Interview with Luis de Guindos, Vice-President of the ECB, conducted by Balázs Korányi and Francesco Cánepa on 12 June 2025

16 June 2025

President Lagarde said the ECB was in a good place now. Investors and ECB watchers took that to mean a pause in rate cuts is appropriate. Was that the correct interpretation?

The projections provide the key to understanding our policy decision. It’s almost a cliché now but the level of uncertainty is huge. So much so, we published alternative scenarios. The key differences in the scenarios relate to trade policy. In the baseline, we assume no retaliation and a 10% tariff. In the adverse scenario, we assume higher tariffs and retaliation.

The final outcome in trade negotiations is by far the most relevant factor of uncertainty that we considered in our projections, which are the basis for our monetary policy decisions. Nobody knows the final outcome of the trade negotiations and the impact it may have on the outlook for growth and inflation.

Having said that, markets have understood perfectly well what the President said about being in a good position. Even in this context of huge uncertainty, I think that markets believe and discount that we are very close to our target of sustainable 2% inflation over the medium term.

Your projections incorporate interest rate futures, which still price in one more rate cut. So, if the baseline materialises, we can still expect a cut?

We incorporate market expectations for interest rates into the underlying assumptions of our projection framework. But I think that, in this case, this assumption is not important compared with the consideration we give to trade issues in the June exercise. Trade has a greater magnitude of relevance in influencing our projections.

Would you say that risks to the inflation outlook are to the upside or the downside?

This is quite an important question. A tariff is a tax on imported goods. So the first impact is inflationary. But tariffs simultaneously depress demand, which can more than compensate for the initial inflationary impact. So, in the medium term, tariffs reduce both growth and inflation.

But there is another factor that is more difficult to calibrate. A fully fledged trade war could give rise to fragmentation in the global economy and distortions in the global supply chain. And that would be inflationary in the longer term.

So, with all these nuances, over the next two years tariffs would reduce both growth and inflation. But, if you look further out, you have to consider the potential impact that fragmentation could have. That goes beyond our projection horizon, but it is something that we will have to take into consideration in the future.

You now project inflation dipping below target and then coming back to 2%. We’ve seen such a scenario before, when the longer-term projection always points to 2%, partly because of mean reversion. So, how much weight do you attach to the 2027 projection? And do you give a lot of thought to this notion of mean reversion as a feature at the back of the projection?

When it comes to 2026, there are two key issues: the appreciation of the euro and the evolution of prices of raw materials, particularly energy. For 2027 a similar appreciation of the currency and a fall in energy prices is not expected to take place, and that is the reason why we expect inflation to come back up to 2%. But, of course, the level of uncertainty is huge. So, even though we are convinced that inflation will converge to our target, we need to stay data-dependent and decide meeting by meeting. Also, bear in mind that we have already reduced interest rates by 200 basis points – from 4% to 2%.

The risk of undershooting in any year is that it influences wage-setting and could perpetuate low inflation. In the first quarter of next year, you see inflation at 1.4%. Do you consider undershooting a significant risk?

I think inflation is going in the right direction. There is a clear deceleration, also confirmed by the latest data. But I don’t think that inflation hovering around 1.4% in the first quarter of 2026 is going to be enough to unanchor inflation expectations and modify the wage bargaining process. We clearly see that wage dynamics are cooling. But, even when you take all these factors into consideration, compensation per employee will be around 3% over time. So, the risk of undershooting is very limited in my view.

Our assessment is that risks for inflation are balanced. Clearly, 1.4% is below target. But we look at the medium term, and in the medium term there are other factors that can compensate for the short-term elements that can temporarily bring inflation down.

Europe is expected to spend more on defence. Do you think that greater military expenditure should come at the expense of other spending, or should it be financed from debt?

A lot of uncertainty still surrounds our fiscal policy assumptions and projections. Trade is prominently in the news, but fiscal policy is often overlooked.

First of all, fiscal policy in the United States is important. The new tax bill is going to increase the deficit, and the US fiscal position is already challenging. The debt ratio is over 100% and the fiscal deficit between 6% and 7%. So, markets are likely to start paying more attention to fiscal policy in the United States, which could give rise to increasing yields. I think this will catch the eye of markets more and more in the future.

In the case of Europe, we have seen a degree of decoupling in terms of yields with respect to the United States. But developments have been much more moderate.

Nevertheless, fiscal policy is relevant because there is an additional need to increase spending on defence, which is going to demand more resources. The starting point for some EU countries is not good. The EU does not have much fiscal space, so we have to look for social and political space in order to expand it.

We will need to have more support from the people of Europe, and governments will have to explain clearly the necessity for higher spending on defence, because it’s a question of independence and autonomy.

This extra spending may take some time to ramp up. Do you think ECB watchers or the ECB’s own projections overestimate how much fiscal support is coming?

There are different fiscal multipliers, and much will depend on the kind of fiscal spending that countries are going to pursue. This kind of expenditure takes time to be implemented, so the impact on inflation and growth is not going to be material in the short term.

Do you think the ECB can play a role in helping that defence spending, like with the targeted QE, targeted TLTRO, or some other tool?

I can assure you that this is something that we have not discussed.

We saw in the minutes of the Federal Reserve System’s May meeting that it had extended the swap line with the ECB. Nevertheless, given the political turmoil in the United States, do you think it would be a good exercise to look at scenarios in which US dollar funding dries up? Should the ECB be preparing the financial sector for such a scenario?

We believe that swap lines with the Federal Reserve are a good instrument in terms of financial stability for both the euro area and the United States. We are fully convinced that the swap lines will be maintained over time because they are positive for both sides and for global financial stability.

But markets are starting to openly doubt the status of the US dollar as the world’s leading reserve currency. And some central banks are even building up reserves in gold. Do you think it would be prudent for the ECB, and the Eurosystem more generally, also to start building up more gold reserves or reserves in assets other than US dollar-denominated assets?

The weight of gold in our reserves has been on the increase clearly because of rising gold prices. Central banks use gold as an instrument to diversify in moments of geopolitical risk, and that is understandable. Some are even looking at silver or platinum to diversify.

But the role of the US dollar as a reserve currency in the short term is not going to be challenged, in my opinion.

The role of the euro as a reserve currency in the global arena will depend on actions taken in Europe. If we can achieve a much more integrated goods and services market, then the capital markets union and the banking union will come about much more easily. It’s very difficult to make progress in the capital markets union or the banking union if you do not advance in the integration of the goods and services market.

You put out a report on the role of the euro last week, which covers basically to the end of last year. Can you provide us with a bit of insight on what’s been happening since 2 April. There’s been a lot of movement on financial markets. Have euro assets really benefited from capital leaving the US dollar, or is it mostly gold that has benefited?

If you look at market developments, we had a big decline and a risk-off movement at the beginning of April. And now market valuations have fully recovered – apart from the US dollar and commodity prices.

The policies of the new US Administration cover not only tariffs, but also fiscal policy and the regulatory frameworks for banks – in terms of the implementation of Basel III – and non-banks, and even for crypto assets. At the end of the day, this is a sort of change of paradigm. There have even been some doubts about how engaged the new US Administration is going to be with multilateral institutions.

Even though markets have recovered, setting aside the US dollar and commodities, there is something that is quite obvious. The correlation of asset prices has changed quite a lot since April. If you look at developments in stock and bond prices, the correlation has been different from the ones we had in the past.

Even in the case of yields on US Treasuries, we have seen ups and downs. But I think that the main element that indicates some doubts about the new US policies is the evolution of the US dollar. That’s quite clear.

The flipside of that is that the euro has become stronger. Is it becoming an issue for growth and for exporters? Can the euro zone even afford reserve currency status given the currency strength that comes with it?

I think that, at USD 1.15, the euro’s exchange rate is not going to be a big obstacle. And the question of the reserve status of the euro in the global arena is not going to have a significant impact in the short term.

In the short term, the status of the US dollar is not going to be challenged. In the medium term, the factor that is going to be key is the kind of policy that we implement in Europe. If we are able to become more independent, more autonomous in defence, and we start to do what we have to do for the integration of markets… gradually, over the medium to long term, the euro will gain market share. But, in the short term, a big jump in market share is out of the question.

So you don’t seem to be terribly concerned about USD 1.15 for the real economy. Accepting that you have no exchange rate target, what is the point where you become concerned that the exchange rate has a detrimental impact on the real economy?

Much more than a specific level, I think that we have to look at the speed of developments, how rapid the appreciation or depreciation is. And if there is a clear overshooting of the exchange rate, that is something we should analyse.

So far, the evolution has been quite controlled. Perhaps the surprise has been that, at the beginning of the year, most market participants believed that we could go to parity. And instead we have gone to the current level. I would not say that the exchange rate has been extremely volatile so far, or that we have seen a very rapid appreciation .

We take the exchange rate into consideration in our projections. The perception of the ECB is that the appreciation of the euro has so far been positive in terms of achieving our target for inflation. That’s one of the reasons why we have revised our inflation projections down for 2026.

A recent paper by Blanchard and Ubide has relaunched the idea of a European safe asset. You were on the other side of the fence when you were once a finance minister. Do you see growing chances of more joint issuance happening?

Ideas coming from the academic sphere are very good. The one you mentioned is a very interesting proposal for a EU safe asset in a very liquid and deep market. That is something we have to take into consideration.

But I think we have to do a lot of things before that. We need a much more integrated single market, and to make much more progress towards the capital markets union and the completion of the banking union. Simultaneously – and I feel we have made some progress here – we need the fiscal positions of euro area countries to be closer and disparities to be reduced.

So it’s an interesting proposal from an academic standpoint. But I think that, from a practical viewpoint, there are other necessary conditions before we get there and these are not yet in place.

Do you think it could be prudent for the ECB and the Eurosystem’s national central banks to bring back some of the gold reserves they store in New York?

There is no doubt in my mind that they are totally safe.

Even when a new Federal Reserve Chair will be appointed next year?

Well, I don’t know who the next Chair is going to be, but I expect it will be a competent and sensible person.

Fair enough. But has there been a discussion about this or didn’t it even come up?

Even the possibility of it didn’t come up.

Over the past few years, the ECB has learned some lessons, such as that you also have to react forcefully to inflation when it’s too high. This didn’t seem to be a problem a few years ago, yet all of a sudden it was. So, with that in mind, how would you like the new strategy document to reflect that?

As you have said, the framework for inflation was totally different five years ago. And now we have had a period of high inflation, which was an important change.

This is going to be a reassessment of our strategy review. In my view, we are not going to see modications in the definition of price stability. With respect to the toolkit, I think that all the instruments are going to remain available for use in the future.

Simultaneously, we have learned much more about side effects, and we are going to pay more attention to financial stability considerations. QE, for instance, was a new instrument added to the toolkit in 2015. What is important is that when you use an instrument, you can gauge its real impact. Sometimes it’s much easier to start using the instrument than to withdraw it — that’s something we have learned as well. And finally, the framework of the global economy is going to be very different from the one we had in 2021. In one sense, I think we are going to have a much more fragmented world.

In 2021, we didn’t have any discussions about trade. Deflation, or low inflation, was the main point of our review, and how close we were to the lower bound. At the same time, some academics raised the issue of the natural interest rate. This is interesting from a conceptual and an academic standpoint, but not for actual monetary policy decision-making.

What should we expect from the new strategy statement?

I would not expect big surprises. This is about evolution, not revolution. It is just a reassessment. It will be much more focused on how the framework for central banks and for the ECB has changed over the last five years.

In a multipolar world, what role can China play for the ECB as a partner, and the People’s of Bank of China particularly?

China is an important player. It’s the world’s second largest economy. We have some monetary arrangements with the central bank, like our swap lines.

Sometimes when we talk about trade policies, we look only at bilateral tariffs. But we need to have a holistic approach. In the case, for instance, of the negotiations between the United States and Europe, what is going to be key is not only the final outcome in terms of bilateral tariffs, but the potential impact of trade diversion. You need to be holistic with respect to trade, because otherwise, perhaps, you are missing the real impact that these trade negotiations are going to have.

Do you see that as a big risk, trade diversion? Your colleague Isabel Schnabel seemed to suggest this was not a major risk.

Well, I don’t know whether it’s going to be a big risk, but undoubtedly this is something that we have to monitor and take into consideration.

Could the ECB work with the People’s Bank of China, for example in the field of payments? China has its own digital currency.

We are fully behind a digital euro. We believe that it’s something that is going to be very important in Europe.

There will be new legislation in the United States about stablecoins. They are going to become a means of payment and most projects are going to come from the United States. My reading of the digital euro project is digital public money: it will be a means of payment, it’s not going to pay an interest rate, and it will not replace cash. We are going to take financial stability implications into consideration too.

People, at the end of the day, both in the analogue and digital context, always want to have public money. For them, that’s real money. And if people doubt whether they can transform their current account balance into banknotes, then a bank run can take place. The digital euro is going to play a similar role in a digital world.

If the case for a digital euro is so clear, why does the legislator not see it? Brussels has been dragging its feet. Why is that, and do you expect a change?

I hope that we will be able to convince the legislators, but you have to ask them why they have so many doubts. From our standpoint, it’s quite clear that a digital euro is something that is extremely relevant and useful in the payment context in Europe. And I think that eventually, they will be convinced of the clear advantages of a digital euro.