Joachim Nagel, president of the Deutsche Bundesbank and member of the Governing Council of the European Central Bank (ECB), was at the Minda de Gunzburg Center for European Studies on Monday as part of the European Economic Forum. Before his discussion on the European Central Bank’s mandate with Benjamin Friedman, William Joseph Maier Professor of Political Economy, Nagel sat down with the Gazette to discuss the ECB’s economic policy and priorities. Interview was edited for length and clarity.
GAZETTE: You are just coming from the IMF-World Bank fall meetings. What were the main topics discussed?
NAGEL: The general assessment was pretty clear: The major economies are suffering from high inflation rates. We have to bring inflation down, and this is a job for the central banks. For the moment, and I say this for the Eurosystem, we have to hike rates further. Of course, we also have to be sensitive to the uncertainty this causes and that there is an increasing risk of financial stability issues. But our primary objective is clear — restoring price stability in the euro area.
GAZETTE: You started your mandate as president of Deutsche Bundesbank and member of the European Central Bank’s Governing Council in January of this year, and right from the beginning you emphasized the need to get inflation under control. Why?
NAGEL: It’s important here to give you some numbers to show the dimension of the problem. In the euro area, the inflation rate in September came in at 10 percent. And according to the latest ECB staff projection, inflation will average 8 percent this year. Our target is 2 percent in the medium term. Obviously, there’s a huge gap between 2 percent and 8 percent.
Inflation means that the purchasing power of wages, pensions, and other nominal income shrinks. High inflation is dampening growth and eroding wealth, with lower- and medium-income families suffering the most. So inflation has also a social dimension. The costs of inflation can be seen in Europe but also in other countries. That is why we all have to bring inflation down.
GAZETTE: Inflation has been rising since mid-2021, long before Russia’s invasion of Ukraine at the end of February 2022. What do you see as the main drivers?
NAGEL: One of the main drivers for Europe is this unprovoked war of aggression of Russia against Ukraine. Our economy was hit by a supply shock: Energy prices went up significantly. The price of gas is six or seven times higher than just 12 months ago. There is an urgent need to better balance supply and demand in European energy markets.
But you are right, even before the invasion, inflation was on the rise. One of the reasons was the pandemic. The supply of goods was constrained, while demand recovered rapidly. In my first speech I gave as the president of the Bundesbank in January, six weeks before this horrible war started, I addressed the risk that inflation could persist. I was aware that underlying pressures were building up. But nevertheless, we shouldn’t forget: The 24th of February was a game-changer which triggered a massive energy supply shock.