Europe should introduce a digital currency – both for retail and wholesale use – as a sovereign instrument to stand up against private sector forces in global finance, according to Joachim Nagel, president of the Deutsche Bundesbank.
In a Q&A session at the close of an OMFIF lecture in association with the London School of Economics, Nagel coupled scepticism about developments in the ‘crypto economy’ with assurances that the European Central Bank would not take risks with undue monetary easing.
Speaking at the lecture 10 days before a German general election, he said, ‘The closer we get to the neutral rate, the more appropriate it becomes to take a gradual approach.’ He added: ‘Proceeding in a data-driven and gradual manner has served the ECB governing council well. There is no reason to act hastily in the present uncertain environment. The data will tell us where we need to go.’
Echoing his French counterpart, François Villeroy de Galhau, governor of Banque de France, Nagel foresaw inflation in the euro area falling to around the ECB’s 2% target by the summer, providing further leeway for potential rate cuts.
During the discussion, he left his audience in no doubt about his views on some of the ‘crypto-friendly’ leanings of the administration of US President Donald Trump. He argued that bitcoin was not a currency but, ‘more like an asset class,’ describing it as ‘the opposite of transparent’. The Bundesbank, he affirmed, is sticking to its view that bitcoin is a ‘digital tulip’, part of a speculative bubble.
He also opposed holding bitcoin as a form of reserve currency: ‘This is not something central banks should look at. This is not a liquid form of something you want on the balance sheet. We should be very cautious here.’
‘CBDCs will play a role in future resilience [of Europe],’ he stated, indicating that this was tied to European sovereignty. Outlining the growing strength of private sector actors, many from the US, in the international payments field, he cautioned that these could ‘be used in a digital environment as a form of weapon’, underlining the need for Europe to establish a means of resistance in the digital sphere. When asked about the impact of digitalisation and the introduction of a CBDC on the neutral rate of interest, Nagel said it was ‘too early to tell,’ but reiterated that a CBDC will have an important role in the future, adding that it is a public good that the monetary authorities should provide.
Reflecting on the core elements of his lecture, he also stressed: ‘We shouldn’t be on autopilot when we are coming closer to the neutral rate.’ This is generally judged to be around 2 to 2.25% for the ECB’s benchmark rate against 2.75% presently. He pointed to the ‘many unknowns and uncertainties’ from US policy administration decisions’, including not only the nature of tariffs, but also the impact on inflation and economic activity.
Asked about the possible effect of an abatement of hostilities between Russia and Ukraine, Nagel parried that observers should not be ‘over-optimistic’ regarding the ECB’s next interest rate decision in March. The war had ‘fundamentally changed’ the economic landscape in Europe. Predicting what might happen next was virtually impossible, he indicated.
When asked whether the last ECB rate hike – in September 2023 – had been excessive, Nagel defended the decision, stating it was based on available data and uncertainty at the time.
Asked whether the ECB might be prepared to cut rates below the neutral level, Nagel replied that ‘spillovers’ might trigger a situation where inflation could fall below target. But he added that, based on current data, ‘I don’t see such a scenario as a high probability.’
On the upcoming German general election which seems unlikely to yield a stable coalition outcome, he termed the German economic outlook as ‘stagnation’, with economic growth seen as a mere 0.2% this year.
He repeated his oft expressed support for ‘more Europe, not less Europe’ including what he termed the vital dimension of capital markets union.Over the past year, the ECB has been voicing an increased need for urgency in addressing fragmentation in capital markets and the energy sector. Nagel cited these drawbacks as negative factors for foreign investment in Europe.
Arunima Sharan is Senior Economist and Yara Aziz is Economist, Economic and Monetary Institute at OMFIF.
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