Source: European Central Bank
Interview with Luis de Guindos, Vice-President of the ECB, conducted by Wouter van Bergen and Martin Visser
20 December 2024
What has kept you awake over the past year?
Looking back at recent times, I would say that my worst nightmare was that a cyber attack would wreak havoc in the payments system. We would have a complicated situation on our hands that would be very difficult to resolve and would have serious consequences for all of us.
And what do you expect will keep you awake next year?
For the future, I’m more concerned about trade policy and the potential fragmentation of the global economy. The new US administration has announced far-reaching import tariffs. If they materialise, a wholly new situation could arise, which would go completely against the lessons from the 1930s and the path we have chosen since the end of the Second World War.
Trump has introduced import tariffs before. What is different this time?
It’s not only the import tariffs imposed by the United States that are the problem, but also the retaliation by other countries in response. If a trade war erupts, it would be extremely negative for the world economy, mainly for growth but also for inflation. For example, if you impose a 60% tariff on goods from China, which already has excess capacity, it would cause a diversion in trade flows and even impact exchange rates. Nobody knows where that will end.
What can the ECB do about that?
We’re not responsible for trade policy. We can provide our advice and explain that a trade war would be extremely detrimental for the world economy and a lose-lose situation for everyone, and that is why it is better to be prudent. But the response is up to the European Commission, and our role is to give our view and deal with the consequences.
Might it also threaten the euro?
It should be the other way around. If such threats emerge, the answer lies precisely in more European integration. The euro plays a hugely important role in that.
But election results indicate that the population in many European countries is not that keen on it…
I think that the European population is smart, and people are well aware that the uncertainties and risks are intensifying, and that becoming more fragmented within Europe would be the wrong response. My impression of populist politicians is that they propose simple solutions for highly complex problems.
Immigration is one such complex problem…
There is talk about restricting immigration, but looking at demographic developments in Europe, you see that the population is ageing. From an economic viewpoint, it is crystal clear that we need ordered immigration, so we should focus on properly managing its social impact.
Are you concerned about the high levels of public debt in many Member States, such as France?
Countries need to put in place credible and prudent fiscal consolidation plans. The fiscal rules were suspended for five years due to the COVID-19 pandemic and the energy crisis, but now we have a new fiscal framework, and it’s important to implement it accordingly. France is not the only country whose budget has not yet been approved. The same goes for Germany, Spain, Belgium and Austria. They know what they need to do, and I am convinced that they will act accordingly.
Relative to GDP, public debt is indeed on average 10% higher than it was before the pandemic. At the same time, the situation in the southern European countries that were in trouble 12 years ago is much better now. Portugal now runs a budget surplus, as do Ireland and Cyprus. Greece and Italy are running primary surpluses. Precisely the ‘usual suspects’ back then are doing well now, thanks to the measures taken at the time.
Former ECB President Mario Draghi painted a dire picture of the state of European competitiveness in a recent report. What can we do to restore it?
The demographic reality is that our population is ageing. An ageing society takes less risks and innovates less. That’s why targeted immigration is so important. It’s something that Europe should reflect on from an economic perspective.
Europe has other structural problems too, like the lack of a genuine single market for goods and services. The array of different rules applying throughout means that Europe is still highly fragmented, in contrast to the United States. We don’t have a real banking union as we don’t have a common deposit insurance scheme. And we don’t have a capital markets union, because there is no single capital market supervisor and insolvency laws still differ across countries. On top of that, we don’t have a fiscal union, unlike the United States. Savings are taxed differently everywhere in Europe, there are disparities in labour market rules and some exceptions to the temporary framework on state aid still have to be fully phased out.
The list of necessary measures is long…
Yes, there is a lot of work to do and the world is not going to wait for us. Because of the policies of the new United States administration, we may need to deal with import tariffs, uncertain fiscal policy, the possibility of deregulation in financial markets and, going beyond economics, even defence. This is a wake-up call for Europe.
How can you remain optimistic in the face of such huge challenges?
It’s not a question of optimism, but pragmatism. In Europe, there is only one way to preserve our current standard of living, and we will eventually choose the correct path.
The inflation rate in the Netherlands has risen again to 4%. The ECB’s policy does not suit the situation in our country…
In the euro area, we have seen that although there is an increase in households’ real disposable income because wages have started to catch up with past inflation, consumption is not recovering well. This is an issue of confidence, which has to do with past inflation, the lagging effects of the pandemic, and the current geopolitical landscape.
People mainly look at prices and they now see that supermarket prices are much higher than they were two or three years ago. That’s why it’s so important that they realise that price levels are stabilising and wages are catching up. And not everything is negative, as labour markets are doing well.
As the ECB, we have to look at the euro area average (at 2.2% in November, ed.). Dutch inflation is more volatile than average. We are confident that inflation will gradually decrease in the Netherlands too, and that inflation across the euro area will gradually converge towards our 2% target.
What message do you have for Dutch consumers?
You still have higher inflation, but inflation in the euro area has declined substantially and without a recession. You have very high employment, so wages are increasing and catching up with past inflation. The tight labour market also shows the need for targeted immigration.
Do you already hold bitcoin?
No, no bitcoin, but I know some people who do.
You missed out on big gains…
Yes, but I could just have gone to the casino [laughs]. The world of crypto-assets is a mixed bag, with stablecoins being very different from others like bitcoin. In general though, there are no fundamentals that determine the value of bitcoin, like there are for shares or bonds. There is only scarcity.
Are crypto-assets a risk for the financial system?
Not for now, there are few of them and volumes are still too small to pose material risks to the financial system.
Europe is lagging behind the rest of the world. Out of the 50 largest tech companies, only three are European. Europeans heavily invest their funds on US stock exchanges and European banks can’t keep up with their US competitors. Is there still hope?
This is an indication that there are some structural issues that we need to improve in Europe, namely by deepening economic integration. I talked earlier about common solvency and taxation rules and a coordinated approach to supervision in capital markets, for example. We have to channel European savings to Europe, and to attract savings from abroad.
Every cloud has a silver lining. Europe is at a crossroads now. The future is now more uncertain than ever since the pandemic due to geopolitical tensions and the risk of significant frictions in global trade in the advent of the new United States administration. That is why we need more integration, not less. It will take courage, but common sense will ultimately prevail.