Interview with Le Monde

Interview with Piero Cipollone, Member of the Executive Board of the ECB, conducted by Eric Albert

4 September 2024

Growth in the eurozone is sluggish, the German economy is contracting and inflation has been below 3% for six months. Are you not worried that you might stifle economic growth by keeping interest rates too high for too long?

In June, our projections for euro area GDP growth in 2024 were 0.9%. Data for the second quarter are consistent with these projections, but the most recent data – such as consumer confidence and activity indicators (Purchasing Managers’ Index), particularly for the manufacturing sector – have not been so encouraging. This poses a risk to the euro area growth outlook. Investment remains weak, which suggests that firms do not believe in a strong recovery. This also weakens our future growth potential by reducing the capacity of our economy to develop and adopt new technologies to boost productivity.

So does this mean that the ECB is keeping rates too high? Our projections for inflation suggest that we will be back to our 2% target in the second half of 2025. Until then, the inflation figures will fluctuate, but we are broadly on track. These projections are based on market expectations of rate cuts.

So are you implying that the interest rate cuts that these projections are based on, so from 3.75% at present to 3.25% by the end of the year, are correct?

We are not pre-committing to any path. We will take our decisions on a meeting-by-meeting basis.

Of course, but at the next meeting on 12 September, will you recommend a rate cut?

The data so far confirm our direction of travel and I hope that they will allow us to continue to be less restrictive.

Do you agree with the ECB’s Chief Economist, Philip Lane, who has warned that the risk of doing too much is now as real as that of doing too little?

Yes, there is a real risk that our stance could become too restrictive. We must ensure that inflation converges to our target without holding back the economy unnecessarily, because we desperately need investment and growth in Europe. Every delay in this area puts us at a serious disadvantage.

Since 2008, Europe seems to have lagged behind the United States economically. And the gap has widened since the pandemic. Why is that?

Employment is no longer a concern: the employment rate in the euro area has increased considerably and that’s very welcome.

Our main concern is productivity. Over the last 30 years, the increase in hourly productivity in the euro area has been only half that in the United States. Our firms do not invest as much as in the United States, particularly in new technologies. That’s because they’re small. Europe has not managed to foster the emergence of firms that are large enough to be competitive at the global level. We are not making the most of our key asset – the single European market. It’s a structural problem.

Our financial and product markets are fragmented along national lines. This limits the financing and development of European firms and thus their ability to compete internationally.

Take the European Football Championship as an example. This was a European event on European soil. But if you wanted to buy tickets online, you had to use American (Visa or Mastercard) or Chinese (Alipay) payment solutions. That’s one of the reasons why we are working on a digital euro, which would be an electronic form of cash for digital payments.

On a similar topic, how is Europe positioned in the AI revolution?

Artificial intelligence (AI) is a very powerful technology, and we could benefit greatly from it. But we need to be careful: if all AI providers come from one country, there is a risk that they could impose such a high price that they amass all the value added. We have already seen this in other sectors, like IT. To avoid falling behind, we need to transform our research and training capabilities – which are already of an excellent standard in Europe – into a capacity to develop innovative products.

In this context, is it wise to reinstate the European fiscal rules this year, which require reductions in public spending?

First of all, the new EU fiscal rules are compatible with maintaining public investment. They include incentives to implement reforms and to invest, allowing the budgetary adjustment period to be extended from four to seven years.

But we do need to be mindful of the size of the debt. I come from a country (Italy) which spends as much on debt servicing as it does on education. The bigger the debt, the more volatile the market, and the more difficult it is to implement an adjustment. When you have excessive debt, your sovereignty is at risk.

So should the solution come from an increase in common European borrowing?

Given what is at stake, we need both private and public investment. And in both cases, it needs to be on a European scale. First, because these are investments that will benefit all Europeans, and second, because doing it at the European level reduces financing costs.

This means developing truly European capital markets and a common borrowing capacity. We have been saying this for a long time. This would make it possible to create safe assets. When we talk to asset managers, they say that they would like to buy more euro-denominated bonds. I think it’s a crucial aspect for the international role of the euro.

But this call for more common borrowing seems to have been ignored so far...

We know that the EU can be slow to reach agreements. It’s a fact of life, but we shouldn’t be discouraged.

Wage growth in the euro area slowed to 3.6% in the second quarter, compared with 4.7% in the previous quarter. This is good news for the ECB as it means a wage-price spiral can be avoided. But do you not think that wages need to make up for lost purchasing power?

Yes, absolutely. We shouldn’t be afraid of wages increasing faster than inflation for a while, having risen at a slower pace previously. Otherwise, I don’t see how we can sustain the recovery and, in turn, the rebound in productivity. We are not seeing a wage-price spiral. It’s a natural catching-up that is healthy for the economy.