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  • Interview

Interview with Dein SPIEGEL

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Dein Spiegel on 19 May 2022

16 June 2022

Lots of people are talking about inflation these days. But what exactly is it?

Inflation is an increase in prices across the board, so not just for individual items, but for many different ones. You may have noticed that some things have become more expensive recently.

Yes, petrol, sunflower oil, a scoop of ice cream…

Exactly. All of us see that in many parts of everyday life. One of the reasons for it is the coronavirus (COVID-19). The economy came to a halt at the start of the pandemic. People stopped going to the hairdresser’s, to the cinema or on vacations. Many wanted to spend their money on other things instead: tablets and computers were in particularly high demand, for example, not least for home schooling. But manufacturers were either unable to produce their goods quickly enough or could not deliver them owing to the pandemic. Demand was higher than the available supply, explaining why many businesses raised their prices.

Does it also have to do with the war in Ukraine?

Yes, it does. The European Union has said that it wants to become less dependent on Russian energy. Up to now we have bought a lot of comparably cheap oil and gas from there. We now want to switch to other sources of energy, many of which are more expensive. On top of that, large amounts of wheat were cultivated in Ukraine. As farmers can now neither sow their crops nor ship out their harvest, prices are soaring. That not only is a problem for us in Europe, but also for many poorer countries.

Why is it dangerous for inflation to be too high?

Many people, particularly those on lower incomes, need to carefully plan how to get by on their salaries. If their heating or petrol bills increase sharply, but their salaries remain more or less the same, they don’t know how to pay those bills. They will then be able to afford less overall. It’s especially difficult if prices rise faster and faster, as happened in Germany around 100 years ago. Prices raced up virtually by the second, becoming so high that you needed a laundry basket full of banknotes to pay for one loaf of bread. That shall not happen again: that’s why it’s so important to have the European Central Bank.

So what is the ECB’s main task?

Our objective is to keep prices stable in the euro area, in other words, wherever the euro is the official currency. We cannot prevent every price increase, but prices should not climb up too high for too long. That is how we retain trust in the value of money. In former times people used to pay in gold coins. Gold is valuable, whereas the paper used for euro banknotes has practically no value. But banknotes are valuable nevertheless. When we buy goods, the sellers accept euro banknotes because they know that others will also recognise their value – this trust forms the basis of our monetary system.

What can the ECB do about inflation?

We can adjust interest rates. The interest rate is the price that you pay when borrowing money from a bank. Many people take out a loan when they buy a house and firms borrow money in order to buy new machines. If interest rates increase, borrowing money becomes more expensive. Houses and machines are then less in demand – and the prices for them consequently fall. That’s how we can steer inflation. We meet every six weeks to discuss whether we should change interest rates.

Why haven’t they been raised up to now?

We assumed that manufacturers would soon produce more goods and would be able to deliver them more rapidly. Inflation would then have largely eased off automatically. But in fact the unusually high level of inflation has now been persisting for much longer than expected. That is why we will soon raise interest rates.

What have interest rates got to do with our savings?

Interest is not only what you pay to the bank for borrowing money. It also works the other way around: the bank pays interest to you when you lend money by depositing it in a bank account. But over the past few years, savers have often received no interest at all on their deposits. That was not only because of the ECB, but also because people all over the world wanted to save so much, for their retirement, for example – even at very low interest rates. That’s why interest rates everywhere were rather low.

How much money does the ECB actually have?

We always have as much money as we need, because a central bank can create money itself. People’s trust in our money depends on how we deal with that responsibility.

Do you have a machine for printing money in the basement, or how do you go about it?

Most of the money that we bring into circulation is created electronically – for example, when we lend money to a bank and transfer that amount to the bank’s account.

Could the ECB produce enough money to solve all of Europe’s problems?

That is not possible. First, it’s up to the national governments to solve the problems in their own countries. We are not allowed to do so and are independent of politics. Second, if we bring more and more money into circulation, prices will go up. That would go against our mandate of keeping prices stable.

Should children be asking for more pocket money because of the rise in prices?

This could be a good time to negotiate with your parents. You could calculate how many cinema tickets or ice cream scoops you can buy with your pocket money now and demonstrate that you can’t afford as many as you could before. Keep in mind though that the high inflation rate also means that your parents themselves have less to spend.

Have your children already asked for more money?

We haven’t spoken about that yet, but this interview might give them the idea!

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