##balancing has taken place, i expect wage growth to moderate, just like firms ’ profits. because, if real wage growth exceeds the economy ’ s growth potential for an extended period of time, firms would pass at least some of these cost increases on to consumers. and this, of course, could mean higher inflation. this would again prompt a response from the eurosystem. currently, we are expecting wage increases to have some effects on prices. but we do not see any evidence of a self - reinforcing spiral. [ 6 ] we will continue to carefully monitor whether the price and wage - setting behaviour will normalise and align more closely with our inflation target. otherwise – as you may have guessed by now – the eurosystem will be called to action. 4. 3 governments i would now like to turn my attention away from the firm - worker nexus and towards another important player : governments. how can fiscal policy make it easier for the central bank to maintain price stability? first, in the current environment of high inflation, fiscal policy needs to be restrictive. expansionary fiscal policy could spur aggregate demand and increase existing inflationary pressures. so i ’ m happy to see deficit ratios declining in the euro area. in many cases, this is related to the phase - out of the crisis response measures. i see the risk of an underlying expansionary trend gaining traction. second, public finances need to be sound. this is not only a timeless requirement, it is also a very topical one. countries need to rebuild fiscal buffers to prepare for future crises and future spending needs to cope with the climate transition, demographic challenges and rising geopolitical conflicts. fiscal rules are the key to ensuring sound public finances. in europe, these fiscal rules are defined in the stability and growth pact. unfortunately, the manner in which the pact was handled in the past was inadequate : it did not prevent high and rising debt ratios. the european commission ’ s recent reform proposal does not improve upon the status quo : [ 7 ] it offers a great deal of scope for interpretation and discretion. and this threatens to weaken the binding effect of the fiscal rules even further. i see two main areas for improvement : [ 8 ] first, the number of exemption clauses should be reduced significantly. because having too many loopholes risks watering down the consolidation targets. instead, we need concrete, non - negotiable minimum standards. second, the surveillance of government finances could be delegated to an independent institution, such

was a challenging year for the german economy. the period of weakness that followed the start of russia's war of aggression against ukraine has continued. headwinds initially came from the aftermath of the sharp rise in energy costs. three other main factors slowed the economic recovery : weak external demand weighed on the industrial sector ; high inflation held back private consumption ; tight monetary policy led to rising financing costs, which dampened investment. however, there were also developments that supported economic activity. many supply bottlenecks eased over the course of the year. moreover, the labour market proved remarkably robust. despite the persistently weak economic environment, the number of persons in employment rose to 45. 9 million, an all - time high. on balance, economic output fell slightly on the year in 2023 ; it was down by 0. 1 % in price and calendar - adjusted terms. the outlook for 2024 promises a little more light than shadow again. our experts expect the german economy to gradually regain its footing during the course of the year and embark onto a growth path. first, foreign sales markets are expected to provide tailwinds. we expect an economic recovery here. this will probably push up global demand for german goods and cause german exports to grow. second, private consumption should benefit from an improvement in households'purchasing power. thanks to a stable labour market, strong wage growth and falling inflation, people will effectively have more money in their pockets. however, as things stand today, the anticipated recovery is likely to start somewhat later than we had projected in december. german economic output could once again decline slightly in the first quarter of 2024. for instance, foreign industrial demand recently trended significantly downward, too. besides this, consumers are likely to remain cautious about spending. because of the delay in the economic recovery, as things stand, the german economy is more likely to tread water on average in 2024. there are clear risks to the economic outlook, if, for example, geopolitical conflicts intensify. this could lead to rising energy and commodity prices and disrupt supply chains again. this would weigh on the german economy and, at the same time, fuel inflation. 2. 2 inflation how we see price developments last year also depends on which perspective we take. looking at the annual average, inflation was still exceptionally high in 2023. germany recorded its second - highest inflation rate since reunification. the harmonised index of consumer prices ( hicp ) rose by 6 %, compared with 8.