Panayiotis Rougalas
In an insightful dialogue about the economic landscape, Joachim Nagel, a prominent figure in the financial realm and a member of the ECB Governing Council, shares his perspectives on inflation, interest rates, and the challenges facing the European economy. Joining him is Constantinos Herodotou, the Governor of the Central Bank of Cyprus, offering valuable insights into the economic projections for the region and the role of the ECB in shaping its future. This interview by Kathimerini's Panayiotis Rougalas explores their thoughts on inflation, monetary policy, and the impact of geopolitical events on the European economy. A candid conversation shedding light on critical economic issues and the collaborative efforts between Europe's largest and smallest economies.
What is your projection for the course of inflation in the Eurozone over the next year, and what factors do you believe will be most influential in this trend?
Joachim Nagel
We have seen an encouraging decline in the inflation rate this year. In particular, energy prices have fallen. However, we cannot take it for granted that inflation will carry on falling in the months ahead. Let me mention three factors. First, dampening base effects are getting weaker. Prices were very high back in autumn 2022, so the increase from there to the level in autumn 2023 was comparatively small. This mathematical effect will soon disappear. Second, fiscal measures designed to cap energy price increases are being phased out in many euro area countries. Third, the continuing high demand for workers means that wage growth will probably remain strong. All in all, I expect inflation to carry on declining, but at a slower pace and with possible bumps along the way.
How close are we to the end of the interest rate hikes, given that Mr. Nagel recently commented that inflation is “a greedy beast”?
Joachim Nagel
High inflation has been eating away at incomes and wealth. And it has eaten its way deep into the economy: underlying price pressures – for goods and services in general – are still strong. That’s why I have called inflation a stubborn, greedy beast. We have not yet won the fight against inflation. The next phase of the decline in inflation will be more difficult. Add in a scenario where an escalation of geopolitical tensions could imply higher inflation and it becomes clear that it would be way too early to declare victory over high inflation rates. I can’t tell whether interest rates have already reached their peak. On the ECB Governing Council, we decide on interest rates on a meeting-by-meeting basis following our data-dependent approach.
What are your predictions for the European economy over the next five years, and what role will the ECB play in shaping this future?
Constantinos Herodotou
The sluggish growth of the European economy in 2023 (0.7%) was expected, but it is important to note that what we call a "hard landing" has been avoided. The eurozone economy is expected to recover further in the coming years and in particular, is expected to achieve growth of 1.5% in 2025. In Cyprus, the data is better as growth is expected to reach 3.1% by 2025. Consumption and investment are the key factors for the realization of the forecasts. Price stability is a prerequisite for achieving consumption and investment projections and therefore the contribution of the ECB's monetary policy to the creation of sustainable economic growth is crucial. Without price stability and moderation, people will not be able to buy what they need and businesses will not be able to plan investments for their growth.
In your view, apart from inflation, what other challenges does the European economy face and how should monetary policy be adapted to meet these challenges?
Constantinos Herodotou
The challenges are huge and multi-level. Just the speed at which some mega-trends are developing is a challenge. Geopolitical developments and their consequences - social and economic, weak productivity growth, the phenomenon of "de-globalization" and its possible consequences on product prices, technological developments and especially the rapid rise of AI, are huge challenges that require systematic monitoring and rapid decision-making. As is the need for a green transition, which will be costly but is a one-way street and its implementation will certainly be beneficial to all. These are trends that we are systematically monitoring at the ECB and at the national central banks so that, whenever necessary, the appropriate decisions can be taken with a view to maintaining price stability.
What are the most worrying implications for the European economy arising from the ongoing war between Israel and Hamas? Also having in mind the ongoing invasion of Russia to Ukraine.
Joachim Nagel
These horrible wars are always on my mind. With respect to the implications for the European economy, I see the biggest risks for the energy market. The wars have also raised the degree of uncertainty that affects economic outlooks.
Constantinos Herodotou
In such cases, the humanitarian aspect is the most important. The impact of the conflicts on the European economy is currently limited from an economic point of view. However, a possible escalation of the conflicts in Ukraine and the Middle East could potentially affect the recovery path of the euro area and lead to higher-than-expected inflation with a consequent slowdown in the course of its correction.
Given the heterogeneity across euro area economies, is the ECB balancing its monetary policy sufficiently to cater to stronger and weaker economies?
Joachim Nagel
On the ECB Governing Council, we strive for price stability in the euro area as a whole. The structural differences across euro area economies as well as idiosyncratic business cycles mean that the single monetary policy may not have the same effect on prices or output everywhere. Such differences cannot be completely avoided in a monetary union of sovereign states. It is up to economic policymakers at the national and European levels to support structural convergence and to cope with different positions in the business cycle. On the ECB Governing Council, our mandate is to make the best possible decision for price stability in the euro area as a whole.
Constantinos Herodotou
Logically, monetary policy affects the national economy of each country differently and this is due to different economic factors as well as social factors. However, looking at the data, there is no country in the euro area that has not been affected by high inflation and in which it has not been necessary to restore price stability. And despite national differences, the ECB's decisions have affected the eurozone countries in a similar way, which has contributed to a large reduction in inflation, bringing the 2% target even closer.
How would you describe the relationship between one of Europe’s largest economies and one of the smallest? Is there common ground and understanding between Germany and Cyprus on monetary policy issues?
Joachim Nagel
We share deep ties with Europe. Cyprus is at the heart of Europe, home to some of the continent’s oldest roots and deeply embedded in its history. Besides that, what unites us all on the ECB Governing Council is the common goal: maintaining price stability in the euro area.
Constantinos Herodotou
The two countries, despite their differences in size and their different characteristics, are facing a common challenge like the rest of the eurozone countries: the large increase in prices that leads to a significant reduction in purchasing power for consumers and households. In addition, during Dr. Nagel's visit to Cyprus, we agreed on an institutionalized technical cooperation between the two supervisory authorities.
