Transcript: Interview with ECB Governing Council member Holzmann on 4 August 2025

5 August 2025

By David Barwick – FRANKFURT (Econostream) - Following is the transcript of an interview on 4 August 2025 with Robert Holzmann, Governor of the Austrian National Bank and member of the Governing Council of the European Central Bank.

Q: Governor, what do you think of the EU-US trade deal?

A: It's a conflict that definitely does not bode well for the European or world economy. The way it is going, there will not be many winners, not in the US and even less so in Europe. It’s a major shock to the system, and if one believes in the economic principle that fewer restrictions are better than more restrictions, then the allocation of resources afterwards will be less optimal than before. In the specific case of this deal, the US may have an advantage, as they get additional revenues and reduce their trade deficit. On the other hand, it requires a substantial change to the US economy. And I question whether the change will be as Mr Trump hopes. You need to have capital to accommodate the return of production to the US, and you need people with the right skill sets. You can automate the processes, but that requires very expensive capital investment, and if this happens, then you don’t get the jobs you wanted.

Q: What does it mean for inflation and growth in Europe?

A: We will have a period in which growth is not as high as we had hoped. When you destroy an existing trade pattern, then you have adjustment costs, implying more expenditures but less value added. So, we'll have to deal with lower growth than anticipated, in Europe as well as in the US. Depending on various aspects, the adjustment is likely to create inflationary pressure. Or we may have a period in which lower growth requires further policy support. Which scenario we get is open, but the next couple of years will be difficult. I'm not optimistic about growth, because even if German infrastructure investment is €100 billion and defence spending several times as much, it won’t make a huge difference, given that other countries face fiscal struggles. Europe’s ratio of debt-to-GDP is likely to continue to increase. On average we already have around 80% or 90%, and recent longstanding research shows quite clearly that beyond this level, life becomes more difficult with respect to growth and financial stability but also in terms of finding an exit strategy that doesn’t involve a major economic shake-up. In Europe we don’t have the elements needed to grow out of the debt, such as a dynamic capital market. And the idea that we can regulate our future in a way conducive to growth hasn’t proven to be correct. So, it’s not a catastrophe, but it’s not a bright future.

Q: And with respect to near-term monetary policy decisions, how should the ECB react?

A: What most of us agreed at the last meeting is that monetary policy now needs to be characterised by a steady hand. After so many interest rate cuts, we are at a level that is expansionary. For Europe and the world, r* has quite likely gone up again, so we would be well-advised to keep interest rates where they are and await further economic developments, without trying to satisfy market expectations. We are not in restrictive territory, and we mustn’t react to short-term developments.

Q: Based on what ECB President Christine Lagarde said on 24 July, it seems that a lot of your colleagues also feel that waiting-and-seeing is the best course of action at the moment, and that there may be no clear reason to move again in September.

A: Exactly. This was a largely shared view, though not by all. We’re in a good position and it’s now time to wait. Inflation is down and may even undershoot, though not by much, so there is no need to react to that.

Q: Would you agree that the ECB’s next rate move could just as easily be up as down?

A: Being at the end of my term, I will refrain from making daring predictions, but I wouldn’t exclude it. The next step could be up. But this depends on the resolution of the uncertainty around our trade relationships, because there has been stocking of goods that has helped maintain constant prices so far. So, for the time being, the price effects have been moderate. But we don’t know where things will go from here, so it could go either way and we may get stronger-than-anticipated inflationary developments. I won't exclude it, but it's not a prediction, just a probability.

Q: A lot of ECB communication lately focuses on more-resilient-than-expected economic developments. It doesn’t sound though like you expect this to last.

A: Here again it depends. For the time being we have had a lot of talk, but very little action. So, it’s difficult to say. We had announcements about what kind of spending may take place, but we have to see how much military spending spills over into the private sector, what impact the infrastructure expenditures has, how much other countries can benefit from the positive impact for Germany. We also don’t know yet how France is going to deal with its fiscal challenges, but for the moment policy is more restrictive than expansionary. And other countries have similar issues. Also, we don’t know how trade will be redirected. Will there be a wave of cheap exports from China to Europe, and if so, how do we react? We don’t know. If so, this could be a deflationary element, but on the other hand, there are clearly inflationary elements of the trade conflict, as mentioned. And now OPEC+ has decided to put much more oil on the market than projected, and Russia urgently needs oil revenues. So, we may get lower energy prices, which is supportive of economic developments. So, we have very high uncertainty, and we need to be ready for anything.

Q: Is the September Governing Council meeting going to be a real battle?

A: We never have real battles. We will have Eurosystem staff projections, and these should serve to give us guidance, but they are not a binding constraint. As individual Council members we are always free to say that given this or that underlying assumption, we think differently. Most of us governors go into the meetings with our own views, based on our own discussions with our own staff. And we exchange those views on Wednesday. But if things remain as they are now, then I don’t see the need for big changes to the outlook in September. From today until the projections are finalised, it’s just a few weeks, so it’s hard to imagine a major revolution taking place. So, my sense overall is that it won’t be a meeting in which the world is turned upside down.

Q: And do you see the euro’s appreciation as manageable indefinitely, provided it remains gradual?

A: Gradual is always better. But my sense is that despite all the problems caused by US policies, the dollar will remain a major player in the international monetary system, so I don't expect a continued depreciation. And given that the US will have higher budget deficits and will need higher interest rates to finance it internationally, this suggests that US Treasuries must remain attractive enough to finance the deficits, since the tariff revenues won’t cover that. So, we may already be at the end of the current dollar depreciation. My sense is that it won’t continue much beyond from around where we are now, which is near the long-term average. But there's nothing more difficult in the world than predicting exchange rates.