Those were bitter times Interview with Frankfurter Allgemeine Zeitung

The Interview was conducted by Isabella Bufacchi and Christian Siedenbiedel.

Following the ECB's latest decision, what's the path ahead now for interest rates?

In these uncertain times, we are not going to change our winning formula: We are not pre-committing to a particular rate path but look at the incoming data including, of course, the outlook for inflation, and make a decision on that basis at the respective monetary policy meeting. In light of the persistently high uncertainty, that's an approach that offers us maximum flexibility. There is no pressure to act at present: The interest rate level confirmed on Thursday allows us to wait and see how things develop.

What does that mean for consumers?

Euro area inflation came in at 2.1 per cent in August, which was only marginally higher than our medium-term target. And the new ECB staff projections see inflation hovering close to 2 % over the next one or two years. We've reeled inflation back in from the double-digit rates seen in autumn 2022. Those were bitter times, above all for low earners. Now prices are stable: That's good news for consumers, whether they are in Germany, Italy or anywhere else in the euro area.

How would you explain the ECB's decision to the general public?

We decided to leave the key ECB interest rates unchanged in the current situation because the latest forecast indicates that inflation is more or less consistent with our target in the medium term. Further interest rate cuts could jeopardise that: Let's not forget that the economy is already being stimulated by rising defence spending and by the large investment package for infrastructure in Germany. This is having an effect across Europe. Leaving that to one side, there are a great many uncertainties surrounding medium-term price developments - not just as a result of US tariffs. We are flexible enough to deal with this, should we have to.

Has the ECB won the battle over high inflation?

As far as we can tell, euro area inflation will be close to our medium-term target - that's 2 per cent - in the years ahead. That's excellent news. Our key interest rate is also at 2 per cent. From this vantage point, we're well placed to observe developments in the coming weeks and months. And respond if necessary. Even so, all that is no reason for complacency: Services inflation continues to be strong, and everyone will be aware of the significant uncertainty, especially in geopolitical matters.

How are US tariffs and higher German government debt going to impact on inflation?

At present, the tariffs appear to be having only a limited impact on inflation, and the higher government spending is only just starting. In the short run, though, the tariffs will definitely place a strain on the German economy. I am only expecting to see very low economic growth for this year. The higher government spending will then probably stimulate economic activity next year - that's a positive development for starters. At the same time, though, we in Europe will need to pay attention to how government debt evolves and how financial markets respond.

Where's the problem?

If markets were to get worried about the debt ratios of some euro area countries, there is a risk that dislocations might occur. That is why we on the ECB Governing Council are emphatically urging governments to comply with the deficit rules and government debt ratios laid down under the European Stability and Growth Pact. Because sound public finances make it much easier for us to discharge our price stability mandate over the long run. It's a challenging situation.

Some economists are very upbeat about 2026, thanks to the positive impact of the German government's fiscal stimulus on German growth. Do you share this optimism?

The Bundesbank is expecting the positive fiscal stimulus to mainly take effect as of next year. However, a great deal will depend on how much additional investment actually takes place and how targeted it will be. Like many other euro area countries, Germany is facing structural challenges. The Federal Government is aware that it needs to tackle these problems, which were not resolved in the past. And Mario Draghi is right to note in his report on European competitiveness that Europe must move forward and act more quickly. We now have the opportunity to make the continent more competitive. The planned investments in Germany can play a part in this.

What needs to happen in Europe? Which of former ECB President Mario Draghi's proposals should be implemented as quickly as possible?

The savings and investments union is overdue, as is a common European deposit guarantee scheme. I am often asked what we can do to attract more capital for investments to Europe. The past few years have shown that the multitude of different rules in European countries present a major obstacle.

What role does the banking union play here?

I am convinced that we can lay the necessary groundwork here to complete the banking union in order to establish a credible and reliable deposit insurance scheme. That scheme would be even more effective at preventing bank runs and promote financial stability without neglecting the particular characteristics of the Italian and the German banking systems with their deposit and institutional protection schemes. We need to do our homework. We need to become more European. "More Europe" is more important today than ever.

What's the Bundesbank's view on cross-border bank mergers? Everyone is calling for a banking union, but when a cross-border bank merger like the one between Commerzbank and Unicredit is proposed, there's a huge outcry …

There is indeed a debate over this in Germany that I am not going to interfere with in this particular case. I will remain neutral on this matter. Generally speaking, though, it is clear that cross-border mergers are part and parcel of a single market.

You mentioned the similarities between the German and the Italian banking systems. The same applies to manufacturing industry, exports, the energy sector and the ageing population: Italy and Germany have much in common. Don't you think that closer cooperation between Germany and Italy would help Europe move forward more quickly?

Greater cooperation between our two countries could definitely help. We are strongly interlinked both economically and politically; after all, we are founding members of the European Union. However, there's even more we can do to grow our two economies even closer together. Because we have similar structural and economic problems, for example in the automotive and defence sectors. The new Federal Government has a clear European focus. In my view, close cooperation with Italy also ties in well with this.

More Europe could also help prevent negative impacts of US policy. For example, the independence of the US Federal Reserve is under attack from the Trump administration. Do you fear that this could lead to similar attacks by European politicians on the ECB?

Developments in the United States, in particular the attacks on the Fed,are worrying me a great deal. Central bank independence is a central principle of modern economies - above all in democracies. Even though it seems contradictory at first glance for such an important institution as the central bank not to be under the direct control of an elected government, this has ensured us low inflation rates and sustainable economic growth worldwide over the past decades. We are all familiar with the catastrophe that occurred in the Weimar Republic when the Reichsbank was not independent. Inflation rose to astronomical levels. Thanks to the United States, the Bundesbank was created as an independent institution. We need institutions like that - institutions that are able to discharge their mandate beyond short-term political interests.

Yes, but now the Bundesbank has some problems of its own. How is it going to solve the drama surrounding its Central Office? It sounds very worrying that the new headquarters was going to cost more than €4 billion …

You are right to speak in the past tense. Those plans for the Bundesbank's Central Office no longer apply. Since taking office in 2022, I have restructured the project and significantly streamlined it together with the Executive Board. I quickly realised that the original project was too large. That bothered me. During the pandemic we furthermore became familiar with the possibilities of working more from home. Our employees have been making extensive use of these possibilities ever since. In addition, the main building was placed under protection as a historical monument in 2022. These developments convinced me more than ever that we needed to make a new start. Ultimately, it's about taxpayers' money. We are currently carrying out a cost-benefit analysis with regard to the historical main building. Based on the results, we will decide on whether to renovate the building and then return there or choose an alternative in Frankfurt.

Do you like the building?

The Bundesbank building is undoubtedly impressive. I will never forget my first day of work here in Frankfurt in February 2003: I was a bit nervous anyway, but when I saw the building, I became even more so. The building's sheer size alone is impressive, and the façade - made of exposed concrete - adds to this impression. But it's not the building that makes the Bundesbank what it is; it's the people who work for it.

Are you currently concerned about France? Are there discussions, for example, about activating the ECB's TPI assistance programme?

Since taking office, I have avoided commenting on developments in individual countries. In general, excessively high deficit and debt ratios create problems. Each country should have an interest in bringing its deficit down to a sustainable level in order to avoid getting into a situation where financial markets doubt the sustainability of government debt. I have the impression that this tenet is generally understood. The past few years have certainly been difficult: the pandemic, the war in Ukraine, political crises - the associated fiscal challenges have been considerable. Nevertheless, for a government there is no getting around resolving the deficit problem.

There is a potential spillover effect from the United States that could cause us concern: the new US law on dollar-denominated stablecoins. Will the digital euro suffice to prevent the United State from fully taking over our payment system in Europe?

The digital euro would be a significant step forward for us as far as European sovereignty in payments is concerned. It is a very important project that I believe we should implement in the next few years and make a success of. First for transactions between financial institutions, such as for the settlement of securities transactions, then for the general public. Cooperation between the ECB,the Bundesbank, the Banca d'Italia and other central banks on this project is working very well.

Do you think stablecoins pose any particular dangers?

Stablecoins can certainly offer added value, especially for cross-border payments. I am concerned, though, that USDstablecoins are contributing to further dollarisation. This is partly because sufficient rules still aren't in place for stablecoins in many countries, in particular jurisdictions outside the EU.What would happen, for example, if the backing assets of stablecoins are insufficient? Where would the necessary financial resources come from then? Regardless of that, we also cannot rule out the possibility that stablecoins would adversely affect the banking system - for example because issuers hold bank deposits as collateral and withdraw them in a crisis. That is why we also need to make sure in Europe that stablecoins are effectively regulated in the interests of financial stability.

And are German and European banks up to the task of digital banking?

The German and European banking sectors are well on track in terms of digitalisation, but we need the capital markets union and the banking union in order to be a leading player and make full use of the new digital opportunities.

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