JM González-Páramo: «That we are without a budget now seems the most normal to us»

– What challenges does the ECB face in managing inflation in a context of economic disparities between member countries?

– The main challenge for the ECB today is to return to price stability in the medium term in the Eurozone. In 2024 the inflation rate has reached a minimum of 1.7% in September, but we ended the year at 2.4%. All this means that the “last mile” to achieve 2% in the medium term is going to be complex. Regarding disparities, the ECB has no mandate to reduce them nor instruments to do so. It is national governments that should address the need to minimize price indexing practices or the impact of lack of competition, optimizing the energy bill or readjusting fiscal policy. Much of the differences between inflation in Belgium (4.4%) and Ireland (1%), for example, have these national factors behind them.

– The Government complains that while the economy’s big numbers are very good, people on the street do not appreciate them. What is the reason for this decoupling?

– The aggregate numbers are very good due to specific factors, such as high immigration, the composition of the energy bill, NGEU funds or the extraordinary growth of tourism, among others. However, it is true that this good dynamic does not reach the perceptions of a large part of the population, for different reasons. Real salaries are lower than in 2019 and are at the levels of the great financial crisis, in part due to the sharp increase in labor supply and stagnation in productivity. The consumer basket is 30% more expensive than before the pandemic, driven by the prices of frequently consumed items. And accessibility to housing, with strong limitations in supply, is in one of its worst moments. These elements, among others, would explain the dissociation between the macro and the micro.

– Apparently, inflation has been a decisive phenomenon in the loss of popularity of politicians like Joe Biden or Justin Trudeau. Has tolerance to the inflationary phenomenon among citizens decreased?

– Indeed, according to surveys and analysis, inflation has been decisive in the political sphere. Inflation is not relevant when people do not talk about it, and this has been the case for at least three decades in advanced countries. The population under 50 years of age had a blurred or non-existent memory of inflation rates higher than 2-4%. And although governments bear partial responsibility for what we have experienced, they have suffered the consequences of citizen frustration.

– Will we see negative interest rates in Europe again?

– It is not probable, although it cannot be completely ruled out in the case of a severe deflationary shock. In normal phases, nominal interest rates should oscillate around 2.5-3% in Europe and 4% in the US. These “broad brush” reference rates correspond to the sum of inflation 2% in the medium term and the trend growth rate.

– There is talk again about the independence of central banks due to Donald Trump’s comments about the Federal Reserve.

– The independence of central banks is the most important institutional innovation of recent decades. Its benefits in terms of price stability and financial stability are beyond doubt. The credibility of the central bank as an independent institution is one of the greatest assets of an economy. In practice, the degrees of personal (governor and council members), financial, institutional and operational independence vary between countries, but it can be said to be high as a rule in most advanced nations. Markets and politicians across the spectrum tend to react poorly to threats of political interference. And these are reasons why the Federal Reserve chair’s position is stronger today than it was a few weeks ago.

– Is the independent central banker born or made?

– A little bit of both things.

– From the time you came to the board of the ECB until today, what is seen is a progressive increase in councilors with a political background. Do you agree?

– That is happening, indeed. In the ECB itself there is nothing more than comparing the composition of the different councils.

– Christine Lagarde herself was a minister…

– I think one thing needs to be clarified: being a minister is neither an original nor a mortal sin. What’s more, being a minister gives first-class experience, knowledge of how the economy and society works. What is very important is that there is no direct jump from a ministry to the central bank because a conflict of interest may arise there. Not only because of the recentness of the experience, not only because of the fact that one may be forced to evaluate and judge from the central bank measures that have been taken as a minister, but because there is a social perception that a politician has taken the entity and that is what matters. Having been a minister is not negative, but there must be a temporal distance between the positions that seems essential to me to eliminate any risk of conflict of interest.

– Germany is talking about ending some disciplinary measures, such as its spending rule and debt brake. What does it look like?

– More than ending the spending rule and the debt brake, the topic of debate in Germany is the extent to which the strict definition of these criteria is hindering the enormous needs derived from the energy and climate crises, as well as of the new imperatives of national defense. Flexibility subject to objective criteria would probably be beneficial for Germany.

– But some interpret it as a sign of liberal spending or fiscal irresponsibility.

– That in Germany is unthinkable. It is not in the German idiosyncrasy to be manipulative and do crazy things with the budget. What there is is a debt brake, a fiscal rule that is one of the most credible in the world because it works. But now we are in an extraordinary moment where they realize that there are enormous needs linked on the one hand to defense and on the other hand to large investments that they need to reinvent themselves.

– What effects can this German debate have on our own fiscal discipline?

– None, because the truth is that here we have established fiscal rules that we systematically fail to comply with.

– In fact, we are without the Government formulating a budget.

– That we are without a budget is already very normal. It seems that it doesn’t matter having a budget or not having one. We had a possibility of a Senate review of the spending paths that has been completed. I would say that, unfortunately, the culture of fiscal discipline in Spain has long ended.

– Donald Trump says that tariff is the most beautiful word. What is going to happen to world trade?

– There will be tariff increases, what we don’t know is how much, because we know that Trump has a transactional mentality and it is possible that some of the threats he has made vary, but that they are going to increase tariffs is something we have to count on. Each country or economic area will try to negotiate that this increase be low or that there are exceptions in exchange for, for example, buying more energy. I am counting on these increases because there has been a lot of electoral commitment to this and there is pressure from the local industry to do so, not to mention the impact that this can have in terms of inflation, which is something that generates a lot of sensitivity in the United States. If there is an inflationary rebound – we are seeing that it is having a difficult time lowering inflation to rates close to 2% with a very dynamic economy – and if this is combined with significant deportations of immigrants who operate mainly in the field of food production or domestic cares, we may face a situation that would force the Federal Reserve to react. He is already doing it very cautiously. Nobody expects, like three months ago, that there will be four rate cuts this year. In fact, I wouldn’t rule out there not being any throughout the year.

– To that we must add the promised tax cuts.

– With which the problem of the deficit would not only not be fixed, but would get a little worse.

– What is your opinion of the number and nature of the reviews that the INE has been making of the GDP?

– Revisions in official figures are inherent to the calculation methods used by statistical institutes, but the frequency and magnitude we have seen has few precedents. It is essential to preserve the credibility of official figures. It is not idle to remember that the formidable crisis of the Greek economy has its beginning in a very strong revision of the official deficit and public debt figures. Nothing comparable either in origin or magnitude to the recent reviews in Spain, but which cannot be completely ignored. Statistical institutes should make every effort to minimize revisions, in number and magnitude, to preserve confidence in official statistics.

– Why has Europe fallen behind the United States in terms of per capita income?

-In this regard, it is difficult to add much to what the magnificent Draghi Report has made public with eloquence and substance. Our productivity has fallen to 80% of North American productivity in just three decades, mainly because Europe continues to specialize in mature technologies and has lost the digital revolution. It is not clear that looking to the future it is doing what is necessary to lead the revolutions that are coming: artificial intelligence and quantum computing. Added to all of this is less dynamic demographics, a lack of coordination between decarbonization initiatives and competitiveness needs, and an uncertain international trade situation. The agenda to overcome these difficulties and restrictions is contained in this relevant Report, which one would like to find on the table of the new European Commission.