Introductory statement to the presidency press
conference
following the meeting of the G7 finance ministers and central bank
governors
20.05.2022 | Königswinter | Joachim Nagel
1 Introduction
2 Promoting long-term growth and resilience
3 Ensuring sound public finances
4 Refocusing monetary policy
1 Introduction
Ladies and gentlemen,
I, too, would like to bid you a very warm welcome to the G7 (Gruppe der Sieben)
presidency press conference. And I would like to add my thanks to those expressed
by Finance Minister Christian Lindner. I am especially grateful to everyone who
helped organise the G7 (Gruppe der Sieben) meeting and whose efforts contributed
to the smooth running of events. From my point of view, this meeting of finance
ministers and central bank governors has been extremely successful - an impression
that I hope our guests also share.
We have discussed a number of important issues in depth. Finance Minister Lindner
has already addressed our support for Ukraine. Of course, our talks also focused on
the economic consequences of the war and the changes to the inflation
environment. At the beginning of this week, for example, the European Commission
downgraded its forecast for euro area economic growth this year to 2.7%; this
figure stood at 4% in the February projections published shortly before the war
broke out. The European Commission now estimates that inflation in the euro area
will come to 6.1% this year rather than the 3.5% previously anticipated.
Today, I would like to focus on the medium to long-term fundamental aspects that
we have discussed over the past two days. First, in the light of the new geopolitical
situation, how can we strengthen the long-term growth and resilience of our
economies? Second, looking ahead, how can fiscal policy navigate the conflict
between the current challenges and rising debt levels? And third, what needs to be
taken into account when refocusing monetary policy?
2 Promoting long-term growth and resilience
Russia's war of aggression on Ukraine has changed the geopolitical landscape.
Policymakers and economists are striving to reduce, diversify or focus economic
dependencies on safe trading partners. This shift may come at a cost to efficiency
and productivity, which is something we will probably have to accept to some
extent. That said, however, we should make all the more effort to promote open
markets wherever possible and continue to exploit their advantages.
Greater resilience and strong integration into the global economy are not mutually
exclusive concepts. This is particularly important for an economy such as Germany's.
Although we should leave the restructuring of supply chains to firms, for example,
this is another area in which it is crucial for policymakers to create a solid
framework. They can do so by championing a rules-based international system of
cooperation, counteracting strategic vulnerabilities and promoting healthy
competition overall.
Beyond this, digitalisation and climate neutrality remain two core aspects we must
heed if we are to prepare our economies well for the future. In both these areas,
policymakers need to set a clear course and create a suitable legal framework to
ensure that the changes go in the right direction.
3 Ensuring sound public finances
Becoming greener and more digital requires investment - private and public alike.
However, additional spending pressure is coming from other quarters, too. After
fiscal policy buffers were already used to mitigate the economic fallout from the
coronavirus crisis, many are now calling for fiscal policy action to cushion the impact
of the Ukrainian war. We must ensure that the funds are used primarily to provide
targeted relief to households or enterprises that are especially hard hit and that
might not otherwise survive. At this stage, there is no need for a broad-based,
debtfinanced demand stimulus, which would actually be more likely to be dissipated by
additional price increases.
Especially in Europe, increased expenditure on defence and energy security is
resulting in an additional need for funding. And, not to mention, the burdens that
we have long since known will stem from demographic developments. Even before
the coronavirus crisis, debt ratios were high in a number of euro area countries.
They are now even higher. To wit: the debt ratio in the euro area was 85.7% in
2019. This year, the European Commission is forecasting a ratio of 94.7% (after a
peak of 99.2% in 2020).
Although fiscal policy intervention was appropriate during the pandemic and the
Ukraine conflict, new borrowing should be scaled back as soon as possible in order
to pave the way for a sustainable debt path. I believe that, in turn, credible fiscal
rules will play an important role here. It will be crucial to preserve fundamental
confidence in sound public finances so that fiscal policy retains agency and our
single monetary policy can focus on ensuring price stability.
4 Refocusing monetary policy
During the coronavirus crisis, monetary policy and fiscal policy successfully worked
in tandem to protect the economy from going into free fall and to limit the
immediate impact of the pandemic on price stability. The focus now needs to be on
fighting inflation.
Energy prices, in particular, have surged. But consumer prices in the industrial
countries have also risen significantly across the board. And we know from our
survey of firms that most companies in Germany are planning to raise their prices
further over the next few months.
Central banks need to ensure that the very strong inflationary pressures do not
become entrenched. We must therefore take decisive action. In the Eurosystem, we
are rapidly scaling back our asset purchases. When net asset purchases come to an
end - possibly in June - I see the time for an initial interest rate hike soon afterwards
- possibly in July - as having come. This could be followed in a timely manner by
further interest rate moves.
Looking further ahead, changes in underlying trends could intensify inflationary
pressures. I am talking here about the "three D's". First of all there is de-
globalisation, driven by geopolitical tensions and a desire to reduce economic
dependencies. Second, the decarbonisation of the economy through carbon pricing
will probably lead to persistent upward pressure - and not just on energy prices.
And demography is the third "D" that might entail inflationary effects - as a result
of a dwindling labour supply, for instance.
The fact is that inflation dynamics have changed dramatically in a relatively short
space of time. Monetary policy has therefore been refocused in most
G7 (Gruppe der Sieben) countries. And monetary policymakers must remain vigilant
and potentially take further measures to safeguard price stability over the medium
term. Because at our meeting, there was no doubt whatsoever that stable prices are
essential to the achievement of our long-term objectives.