is the loss of competitiveness that followed the phase of supply bottlenecks and the energy crisis. Bureaucracy, high corporate tax rates and energy costs are not the only reasons for this, he believes, citing demographic change as another major factor. Better childcare options and more skilled immigrant workers are vital to increasing the labour supply in Germany, Mr Nagel argued. He also spoke in favour of gradually raising the retirement age in line with life expectancy after 2031. Our population is ageing, and given the way our pension system is set up, I see big question marks in the longer term. I think it’s right that those who want to work longer can do so flexibly. After all, he said, we’re in better shape today than people of the same age were 40 or 50 years ago. If you don’t want to adjust this lever, we will pay the price elsewhere – social security contributions, the pension level or central government funding, something will have to give, Mr Nagel remarked.

Euro area inflation back under control

The Bundesbank President considers European monetary policy to be on the right track, with inflation now back under control. Euro area inflation is currently at around 2%, he said, which is close to the target – but that doesn’t mean the job is done. The art is keeping inflation permanently at 2%, he told the interviewer. At present, though, there are still significant wage-related price pressures, he said, which are being masked by the decline in energy prices. Core inflation, which strips out energy and food prices, is fairly high both in the euro area as a whole and in Germany. Timing is a major issue in interest rate decisions, according to Mr Nagel. That is why, in these uncertain times, the Governing Council of the ECB is making decisions from one meeting to the next based on the incoming data and forecasts. But I firmly believe that we’re on the right track, Mr Nagel said.