Please note that the following text is based on a speech and may have been slightly altered for clarity:
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I am pleased to be at the Frankfurt School today and grateful for the opportunity to share some thoughts with you. The topic of today’s discussion reminds me of a recent meeting in Washington D.C., where we discussed the potential impact of new policies on the global economy.
I will address three key questions in my speech. First, I will discuss the current state of monetary policy in the euro area and its relationship to the natural rate of interest. Second, I will explore how geopolitical factors are influencing monetary policy. Finally, I will touch on the need for structural reforms in Europe, specifically in Germany.
Starting with monetary policy in the euro area, we have seen a significant decrease in inflation over the past few years. While the European Central Bank predicts a gradual return to the 2% target, there are still uncertainties surrounding inflation. The concept of the natural rate of interest, or r-star, is often used to assess the appropriateness of monetary policy. However, estimating r-star is challenging and should not be the sole basis for policy decisions.
Geopolitical tensions and economic uncertainty are also impacting monetary policy decisions. The rise in global economic uncertainty and trade policy tensions require central banks to consider risk scenarios when making decisions.
In conclusion, while the natural rate of interest provides a useful framework for long-term perspectives on monetary policy, other factors such as geopolitical tensions and economic uncertainty must also be taken into account. Thank you. Although the impact on the euro area would be less than on the US economy, it is still significant. The ECB Governing Council should continue to make decisions based on new data rather than committing to a specific interest rate path to maintain flexibility. The rise in uncertainty in Europe coincides with a period of increased harmful trade interventions, with the number doubling since 2020.
Trade interventions, including protectionist measures like tariffs and subsidies, have increased globally, with two-thirds of them being trade-distorting subsidies. While harmful interventions have risen in all G20 countries, the US and China show the most significant increases, often reciprocally. This trend poses a risk of self-reinforcing protectionist measures.
Despite these challenges, global trade integration remains close to pre-financial crisis levels, with world trade representing 58% of global GDP in 2023. However, regional trade is on the rise, with trade between blocs decreasing compared to trade within blocs. Regional trade agreements, like the one between the EU and Mercosur, are becoming more common.
The shift away from a rules-based global trade order poses a major risk to the global economy, impacting countries like Germany, which rely heavily on international trade. Structural reforms are needed in Germany to address obstacles to economic growth, including high energy prices, labor shortages, and lack of innovation. Structural reforms can increase competitiveness and encourage private investment, essential for boosting growth.
To address these challenges, Germany must provide more clarity on the green transition to mobilize low-carbon investments and reduce uncertainty for firms. Implementing a broad price on carbon emissions across all sectors is crucial for lowering greenhouse gas emissions cost-effectively. Complementary measures, such as investing in green technologies and enhancing energy systems integration, are also necessary for a smooth transition to a low-carbon economy.
Addressing labor shortages in Germany requires reducing incentives for early retirement and gradually raising the retirement age based on life expectancy. Improving childcare facilities can also encourage young parents to increase their working hours, contributing to economic growth. Similarly, by addressing disincentives to work in the tax and levy system, the participation of secondary earners in the labor force could be increased.
Moreover, Germany should focus on attracting skilled labor from overseas by simplifying the procedures for obtaining work and residence permits.
Another crucial area that requires attention is the reduction of bureaucracy and promotion of innovation to enhance business dynamics. This was highlighted in a recent survey by the German Chamber of Commerce and Industry.
Streamlining regulations and avoiding unnecessary complexity, such as with the Supply Chain Act, would greatly benefit many businesses in Germany.
Efforts should also be made to improve the speed of bureaucratic processes in Germany, particularly in the approval processes.
Digitalization of public administration presents a significant opportunity for efficiency, as seen in the advancements made by the Bundesbank in utilizing AI technology.
The Bundesbank’s initiatives in digitalization, including the use of public and private cloud services and AI technology, are paving the way for future challenges.
Furthermore, the Bundesbank’s exploration of a digital euro project demonstrates its commitment to strengthening Europe’s financial systems.
In conclusion, the changes discussed in monetary policy, geoeconomic fragmentation, and structural reforms in Germany all point towards the need for adaptation and vigilance by policymakers. These challenges present opportunities for closer collaboration in Europe, as Jean Monnet once said, «Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.»
Thank you for your attention. Thank you for the opportunity to contribute to this important exchange of ideas. The topic of today’s event brings to mind my recent discussions in Washington D.C. with a diverse group of researchers and central bankers about the potential policies of a new administration and their implications. As we see changes unfold, it is evident that the actions taken by Europe, particularly Germany, will play a crucial role.
I will address this topic through three key questions: the current state of monetary policy in the euro area, the impact of geopolitics on monetary policy, and the necessary structural reforms in Europe, focusing on Germany.
Starting with monetary policy, the decline in inflation in the euro area over the past few years has been significant. While progress has been made towards the 2% target, uncertainties remain. The concept of the natural rate of interest, although uncertain, provides a framework for long-term perspective in monetary policy decisions.
Geopolitical tensions and economic uncertainties also pose challenges to monetary policy. The rise in uncertainty, as seen in various economic indices, requires policymakers to consider risk scenarios in their decision-making process.
In conclusion, the ongoing geoeconomic fragmentation and uncertainty in trade policies emphasize the need for a cautious and data-driven approach to monetary policy decisions. The ECB Governing Council’s flexibility in responding to new data is crucial in navigating these complex economic challenges. This approach provides the needed flexibility and complete range of options. The recent increase in uncertainty, posing a challenge for Europe, coincides with a period of heightened geoeconomic fragmentation. The number of detrimental trade interventions has notably risen since 2020, reaching unprecedented levels. Trade interventions, including protectionist measures like tariffs and subsidies, have surged in recent years, with trade-distorting subsidies making up a significant portion of these actions. While all G20 countries have seen a rise in protectionist measures, the United States and China have experienced the most substantial increases. Despite these developments, the impact of these restrictions on global trade dynamics remains uncertain. Global trade integration has remained relatively stable since the global financial crisis, although international trade is increasingly regional. The shift away from a rules-based global trade order poses risks for the global economy and European growth. In Germany, structural reforms are necessary to address weak growth, including obstacles such as high energy prices, labor shortages, and lack of innovation. Structural reforms in energy policy and labor markets, along with reducing bureaucratic red tape and fostering innovation, are crucial for boosting economic growth in Germany. Approval processes are notoriously sluggish, particularly in the public sector. However, the digitalization of public administration presents a significant opportunity that may also extend to the private sector. One notable example is the AI software DeepSeek, which has garnered attention for its ability to deliver AI solutions with minimal hardware requirements.
The rapid advancement of AI technology and its applications offers promising prospects for more efficient work practices. As a Bundesbank board member overseeing the Directorate General of Information Technology, I can provide insights into how digitalization is transforming the public sector. Here are three examples of our initiatives:
First, the Bundesbank is pioneering the use of the public cloud with the launch of our innovative and secure eBusiness portal, the New Extranet (NExt), catering to over 180,000 customers, including banks, insurers, and public sector entities. Additionally, we have established a Bundesbank-owned private cloud for sensitive data, complementing our hybrid cloud strategy and investments in technologies like AI to prepare for future challenges.
Second, the Bundesbank is leveraging AI to enhance risk control functions, particularly in analyzing counterparties involved in financial transactions. By harnessing diverse datasets, AI can identify potential financial risks early on, a task that would be nearly impossible to accomplish manually given the volume and complexity of the data involved.
Furthermore, AI is instrumental in expanding our economic analyses, offering insights into the impact of policy measures on inflation, employment, and economic growth. Lastly, the Bundesbank is actively involved in exploring the issuance of a digital euro within the Eurosystem, aiming to strengthen Europe’s sovereignty, resilience, and efficiency by enabling the settlement of digital assets in central bank money.
In conclusion, the convergence of monetary policy, geoeconomic fragmentation, and structural reforms underscores the need for policymakers to adapt to these evolving challenges. Embracing change as an opportunity for closer collaboration in Europe, we can navigate through crises and find solutions that forge a stronger, unified Europe. Thank you for your attention. I will begin by discussing monetary policy, followed by the geopolitical environment, and finally addressing structural reform in Europe, specifically in Germany.
The questions I aim to tackle are as follows:
1. Firstly, what is the current status of monetary policy in the euro area, and how can the natural rate of interest assist in answering this question?
2. Secondly, how does monetary policy intersect with geopolitics, and what are the economic consequences of ongoing geoeconomic fragmentation?
3. Lastly, what steps does Germany need to take to stimulate its limited potential growth?
Starting with monetary policy in the euro area, the quest for price stability is a priority. Inflation has significantly decreased over the past couple of years, with the current headline rate standing at 2.4%, a fraction of its peak in October 2022. The European Central Bank (ECB) staff projects a gradual decline in inflation, expected to reach the 2% target by 2026. However, challenges remain as core inflation and services inflation remain high. The ECB has lowered key interest rates multiple times in response to these developments.
When analyzing whether monetary policy is still restrictive, the concept of the natural rate of interest, or r-star, is often used. R-star is the real interest rate that would exist if the economy operated at potential with stable inflation. While estimating r-star is complex and uncertain, it provides a useful framework for long-term perspectives. Despite its limitations in day-to-day policymaking, it offers insights into the broader economic landscape.
Geopolitical tensions and economic uncertainties also impact monetary policy decisions. Rising global economic policy uncertainty and trade tensions require policymakers to consider risk scenarios alongside baseline projections. The ECB Governing Council’s flexible approach to decision-making based on new data is crucial in navigating these uncertain times.
In conclusion, while monetary policy faces challenges from both domestic and international factors, a comprehensive approach that considers a range of indicators and scenarios is essential for effective policymaking in the euro area. However, the number of interventions increased to six thousand in 2020 and has remained at a significantly higher level since then. Trade interventions, such as tariffs, quotas, and subsidies, have been on the rise, with trade-distorting subsidies accounting for nearly two-thirds of harmful interventions between 2020 and 2023. While all G20 countries saw an increase in protectionist measures, the United States and China experienced the most significant spikes. This reciprocal nature of interventions poses a risk of self-reinforcing loops.
The impact of these restrictions on global trade dynamics is mixed. Global trade integration remains close to pre-financial crisis levels, with world trade representing 58% of global GDP in 2023. However, international trade is becoming more regional, with a decrease in trade and investment between blocs compared to within blocs. Regional trade agreements are also on the rise, such as the recent agreement between the EU and Mercosur.
Despite some positive developments, there is a general shift away from the rules-based global trade order. This poses a major risk to the global economy, with one country questioning its trade relationships. This uncertainty, along with geoeconomic fragmentation, is weighing on European growth, particularly in Germany.
Structural reforms are needed to address the weak economic growth in Germany, which is not just cyclical but also due to falling competitiveness and structural problems. High energy prices, labor shortages, and lack of innovation are key obstacles to growth that can be improved through structural reforms. Addressing energy policy, reducing bureaucracy, and fostering innovation are crucial steps to stimulate growth and improve competitiveness in Germany. It appears that it can offer AI solutions with only a fraction of the hardware that others require. Please rewrite this sentence. Please rephrase this sentence.
QUELLEN
