Structural problems need to be addressed
Mr Krüger, like most economists, you expect the ECB to cut interest rates again in December. But how likely do you think it is that there might be another easing in October after all?
Very unlikely – perhaps 5% to 10%. The ECB did not give any indications for October at its last meeting, neither in its communication nor in its projections. The central bank remains optimistic despite the slight downward revision in economic growth. Lagarde also pointed out that the expected fall in inflation in September should not be overestimated due to statistical effects.
What would have to happen for this to materialise? The October interest rate meeting is not far off, and according to Lagarde the anticipated fall in inflation for September is probably not an argument for the ECB to ease monetary policy.
An unforeseeable, crisis-like situation would have to hit us. Otherwise, there is unlikely to be an interest rate cut in October.
You also assess the probability of an interest rate pause in December at 20%. Why is that?
We see inflation easing, but not yet price stability. Wage growth is clearly outpacing productivity growth. In this respect, there is potential for companies to pass on their higher costs to customers, which will increase inflation. I also expect that the members of the ECB Governing Council will now proceed with caution when easing monetary policy after their experience in recent years when they somewhat underestimated the rise in inflation. Nevertheless, in view of the foreseeably complex economic development, our base scenario is still an interest rate cut in December.
Alexander KrügerThe ECB expects consistent above-trend growth. I wonder where that will come from.
Let's move on to the new ECB forecasts. Although the central bank has lowered its economic growth forecast slightly, it remains pretty optimistic. Too optimistic?
I think so, especially with a view to the coming year. The ECB expects consistent above-trend growth. I wonder where that will come from. The sentiment indicators don't show that. Consumers are massively unsettled and are holding back on spending, and not just in Germany. The labour market prospects in Germany are becoming gloomier. And we are also experiencing a slump in corporate investment. I therefore expect the ECB to lower its growth projection again in December, which also argues in favour of a rate cut at this meeting.
Some central bankers and economists argue that interest rate cuts will help the euro economy get back on its feet. But is the effect really that great? After all, many structural problems are responsible for the weak growth.
Absolutely, I estimate that structural problems are more than half responsible for the economic weakness. Companies and consumers currently lack confidence and planning security. Interest rate cuts won't help. The economic policy of the traffic light coalition government is unsettling companies and consumers, making them reluctant to invest and consume.
What should politicians do to improve the mood among households and companies?
Above all, we need a predictable economic policy. To this end, I would advise the coalition government to carefully read the reports of the German Council of Economic Experts in recent years, and implement some of them. Economic policy should also be less ideological. Climate protection is essential. There is no denying that. However, we also have other vital problems in our country that the government should pay more attention to, such as internal security, defence capabilities and social systems.
Alexander KrügerDraghi has rightly identified an investment problem in Europe.
In his report to the EU Commission, Mario Draghi brought up the idea of joint European debt for more investment. What do you think of this?
Draghi has rightly identified an investment problem in Europe. However, his proposal for joint European debt would cause a number of problems in practice. For example, distribution battles over where in the EU the money should be invested. In addition, it would have to be ensured that the investments actually end up where they are supposed to. I would, therefore, be in favour of the European states scouring their budgets for potential cuts instead. Then, there would also be more funds for investment. However, I think it is not very sure that this will happen.
Let's take a look at the USA. Will it have an impact on the ECB's monetary policy whether the Fed cuts the key interest rate by 25 or 50 basis points on 18 September?
I don't think it will have an impact on the ECB. It acts independently in its monetary policy and looks at the economic and inflation data in the eurozone. I also don't expect any significant impact on the euro-dollar exchange rate.
The US presidential elections are not that far away, either. Could the outcome of the elections have an impact on inflation in the eurozone – for example via a protectionist US trade policy?
Donald Trump's economic policy would probably be significantly more protectionist than that of Kamala Harris. If Trump wins the election and the Republicans also gain a majority in Congress, this is more likely to increase inflation. However, I consider the outcome of both elections to be completely open. It isn't easy to make a forecast.
