Joachim Nagel (Karlsruhe, 1966) travels to Madrid this Tuesday and beforehand grants a joint telematic interview with the Governor of the Bank of Spain, José Luis Escrivá, to EL MUNDO and Süddeutsche Zeitung. He believes that the new German government must exercise more leadership in the EU in a context where the most indebted countries cannot continue to bypass the new EU rules. Both agree on various points on how to address current challenges.
Question: Is Trump's new world order the most complicated situation he has faced in his career?
From my point of view, the uncertainty we have seen in the last two weeks is not going to disappear quickly. The U.S. Administration has been announcing and retracting decisions of great significance, sometimes unprecedented, at a rapid pace, with significant repercussions for the economy and financial markets. This makes monetary policy even more challenging.
You do not know what Trump will decide, but the ECB must make decisions on interest rates anyway. How to handle this situation?
In monetary policy, it is important to be cautious and not overreact, giving excessive importance to specific announcements that could change shortly after. In the analytical field, we are continuously improving our economic projections and scenario analyses. I believe this is the best way to approach monetary policy given the situation. For the ECB Governing Council, it means that we will continue to apply a data-dependent approach, where decisions are made at each meeting to determine the appropriate orientation of monetary policy. So far, this strategy has worked: euro area inflation has fallen to just above 2%.
What do you think of Trump's attack on the independence of the Federal Reserve?
The independence of a central bank is part of the DNA of good monetary policy. History has taught us that, without such independence, central banks are not fully prepared to achieve and maintain price stability for the benefit of all. What is less known is that the foundations of the renowned independence of the Bundesbank were laid after World War II when the central banking system in Germany was largely rebuilt based on the model of the U.S. Federal Reserve. The current attacks on the Fed are pointing in a completely wrong direction.
You belong to the German Social Democratic Party. How does that affect your independence?
I started my career 26 years ago at the Bundesbank. Therefore, I am a central banker through and through, and the fact that I am a member of a party has never influenced my professional career in any way, nor will it in the future.
The banking system is experiencing a wave of deregulation. How can we avoid sending the wrong signal to society? Have the financial crisis or the recent Credit Suisse disaster been forgotten?
The discussion in Europe focuses on how to make regulation less complicated, not less binding. We do not want to give up capital requirements, for example, because they are essential. Overall, our regulatory framework since the financial crisis has been an asset for banking entities and the financial sector as a whole. Now it is about examining possibilities for simplification without weakening supervision or financial stability. After a decade, it is a good exercise to evaluate the methods and results. In some areas, such as reporting obligations, requirements may have become excessively complex. Therefore, we are now assessing the situation to identify areas where bureaucracy could be reduced.
European financial markets have shown considerable resilience, but a significant collapse in fixed income markets could occur at any time. How is the ECB preparing for the worst-case scenario?
We have a full set of instruments at our disposal and have shown in the past that we can use them quickly or adapt them if necessary. However, currently, European financial markets are strong, and euro area credit institutions are in good shape. Nevertheless, the turbulence experienced by financial markets in early April showed us that we should not become complacent.
Are the new European fiscal rules being taken seriously enough? Should the European Commission be stricter with the fiscal plans presented by Member States?
What is important to me is that Member States comply with the Stability and Growth Pact rules. It is up to the European Commission to manage this process. We can all benefit from it, especially in a situation where new uncertainties arise. Fiscal rules allow for dealing with extraordinary circumstances and the need for temporary additional spending. In the end, Member States with high debt ratios have to reduce them. And the European Commission must ensure that the process is transparent and clear for everyone.
Germany is heading towards its third consecutive recession. What should the new Government do to improve the German economy?
The Bundesbank has urged the German government to overcome the limitations hindering economic growth. Germany needs to improve its infrastructure, expand its labor supply, digitize and streamline public services, reduce bureaucracy, and strengthen its defense capabilities. The coalition agreement includes some important elements in this direction. The German Parliament has approved a broad margin for new investments, and it is now up to the new government to fulfill and implement these elements quickly and effectively. Germany also needs to take its role in Europe more seriously.
What will be the future role of the EU in the world?
The new German government has to actively contribute to the further development of the EU and Europe. I agree with José Luis Escrivá that Germany has to play its part in leading the EU. The Single Market, the Savings and Investment Union, defense, and energy markets: all are important. But Europe is much more than that. I believe there should be a holistic understanding of why we need more Europe and not less Europe. We now have an opportunity to strengthen the EU and significantly improve Europe's position in the world. Ultimately, the European Union is the world's second-largest economic area. We are not weak, but we can make much better use of our great potential. Let's unleash it.
To seize this opportunity, the German Parliament approved a massive borrowing program. It will assume debt of approximately one trillion euros over the next twelve years. Do you approve of this decision, or is there a risk of inflation or even fiscal complacency?
I am in favor of using extraordinary financial resources to effectively address the serious current problems. We are going through very difficult times. With its needs in defense and infrastructure, Germany is in an exceptional situation right now, and the extraordinary debt should be seen as a unique opportunity for the country. However, it is very clear that we cannot solve all problems with additional spending and that, after an adjustment period, the debt ratio will have to be reduced again. Germany's obligation to comply with European fiscal rules has not changed.