Interview with Vice President of the European Central Bank, Luis de Guindos, conducted by Reuters
Frankfurter Times - Unfiltered ECB Vice President Luis de Guindos' Q&A on ECB Policy, Inflation, and Trade
The on-the-record Q&A between Reuters and ECB Vice President Luis de Guindos offers insights into the European Central Bank's stance on monetary policy, inflation, and trade.
Click here for an interview story and here for a policy review story.
Question: President Lagarde mentioned the ECB being in a good place now. Some take this to mean a pause in rate cuts is appropriate. Was that the correct interpretation?
Answer: The ECB's projections serve as the key to comprehending our policy decisions. To be frank, the level of uncertainty is enormous, as evident by our publication of alternative scenarios. The primary differences in these scenarios revolve around trade policy. We assume no tariff retaliation and a 10% tariff in our baseline scenario. In our adverse scenario, we consider higher tariffs and retaliation.
The final outcome in trade negotiations is by far the most significant factor affecting our projections, which form the basis for our monetary policy decisions. To be clear, nobody knows the exact outcome of the trade negotiations and its potential impact on growth and inflation.
Nevertheless, markets have a solid grasp of what President Lagarde meant by being in a good position. Even in this climate of immense uncertainty, markets believe and discount that we are very close to our target of sustainable 2% inflation over the medium term.
Question: Your projections incorporate interest rate futures, which still price in one more rate cut. So, if the baseline materializes, we can still expect a cut?
Answer: We integrate market expectations for interest rates into our projection framework. However, considering the prominence we give to trade issues in our June exercise, this assumption is relatively insignificant compared to the impact of trade on our projections.
Question: Would you say that risks to the inflation outlook are to the upside or the downside?
Answer: That's a vital question. To clarify, a tariff is essentially a tax on imported goods, causing an initial inflationary impact. However, tariffs also suppress demand, which can more than offset the inflationary impact in the short term.
Furthermore, there's another factor that's difficult to gauge: a fully fledged trade war might result in fragmentation in the global economy and distortions in the global supply chain. In the long term, this would be inflationary.
With all these nuances, over the next two years tariffs would reduce both growth and inflation. However, when looking further out, the impact of potential fragmentation must be considered. This goes beyond our projection horizon but constitutes an element we must take into consideration in the future.
Question: You project inflation dipping below target and then returning to 2%. We've seen this scenario before, with the longer-term projection always pointing to 2%, partly because of mean reversion. How much weight do you attach to the 2027 projection? And do you give a lot of thought to this notion of mean reversion as a feature of the projection?
Answer: When it comes to 2026, two key factors arise: the appreciation of the euro and the evolution of prices for raw materials, particularly energy. For 2027, a similar appreciation of the currency and a decline in energy prices are not expected, which is why we anticipate inflation returning to 2%. Of course, the level of uncertainty stays high. Even though we are convinced that inflation will converge with our target, we need to be data-dependent and make decisions on a meeting-by-meeting basis. It's also crucial to keep in mind that we have already reduced interest rates by 200 basis points—from 4% to 2%.
Question: The risk of undershooting in any year could perpetuate low inflation. In the first quarter of next year, you see inflation at 1.4%. Do you consider undershooting a significant risk?
Answer: Inflation is moving in the right direction. A declining trend, corroborated by the latest data, is evident. However, I don't think that inflation hovering around 1.4% in the first quarter of 2026 will unanchor inflation expectations or influence wage bargaining processes. We can see that wage dynamics are cooling. That being said, compensation per employee will average around 3% over time. In my view, the risk of undershooting is very limited.
Our assessment is that risks for inflation are balanced. Clearly, 1.4% is below the target. But for the medium term, other factors can offset the short-term elements that bring down inflation.
Question: Europe is expected to spend more on defense. Should greater military expenditure come at the expense of other spending, or should it be financed from debt?
Answer: Much uncertainty still lingers around fiscal policy assumptions and projections. While trade is widely discussed, fiscal policy is often overlooked.
First of all, fiscal policy in the United States is essential. The new tax bill will boost the deficit, and the US fiscal position is already problematic. The debt ratio is over 100%, and the fiscal deficit is between 6% and 7%. Consequently, markets may begin paying more attention to fiscal policy in the United States, potentially leading to increased yields. This development is likely to gain more focus in the future.
Nevertheless, fiscal policy is highly relevant due to the requirement to boost spending on defense, necessitating more resources. The fiscal positions of many EU countries are not in a strong position, so we need to search for social and political space to expand our fiscal capacities.
We will need more support from the public of Europe. Governments should clearly explain the necessity for higher spending on defense, as it's about independence and autonomy.
Question: This additional spending may take some time to ramp up. Do you think that ECB watchers or the ECB's own projections may have overestimated the amount of fiscal support coming?
Answer: The different fiscal multipliers will matter significantly. Moreover, expenditure is going to take time to be implemented, so we don't expect a quick impact on inflation and growth in the short term.
Question: Do you think the ECB could play a role in facilitating that defense spending, like with targeted QE, targeted TLTRO, or some other tool?
Answer: Let me assure you that this has not been discussed.
Question: The expansion of the Fed's swap lines with the ECB was noted in the minutes of the Federal Reserve System's May meeting. Given the political turmoil in the United States, should the ECB be preparing the financial sector for potential US dollar funding drying up?
Answer: Swap lines with the Federal Reserve are a beneficial instrument in terms of financial stability for both the euro area and the United States. We believe that these swap lines will be maintained over time because they are advantageous for both parties and contribute to global financial stability.
Question: Markets are questioning the status of the US dollar as the world's leading reserve currency. In light of this, should central banks, including the ECB, consider building up reserves in assets other than US dollar-denominated assets?
Answer: The weight of gold in our reserves has been increasing, given the rise in gold prices. Central banks typically use gold as a means of diversifying in times of geopolitical risk, which is understandable. Some are even considering silver or platinum to diversify.
When it comes to the status of the US dollar as a reserve currency in the short term, I believe it will not be challenged.
The significance of the euro as a reserve currency in the global arena will depend on actions taken in Europe. If we can achieve a more integrated goods and services market, then the capital markets union and the banking union will come about more easily. It's incredibly challenging to make progress in the capital markets union or the banking union without advancing in the integration of the goods and services market.
Question: Your recent report on the role of the euro covered the period up to the end of last year. Can you offer some insight into what's happened since April 4? There's been a good deal of movement on financial markets. Have euro assets genuinely benefited from capital leaving the US dollar, or is it mostly gold that's benefited?
Answer: If you examine market developments, we witnessed a significant decline and risk-off movement at the beginning of April. However, market valuations have now fully recovered, apart from the US dollar and commodity prices.
Policies of the new US administration address more than just tariffs. They also encompass fiscal policy, the regulatory frameworks for banks, and non-banks, as well as digital assets. At the end of the day, this represents a change of paradigm. There have even been some doubts about how committed the new US administration will be to multilateral institutions.
Even though markets have recovered, there's something quite apparent: the correlation between asset prices has changed significantly since April. If you compare stock and bond prices, the correlation has shifted from the patterns we experienced in the past.
Even in the case of US Treasury yields, we've seen ups and downs. But I believe that the main indication of doubts about the new US policies lies in the evolution of the US dollar. This is rather evident.
Question: The reverse of this development is that the euro has become stronger. Is this becoming a challenge for growth and exporters? Can the eurozone even afford reserve currency status given the currency strength which comes with it?
Answer: At USD 1.15, the appreciation of the euro is not expected to present a significant challenge to growth. And for the eurozone to assume reserve currency status in the global arena, the impact in the short term is not going to be significant either.
In the short term, the status of the US dollar as a reserve currency is not in question. In the medium term, the key factor will be the type of policies adopted in Europe. If we can become more independent, more autonomous in defense, and take the initiatives needed for market integration, the euro will gradually gain market share. However, a significant jump in market share in the short term is out of the question.
Question: So, you don't appear to be unduly concerned about USD 1.15 in terms of its impact on the real economy. Despite having no exchange rate target, what's the point where you become worried that the exchange rate has a detrimental effect on the real economy?
Answer: Rather than a specific level, I focus on the speed of changes, how rapid the appreciation or depreciation is. If there's a clear overshooting of the exchange rate, that should be analyzed.
So far, the exchange rate evolution has been relatively controlled. Perhaps the surprise was that, at the beginning of the year, most market participants believed we could reach parity. Instead, we are currently at the current level. I would not say that the exchange rate has been extraordinarily volatile or that we've seen a particularly rapid appreciation so far.
We have considered the exchange rate in our projections. Thus far, the appreciation of the euro has reportedly been beneficial in achieving our target for inflation. That is one of the reasons why we have revised our inflation projections down for 2026.
Question: A recent paper by Blanchard and Ubide has brought up the idea of a European safe asset. You held a contrary stance when you were once a finance minister. Do you see a growing chance of greater joint issuance happening?
Answer: Ideas like the one you mentioned from the academic realm are incredibly valuable. This proposal for a European safe asset within a liquid, deep market is a fascinating concept that we must take into account.
However, we have a great deal of work ahead. We need a much more integrated single market and to make considerable progress toward the capital markets union and the completion of the banking union. Simultaneously, and in my opinion, we have made progress in the fiscal union sphere.
It's an intriguing proposal from an academic standpoint. But from a pragmatic perspective, there are other necessary conditions that must be fulfilled before we can reach that state, and these are not yet in place.
Question: Do you think it could be prudent for the ECB and Eurosystem's national central banks to reclaim some of the gold reserves they store in New York?
Answer: There is no doubt in my mind that they are entirely secure.
Question: Even in the case of a newly appointed Fed Chair next year?
Answer: I don't know who the next Chair will be, but I presume they will be a competent and sensible individual.
Question: Have there been discussions about this, or did it not even come to mind?
Answer: Not even the possibility has been considered.
Question: Over the past few years, the ECB has gained valuable insights—such as the need to act decisively when inflation is too high. This was not an issue a few years ago, but suddenly, it became necessary. So, how would you like the new strategy document to reflect these learnings?
Answer: As you have stated, policies from just five years ago were entirely different. Now, we have experienced a period of high inflation, constituting a significant shift.
This is an evaluation of our strategy review. I believe we will not modify the definition of price stability. In terms of the toolkit, all instruments will remain available for future use.
Furthermore, we will place greater emphasis on financial stability considerations. QE, for instance, was a new instrument in 2015. The key lies in understanding the actual impact an instrument has, as it is sometimes easier to initiate the instrument than to withdraw it. Lastly, the framework of the global economy will be different from what it was in 2021. One could argue that we are entering a fragmented world.
Question: What should we expect from the new strategy statement?
Answer: Don't expect any big surprises. This is mostly about evolution, not revolution—it's just a reassessment. It will primarily focus on how the framework for central banks and the ECB has changed over the previous five years.
Question: In a multipolar world, what role can China play as a partner for the ECB, particularly with the People's Bank of China?
Answer: China is an essential global player, being the world's second-largest economy. We have monetary arrangements with their central bank, such as our swap lines.
At times, when addressing trade policies, we consider only bilateral tariffs. However, it's crucial to take a holistic approach. For instance, when examining negotiations between the United States and Europe, it's important to consider not only the final outcome in terms of bilateral tariffs but also the potential impact of trade diversion. A broad approach to trade is essential, as an exclusive focus on bilateral tariffs may cause the actual impact of trade negotiations to be overlooked.
Question: Do you see that as a significant risk, trade diversion? Your colleague Isabel Schnabel seemed to suggest this was not a major risk.
Answer: Well, I don't know whether it's going to be a significant risk, but undoubtedly, this is something that must be monitored and taken into account.
Question: Could the ECB work with the People's Bank of China, for example, in the field of payments? China has its own digital currency.
Answer: We are fully supportive of a digital euro. We believe that it's something incredibly valuable in the European payment context.
There will be new legislation regarding stablecoins in the United States. The majority of these projects emerge from the United States. My reading of the digital euro project is digital public money: it will be a means of payment, won't pay an interest rate, and won't replace cash. We are mindful of financial stability implications, as well.
People, in both the analog and digital context, need public money. They view this as real money. If people question whether they can transform their current account balance into banknotes, then a bank run can occur. The digital euro will play a similar role in the digital world.
Question: If the case for a digital euro is so clear, why hasn't the legislator seen it? Brussels has been slow to act. Why is this, and do you expect a change?
Answer: I hope that we can convince the legislators, but you should question them about their apprehensions. From our perspective, the benefits of a digital euro are crystal clear and highly valuable in the payment context in Europe. And I think that eventually, they will be convinced of the advantages of a digital euro.
In the context of the European Central Bank's stance on monetary policy, finance, and business, both markets and the ECB acknowledge that the European Central Bank is very close to its target of sustainable 2% inflation over the medium term, despite the uncertainty surrounding trade policy. Given the significance of fiscal policy in the United States and the need for increased European defense expenditure, the EU must find social and political space to expand its fiscal capacities and clearly communicate the necessity for higher spending on defense.
The ECB's projections incorporate interest rate futures and take into account market expectations for future interest rates, but trade issues play a more substantial role in shaping these projections. As such, while the baseline scenario still indicates a possibility of one more rate cut, the impact of trade on the European economy may overshadow this assumption.
