As growth slows, targeted spending vital in expansionary spending, German central bank chief says

Joachim Nagel, president of the Deutsche Bundesbank and a member of the Governing Council of the European Central Bank, speaks during an interview with the Korea JoongAng Daily and the JoongAng Ilbo held in the Bank of Korea in central Seoul on Dec. 2. [WOO SANG-JO]

 
[EXCLUSIVE] 
 
Korea and Germany may sit on opposite sides of the globe, but they share striking economic parallels. Both rose to prosperity within decades on the back of manufacturing and strong exports, anchored by world-class car industries.
 
Yet, the two nations now face the same headwinds: a rapidly aging population, a low fertility rate and a shifting global trade landscape that is undermining the very foundations of their growth model — putting the brakes on their momentum.
 
For Germany, part of the countermeasures to these challenges is expansionary fiscal policy underpinned by effective fund allocation, according to Joachim Nagel, president of the Deutsche Bundesbank and a member of the Governing Council of the European Central Bank (ECB).
 
“The question is how the money will be invested,” said Nagel in an interview with the Korea JoongAng Daily and the JoongAng Ilbo at the Bank of Korea (BOK) office in central Seoul on Tuesday. “We at the Bundesbank have this strong belief that it’s really important the money goes into those sectors where we were underinvested over the last years: infrastructure, digitalization, all the future technologies,” he added, while referring to Germany’s recent large fiscal package and the softening of the debt brake. The package includes a special fund for infrastructure and climate neutrality amounting to 59 billion euros ($68.8 billion) in 2025 and 116 billion euros in 2026.
 
But he stressed that debt needs to be reduced following the mass spending.
 
“The caveat is coming after this money is spent. We have to embark into a new era of fiscal consolidation,” he added, emphasizing the importance of investing in sectors that can deliver higher growth over the medium to long term to make the fiscal consolidation more manageable.
 
Seoul could take a lesson from this approach, having pursued an expansionary fiscal policy, with the National Assembly approving a budget of 727.9 trillion won ($494 billion) for next year — an 8.1 percent increase over this year’s initial budget plan. Korea has faced warnings from global institutions like the Organization for Economic Cooperation and Development, which cautioned that Korea lacks a credible plan to restore fiscal discipline.
 
“We are living in this extraordinary time,” Nagel said, adding that fiscal spending, along with labor reforms and the acceptance of more immigrants, are pivotal measures to sustain a country’s growth momentum.
 
Considered a potential candidate to succeed Christine Lagarde as President of the ECB when her non-renewable term expires in October 2027, Nagel paid a visit to Korea after an invitation from the BOK.
 
Below are excerpts from the interview, edited for length and clarity.

Joachim Nagel, president of the Deutsche Bundesbank and a member of the Governing Council of the European Central Bank, poses for a photo ahead of an interview with the Korea JoongAng Daily and the JoongAng Ilbo held in the Bank of Korea in central Seoul on Dec. 2. [WOO SANG-JO]

Q. How does Bundesbank view Germany’s large fiscal package?
 
A. The new government decided to launch a large fiscal package over the next years, as there was that understanding we have to invest in our infrastructure, digitalization and defense. The Bundesbank has a good understanding for that. These are extraordinary times, so there’s good reason that the government decided to do this very exceptional measure. What we see now is our debt-to-GDP ratio is going up maybe to a level of 90 percent [in 2040]. But after that, it has to go down again to 60 percent.
 
  
With growing protectionism, Korea and Germany face major challenges as manufacturing-centered economies. What would be the appropriate policy responses to address them?
One of the policy responses is that we definitely need multilateralism. Despite the fact that the world seems to be getting more problematic, I believe it is important that countries like Germany and Korea work more closely together, as we have the same problems.
 
Finding new trade relationships, new cooperation is of importance to circumvent — to a certain extent — those problems. Many German firms are now thinking about how they can diversify the supply chains, finding new ways on how to do business and how to expand over time.
You’ve emphasized the importance of embracing immigrants to sustain growth momentum. Does this approach apply to other countries facing weak growth, like Korea?
 
I think this immigration question is very important for both Germany and other countries in an aging society. Labor supply is of utmost importance when it comes to the competitiveness of a country.  
 
As part of the solutions, raising women’s participation rate in the work force is one element. This is what the German government has been trying for many years, but there’s been a certain limitation. Then, you can think about technology. AI, for example, can, to a certain extent, fill this gap. But there’s also a certain limitation. And then what could be a third element is immigration. I’m much in favor of an immigration policy.
How can a country address local resistance toward immigrants?
 
A mind shift is a complicated exercise. But we have to open ourselves to this and accept that this is the reality. This is like a marathon. You have to do it on a daily basis — explaining it to the country, to the people, to your voters — why it is so important. It’s crucial to have immigrants because they are an important element of the wealth of our nation. We need a qualified labor force. They can also enrich our lives because of different cultures, and we have to be open to that. They are good people, and we can integrate them.
 

Joachim Nagel, president of the Deutsche Bundesbank and a member of the Governing Council of the European Central Bank, center, speaks during an interview with the Korea JoongAng Daily and the JoongAng Ilbo held in the Bank of Korea in central Seoul on Dec. 2. [WOO SANG-JO]

How can raising the retirement age help with growth?
 
Germany’s statutory retirement age was 66 last year and will continue to increase until 2031, reaching 67 years. I believe we have to link the retirement age to life expectancy. So, in our scenario, we could go up to 69 over the next years. That, we believe, is a proper retirement age.
 
When the German pension system was established in 1957, the life expectancy (around 66 or 67) then was just a little above the retiring age. So on average, many didn’t live long enough to receive the pension. And now, the life expectancy of men in Germany rose to 79 and 83 for women, with the numbers expected to rise further. The system has to more or less take that into account — and that means, to me, working longer.
 
It’s also a question of generations. The younger generation has to pay for the older generation, and I believe they should have the same expectations and equality between the generations. This is not an argument or something people would like to hear, but I think this is reality.
How do you think the rise of stablecoins will affect the dollar dominance in the global financial system?
 
Most of the stablecoins are denominated in U.S. dollars, so they are backed by the U.S. Treasury. So, there’s concerns on the potential danger of further dollarization.
 
Also, as stablecoins are pegged in U.S. dollars, U.S. Treasury, if [uncertain events like] the April (U.S. “Liberation Day” tariffs) take place, that could also bring stablecoins into a situation where you are in a very problematic situation.  
 
On top of that, some banks are liquidity providers for the stablecoin issuers. So, there could be a spillover from the less regulated market to the more regulated market banks. So, from a central bank perspective, we have to look at it, and I believe robust regulation is absolutely a necessity. They’re the same as what I would say for cryptos — these are not currencies but a speculative asset class.
How are stablecoins affecting Europe?
 
For Europe, it’s important to regain some independence from the U.S. financial system. We are so much dependent on the U.S. hyperscalers as well as their financial and tech companies like Visa, Mastercard, Apple Pay, Google Pay and PayPal. So, what we need is a European alternative, and our alternative is the digital euro.  
 
The Central Bank Digital Currency (CBDC) — in our understanding — is the digital twin of banknotes and cash. It is a public good. So, in the euro system, we will establish, such as the CBDC, the digital euro as part of the project to make Europe more independent from the U.S. financial system.

BY JIN MIN-JI, PARK YU-MI [[email protected]]