Bundesbank’s Joachim Nagel calls on Europe to tighten its financial belt

Germany’s new central bank chief said it was time for Europe to tighten its financial belt by ending the one-off monetary and fiscal stimulus that helped the economy rebound quickly from the pandemic.

Joachim Nagel, who took office as Bundesbank president last month, called for a “normalization” of eurozone monetary policy in response to record inflation and said EU fiscal rules should be “stricter” to prevent countries from ignoring them.

“Many countries are starting to ease pandemic restrictions,” Nagel says Die Zeit during his first interview since he started his job. “The economy is recovering. Labor markets are doing well. It is an encouraging image. This is why monetary policy can become less expansive.

His comments are clear confirmation that the new president will continue the Bundesbank’s inflation-fighting hawkish tradition. The German central bank has always viewed unconventional policies such as negative interest rates and bond purchases with suspicion.

Nagel predicted that inflation would remain high and average 4% in Germany this year, saying that unless the situation changed soon, he would ask the European Central Bank to reverse its ultra-loose monetary policy during its March 10 meeting. The step is to end net bond purchases in 2022,” he said. “So interest rates could go up this year.”

He also urged Brussels to tighten EU fiscal rules so that it is harder to “work around” them as many countries have done in the past, even Germany. The rules limit debt levels and government deficits, but have been suspended since the pandemic hit in 2020.

“What applies to monetary policy also applies to fiscal policy: a lot of things need to change after the pandemic,” Nagel said. “Once we have put the crisis behind us, it will be time to reduce the high public debt ratios and thus rebuild reserves.”

“We should think about clearer, simpler and stricter rules,” he said. “The rules should better ensure that high public debt ratios are reduced.” His comments clash with recent calls from French and Italian leaders to revamp the rules to allow for higher public investment, setting up a battle before the limits are reintroduced next year.

Nagel, a former Bank for International Settlements executive, worked at the Bundesbank for 17 years before leaving in 2016 and was chosen by the new German government to succeed Jens Weidmann who decided to step down after a decade on the job.

Last week, he joined several of his fellow ECB governing council members in calling for more immediate action than what was finally announced at their meeting.

Christine Lagarde, President of the ECB, caused a massive sell-off in the bond markets by no longer ruling out that the bank could raise its interest rates this year. His comments sparked a sell-off in eurozone government bond markets as investors predicted the ECB could halt net asset purchases and cut its negative deposit rate to zero by the end of the month. ‘year.

Nagel said the current situation of high inflation, falling unemployment and resurgence in demand was a “textbook model” for when a central bank should act. “We shouldn’t ignore the fact that we have provided abundant, if not overabundant, liquidity to the markets over the years because the inflation rate has been too low for a long time,” he said.

He warned that hesitating to act now could force the ECB to take more drastic measures later, which would be more shocking for financial markets and the economy, adding: “In my view, the economic costs are significantly higher if we act too late only if we act early.

Mary I. Bruner