“We are experiencing a turning point here”

Mr. Nagel, how do you experience the Ukraine crisis in your new position as head of the Bundesbank?
I am dismayed by the military aggression and I want to express my sympathy for the people of Ukraine. The terrible suffering there affects me personally very deeply. This war by Putin must end. As the Bundesbank, we support the federal government, for example in implementing the financial sanctions.

What economic consequences will war and sanctions have?
We are experiencing a turning point here. Trust in Russia, a country with which we have had diverse economic relations for decades, is gone and will not come back any time soon. Economically, this results in significant, costly adjustments.

In the short term, we are now seeing the violent reactions on the financial and commodity markets. But what do you expect in the long term?
Before the war, we in Europe were already getting closer to the growth path we were on before the corona pandemic. We were on the right track. Now we are painfully experiencing how dependent we are on Russian raw materials. Politics and business now want to reduce this dependency. This means a major, ongoing restructuring process. It overlaps with the energy transition, but should be much faster.

Is the Bundesbank prepared if an escalation of the crisis should lead to problems in the financial system?
Yes. Since the financial crisis of 2008, we have had a crisis management team at the Bundesbank for such situations. As the head of the Markets department at the time, I was involved in establishing it myself and thus bringing the great expertise of the relevant departments – markets, supervision, economics and so on – to one table. This allows us to react very quickly if necessary.

Are recent events propelling us into stagflation, a scenario of rising inflation and economic weakness?
I do not currently expect stagflation, even if the effects of the war will increase the inflation rate and weaken economic growth. The labor market is already tight and problems are foreseeable in Germany due to the shortage of skilled workers. However, we currently have no signs of a wage-price spiral. And we continue to assume that there will be an upswing – it will probably only be delayed.

Against the background of the burdens, it was surprising that the European Central Bank (ECB) indicated an end to bond purchases and thus cleared the way for interest rate hikes.
I don’t find that surprising. We made it clear at the February meeting that decisions should be made in March. We also decided to drive on sight and keep our options open.

Sure, that became apparent in February. But now the war has broken out.
That’s true, but that will not only dampen economic output, but will also intensify the already persistently high price pressure. The experts at the ECB are now assuming that the inflation rate in the euro area will be 5.1 percent this year, and the upside risks for the period after that have also increased. We reacted to that.

The decision also includes a change in monetary policy orientation. The wording that a rate hike should follow “shortly after” the end of bond purchases has been replaced by a more vague “some time after”. Does that mean the first rate hike will come later?
This wording is intended to make it clear that we are keeping an open mind as to when we will raise interest rates once net purchases have ended. And given the high level of uncertainty, I think it’s very important that we don’t predetermine ourselves, but remain flexible.

Is it possible that the ECB will soon regret Thursday’s decisions again if the burden on the economy turns out to be even heavier?
Even if we later found it necessary to react differently, that would have nothing to do with remorse. It is a matter of good monetary policy to react appropriately to new data and forecasts.

Let’s stick to the data: The ECB’s forecasting models didn’t work even before Corona and mostly showed inflation that was too high. Last year, the forecasts were much too low. Isn’t it poking around in the fog to rely on models in this difficult situation?
I wouldn’t see it that way. The models offer a good orientation as to what can be expected for the future based on the past. But especially when a lot is in flux in economic activity and this cannot yet be properly captured in models, we will not rely solely on their results.

ECB President Christine Lagarde indicated that there were differences of opinion at the Council meeting. Some members would have advised not to decide anything. Others would have pushed for announcing the faster cut in bond purchases without explicitly making this dependent on future data. Did you belong to the second camp?
I have made it clear on previous occasions how seriously I take the rise in inflation. We should focus on normalizing our monetary policy. But above all, it should be noted that in the end we agreed on what I believe to be a good, balanced decision.

In the past, there have been frequent disputes in the Governing Council. Many now expect you to continue the stability-oriented Bundesbank tradition. Others hope that you are trying to avoid an outsider role within the Governing Council. How do you intend to master this balancing act?
There is no such balancing act. People can rely on the Bundesbank as an anchor of stability, I made that clear from the start. In the Governing Council, we all have a common mandate to ensure price stability. And the most recent decision shows that we are facing up to it. I see myself in the Governing Council as a team player who doesn’t shy away from controversial discussions.

In Germany there are always concerns that the ECB cannot raise interest rates far enough, because otherwise some countries such as Italy would no longer be able to bear their debt burden.
We must align monetary policy with our goal of price stability. There can be no compromises. Fiscal policy has a major responsibility at national and European level to reliably ensure solid public finances. In a historical comparison, interest rates in the entire euro area are extremely low. This is a favorable starting position from which interest rate increases can be better absorbed.

If the economic situation worsens, the ECB could be forced to buy the bonds of certain countries in a targeted manner so that the risk premiums on government bond yields do not get out of hand there.
Fiscal policy is at the forefront here. It is not the task of monetary policy to secure the financing of states. So far, the risk premiums are no higher than before the corona pandemic. And it can be said that monetary and financial policy worked very well during the pandemic and each made a significant contribution to stabilization.

Massive amounts of debt are now being incurred in Germany. In order to strengthen the Bundeswehr, a special fund is to be formed with which the debt brake enshrined in the constitution can be circumvented. What do you make of it?
We are dealing with an absolutely exceptional situation. A special fund should probably be anchored in the Basic Law. In my view, that would be a reasonable approach. In particular, anchoring it in the Basic Law, supported by a large majority in the Bundestag, would not weaken the debt brake.

Do the debt rules of the Maastricht Treaty still make sense today? When it was decided, the Bundesbank’s key interest rate was almost nine percent; today it is zero percent.
The reform discussion is currently underway, and the Bundesbank has also submitted proposals. But no matter how we evaluate the rules and any changes to them in detail, we have to keep one thing in mind: Sound public finances are important. The now very high debt ratios must be reduced significantly. And for that we need reliable, comprehensible and binding fiscal rules. During the corona pandemic, Germany benefited greatly from the fact that we created valuable leeway in the previous years for later crisis management.

The low interest rates in recent years have pushed up real estate prices in Germany. Is there a bubble about to burst?
We see overvaluations in the residential real estate market in Germany, which have also increased during the pandemic. And in recent years, low interest rates have been an important price driver. However, it is primarily a matter for so-called macroprudential policy to counteract the risks to financial stability. Measures have recently been taken here, such as higher capital buffers for banks.

Finally, a specific question: what about the Bundesbank’s new campus? There were delays in the move, and the costs are said to be higher.
The current building was designed in the 1960s and occupied in 1972. It no longer meets today’s requirements. We now need modernization that will last a very long time. The delayed move has not resulted in any additional rental payments.

What are your priorities on the project?
We need enough space on the new campus to bring together the employees who were previously scattered across different Frankfurt properties. In addition to working conditions that are up to date, it is important to me that we get a largely climate-neutral heating and cooling supply. We also have very high security requirements, after all we keep around half of our gold holdings there.

But are you hoping that you will be able to move to the new campus during your term of office?
Of course!
Mr. Nagel, thank you very much for the interview.

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