Interview with Le Monde

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Éric Albert on 16 April 2024 and published on 23 April 2024

23 April 2024

In March, inflation in the euro area was 2.4%, close to your 2% target. Has the battle against inflation been won?

The battle isn’t over, but we have notched up several important victories along the road to disinflation. We have gone from 10% headline inflation to 2.4%. Core inflation is also falling and is now below 3%. All the indicators are moving in the right direction. We’re not there yet, but the end is in sight. We think we will reach our 2% target in 2025.

Looking beyond geopolitical risks, the largest remaining threat stems from inflation in the services sector, mainly driven by wages. But here, too, there is a clear slowdown in the dynamics: wages were increasing at a rate above 5% a couple of quarters ago but were growing at just over 4% in the last quarter of 2023.

Looking at wages, why is it always employees who have to pay the consequences? Your fellow Executive Board member, Piero Cipollone, recently stressed there needs to be a catch-up of lost purchasing power…

Wages need to rise to make up for lost purchasing power, but this catch-up process has to go hand in hand with an improvement in productivity. However, this is not happening, whether we’re talking about productivity per employee or per hour worked. As a result, unit labour costs are still increasing. But I think we’re going in the right direction and will see some gains in productivity.

Does this mean a reduction in interest rates in June is almost certainly on the cards?

We have been very clear: if things move in the same direction as they have in recent weeks, we will loosen our restrictive monetary policy stance in June. Assuming there are no surprises between now and then, as you say in French, it’s a “fait accompli”.

How quickly can the ECB cut interest rates after that?

That will depend on how the data evolve, on the geopolitical situation and the potential impact on oil prices, for example. We will also need to monitor wage and productivity developments. And we will need to take into account what’s happening in the United States, where inflation is higher. The level of uncertainty makes it very difficult to say. I already mentioned June. As for what happens afterwards, I’m inclined to be very cautious.

You mentioned inflation in the United States, which is higher than in the euro area. The Fed might not be in a position to reduce its interest rates as early as initially expected. Will this limit the ECB’s capacity to act?

The US economy is the largest economy in the world. What the Federal Reserve decides is crucial not only for the United States, but also for the global economy, which also affects the euro area. The euro-US dollar exchange rate could be one of the channels through which there is an impact. We don’t have an exchange rate target, but we need to take the impact of exchange rate movements into account. Capital flows are another significant channel. If long-term yields in the United States become much higher than in the rest of the world, they will attract capital.

Moreover, concerns about the United States could be transmitted via financial market expectations, which are currently pricing in a perfect disinflation process, with a soft landing for the economy, a fall in inflation, lower interest rates, etc. If anything untoward happens, we might see a rise in volatility and a price correction that could end up spreading to European banks. The disinflation process in the United States has slowed considerably: inflation is slightly below 3.5% and core inflation is just under 4%.

The European economy is stagnating. A decade on from the eurozone crisis, is it going to be left behind once again?

If we compare the euro area with the United States, it’s clear that our growth is lower. The big difference is productivity, which is higher in the United States. The leading indicators in Europe point to a modest recovery in the second half of 2024. But we will have a growth rate of less than 1%, below our potential, which is a very low outcome.

Is this a permanent loss of competitiveness for Europe?

No – the European economy has been a lot more exposed to recent shocks, especially Russia’s war against Ukraine. For the United States, the energy shock was a lot less intense.

France’s deficit increased to 5.5% of GDP in 2023, which was higher than expected. Italy’s peaked at 7.2%. Should European countries reduce their public spending, at the risk of choking off the current weak growth?

We shouldn’t forget that the threat from the fiscal stance is real, and that the level of debt has increased considerably. The support measures introduced at the beginning of the energy crisis should be discontinued, because energy prices have returned to their previous levels. After that, a careful process of fiscal consolidation needs to be carried out. I don’t think there’s any risk of making the same mistakes as during the euro area crisis, because the new fiscal rules are much more balanced and prudent. There’s more flexibility on how to return to 60% [debt-to-GDP ratio] and 3% [budget deficit in GDP terms]. And I hope that the new European Commission will avoid any unnecessary procyclical policies.

There’s also the competition from China. Should industry in Europe be worried about an influx of subsidised products?

The main risk posed by China is actually linked to concerns about growth. This is one of the reasons the German economy is lagging behind the rest of the euro area, as exports are very important for Germany. This worries me more than any influx of Chinese products in Europe, although we need to remain vigilant.

The human cost of the crisis in the Middle East is enormous, but what are the economic consequences?

If you look at oil prices, the initial response of the markets has been relatively benign. Let’s hope they’re right. But the geopolitical risks are very relevant. You know how these kinds of things start, but you don’t know how they will end.

In March the ECB issued a press release calling for a capital markets union to be implemented in the EU. But this project seems to have been going nowhere for years…

Insufficient progress has been made on European integration. There’s a lot of talk about the capital markets union, but very little delivery. We haven’t completed banking union. We’ve set up “Next Generation EU” [a common European borrowing scheme totalling around €800 billion], which has been a very important step, but an isolated one. I don’t see any movement towards creating a common fiscal capacity. This is a delicate moment, with the European elections coming up in June and the arrival of a new Commission. I only hope that afterwards there will be fresh impetus.

So, you’d like to see the creation of a joint European fiscal capability?

The ECB has been clear on this: we have a single monetary policy and a single supervisory mechanism, and we need a central fiscal capacity for the Economic and Monetary Union.