Eurozone: “Germany must take its role in Europe more seriously”

Once a year, the central bank governors of the euro zone convene to consider the broad outlines of monetary policy. This time, ECB President Christine Lagarde invited her colleagues to the Portuguese port city of Porto. Also present were Bundesbank President Joachim Nagel, 58, and the head of the Spanish central bank, José Luis Escrivá, 64. In an online interview conducted jointly with the Spanish newspaper El Mundo , the two central bankers discuss what needs to be done in these turbulent times.

SZ: Mr. Nagel, Mr. Escrivá, is the new Trumpian world order the greatest challenge in your professional career?

José Luis Escrivá: I was a minister in Spain when the coronavirus pandemic broke out. This shock, too, was accompanied by great uncertainty regarding its economic impact. But I would say that back then, the direction of the shock was very clear, and the policy responses were also more definitive. This time, the uncertainty resulting from the Trump administration's decisions is creating a much more complex environment, and the policy response is more difficult.

Joachim Nagel : In my opinion, the uncertainty we've experienced in recent weeks won't disappear anytime soon. The US government has been announcing and then reversing far-reaching, sometimes unprecedented, decisions at a rapid pace, which has significant repercussions for economies and financial markets. This makes monetary policy even more challenging.

The ECB has to make interest rate decisions. How does one do this in this geopolitically uncertain situation?

Escrivá : If we were able to determine a clear scenario for future inflation, and if that scenario were highly likely to occur, our decisions would be easier. At this point, we first need to gather more information. This isn't easy. We must assess the current situation with humility.

Nagel : With regard to monetary policy decisions, it is important to be cautious and not overreact by overemphasizing certain announcements that could change shortly thereafter. In terms of analysis, we are continuously improving our economic projections and scenario analyses. I believe this is the best approach for monetary policy in a situation like this. For the Governing Council, this means that we will stick to our strategy of deciding on the appropriate monetary policy stance from meeting to meeting based on the latest data. So far, this strategy has been successful; inflation in the euro area has fallen to just over 2 percent.

What do you think about Trump's attack on the independence of the Federal Reserve?

Nagel : The independence of central banks is part of the DNA of good monetary policy. History teaches us that without this independence, central banks are unable to achieve and maintain price stability for the benefit of all. Less well known is that the foundations for the Bundesbank's recognized independence were laid after World War II, when the central banking system in Germany was largely rebuilt along the lines of the American Federal Reserve System. The attacks on the Fed are aimed in completely the wrong direction.

Mr. Nagel, you are a member of the SPD, and Mr. Escrivá, you were part of Pedro Sánchez's government. How does this affect your independence as a central banker?

Nagel : I began my career at the Bundesbank 26 years ago. So, I'm a central banker through and through, and being a member of a political party has never played a role in my professional career—and it won't play a role in the future either.

Escrivá : I joined the Bank of Spain 40 years ago and worked there for many years. I also worked at the ECB and the Bank for International Settlements. At one point, I was invited to join the government to bring my experience and, above all, my independence to politics. I believe one has a responsibility to serve when the opportunity arises. Now I have returned to my job. This should not be perceived as a problem, as it is not perceived as such in most countries.

A wind of deregulation is blowing through the banking system. Have the global financial crisis or the recent Credit Suisse disaster been forgotten?

Nagel : The discussion in Europe is about how to make regulation less complicated, not less binding. For example, we do not want to compromise on capital requirements – they remain essential. In general, our regulation since the financial crisis has been a win for banks and the financial sector as a whole. Now it is about looking for ways to simplify things – 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, the requirements may have become too complex. We are therefore now assessing the situation to identify areas where bureaucracy could be reduced.

Financial markets in Europe have proven quite resilient so far, but a major collapse of the stock or bond markets is possible at any time. How is the ECB preparing for the worst-case scenario?

Nagel : We have all the tools in our toolbox, and we've shown in the past that we can deploy or adapt this toolbox very quickly when necessary. However, the financial markets in Europe are currently robust, and the banks in the euro area are in good shape. But the financial market turmoil in early April showed us that we shouldn't become complacent.

Escrivá : Market volatility was significant. I believe that valuations in some markets were very high, while risk was priced very low.

Germany is heading into its third consecutive year of recession. What must the new government do to change the German economy for the better?

Nagel : The Bundesbank has called on the German government to overcome the obstacles that hinder economic growth. Germany must improve its infrastructure, expand its workforce, digitize and accelerate public services, reduce bureaucracy, and strengthen its defense capabilities. The coalition agreement contains several important elements in this direction. The German Bundestag has approved significant scope for new investments. Now it is up to the new government to implement these elements swiftly and efficiently. Germany must also take its role in Europe more seriously.

Escrivá : We need to move forward in Europe, address the challenges, and initiate reforms to make our economy more competitive and robust. And I think it's very difficult to assume a strong leadership role in Europe without Germany. The stakes are very high, but expectations are also very high.

What do you mean specifically?

Nagel : The new German government must actively contribute to the further development of the EU and Europe. And I agree with José Luis Escrivá that Germany must play its role in leading the EU. The common market, the savings and investment union, the defense and energy markets: they are all important. But Europe is much more than that. I think there should be a holistic understanding of why we need more Europe, not less. We now have the opportunity to strengthen the EU and put Europe in a much better position globally. Ultimately, the European Union is the second largest economy in the world. We are not weak. But we can make much better use of our enormous potential. Let's unleash it.

Escrivá : Europe is well-equipped to contribute to global stability. And if instability and unpredictability continue to emanate from other parts of the world, I think Europe certainly has the opportunity to play a more important role. For example, the euro can play a greater role as a reserve currency. Europe should be ready and take a number of initiatives to ensure that we are prepared to play a more important role internationally.

The German Bundestag has approved a major debt program. Around one trillion euros are to be borrowed over the next twelve years. Do you support this decision?

Nagel : I support the use of additional financial resources to effectively address the serious problems we face. These are very difficult times. Germany is currently in an exceptional situation with its defense and infrastructure needs, and the additional debt should be seen as a unique opportunity for the country. But it is quite clear that we cannot solve all problems with additional spending. The debt ratio must fall again after a period of adjustment. Germany's commitment to comply with European fiscal rules remains unchanged.