It's certainly not set in stone, even though many signs point to an interest rate cut in June. But we are living in times of crisis, where things can change quickly. By that, I don't mean wage development, which doesn't concern me, but rather the situation in the Middle East and Ukraine. Depending on how the situation develops there, energy prices could increase more than currently expected, which would strengthen inflation. Overall, however, I see a greater risk that inflation will be lower in the medium term than expected by the ECB.

The economy in the Eurozone, and particularly in Germany, is significantly below its potential. There's a risk that the economy will remain weak because the ECB's monetary policy is highly restrictive. Reduced demand for goods and services reduces inflation. Also, in the medium term, restrictive monetary policy weakens economic growth as companies invest less. According to DIW's models, the German economy will remain below its potential growth until 2028, while the recovery in the Eurozone will be somewhat faster. Therefore, I would have supported it if the ECB had already lowered interest rates in April.

You always have to be cautious with such models, but our calculations show that without restrictive monetary policy, economic growth in the Eurozone in 2023 would have been approximately one percentage point higher. But of course, inflation would also have been higher than it was. Thus, I don't criticize the ECB's interest rate hikes last year, but rather that it now risks cutting rates too late. The ECB needs to return to a symmetric and forward-looking monetary policy. Additionally, I would have preferred a different approach to the most recent communication.

It's insufficient to constantly emphasize data dependence. Instead, the ECB should have communicated that it aims to return monetary policy to a neutral level by 2025. This clear perspective would have given companies more certainty for investments again and already loosened financing conditions, and thus strengthened economic growth. If there were to be a greater external price shock by 2025, such as in energy prices, the ECB could deviate from this plan, as the data situation would have changed.

It's hard to express this with absolute precision. But despite the uncertainty in estimating the neutral interest rate, it is likely to be below 3%. Perhaps even significantly below. Currently, the ECB's main refinancing rate is at 4.5%. So, to reach the neutral interest rate in 12 to 14 months, we would need interest rate cuts of approximately 175 to 200 basis points by then. This does not align with the ECB's communication. Therefore, the ECB is again at risk of being behind the curve, as it was with interest rate hikes in 2022 when it should have raised rates earlier. Hence, I consider a first interest rate cut in June to be too late and the expected three interest rate hikes by the end of the year to be insufficient. Especially considering that interest rate changes take one and a half to two years to fully take effect.

The ECB's primary task is price stability with an inflation rate of 2% in the medium term. Nonetheless, if its current monetary policy reduces economic growth over a longer period, it risks falling below the inflation target in the coming years. Even then, it would not achieve the goal of price stability. Thus, the issue of potential growth and investments is also relevant to the ECB's mandate.

The current configuration of the debt limit is causing widespread consternation on the international stage. Germany has a high need for public investments, some of which are not happening due to the debt limit. At the same time, we have the weakest economic growth of all industrialized countries, favourable financing conditions for government debt, and a low debt-to-GDP ratio. The debt limit is a major risk to Germany's international competitiveness. A reform is urgently needed.

It's good to set rules for public debt. But the current design of the debt limit is too inflexible. Additionally, we should distinguish between consumption and investments. Public investments should be exempt from the debt limit as they strengthen the economy and thus tax revenues and debt sustainability. To implement this, we would first need to agree on an economically sensible definition of investments because education spending should also be increased, even if it is not counted as investments statistically.

The Fed's monetary policy obviously impacts financial markets in Europe. For example, the euro-dollar exchange rate is affected by it. But I think the discussion is exaggerated. The ECB should focus on its own data and not look at the Fed. The economic situation and inflation dynamics in the Eurozone are quite distinct from those in the United States. There, we have dynamic economic growth and inflation that is significantly higher than ours. In the Eurozone, monetary policy is currently too tight, as I have outlined. Therefore, the ECB should gradually lower interest rates from June on until the neutral rate is reached. And communicate this plan accordingly so that the financial markets can adjust to it and unnecessary uncertainty is avoided.

The interview was conducted by Martin Pirkl.