By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Madis Müller on Friday said that interest rates are at an “appropriate level” given the outlook, with the euro area economy growing moderately and inflation expected to stabilize around 2%.
Müller, who heads the Bank of Estonia, said in a blog post on the central bank’s website that the US president’s suggestion that last year’s trade agreements with European countries could be reopened, together with US threats toward Greenland and the removal of Venezuela’s president, had raised anxiety and “undermined the reputation of US securities as a reliable ‘safe haven.’”
Müller linked that shift to a weaker dollar and higher precious metals prices.
Japan’s bond-market turbulence offered another cautionary lesson, he argued, after investors reacted to the prime minister’s call for elections and the prospect of wider deficits despite already high debt.
The late-January repricing pushed up Japanese government borrowing costs, which he said should remind European governments that high debt and deficits reduce room for economic-policy maneuver.
In contrast, he said that the euro area has produced “no major surprises” in recent months and that the European Central Bank’s December forecast remains a solid basis for interest-rate decisions.
Pointing to softer-than-expected price increases at the start of the year and stronger-than-expected late-2025 growth, Müller said the euro area economy “in the short term…appears to have reached a balance.”
“[I]nflation is close to the central bank's target of 2%, the economy as a whole is growing moderately and interest rates are, all things considered, at a suitable level,” he said.
He added that surveys suggest euro area firms have become more optimistic about the near-term outlook for their businesses.
Over a longer horizon, Müller warned against complacency, arguing that the euro area’s potential growth has fallen in recent years and is likely to decline toward about 1% in the years ahead.
That backdrop would force difficult choices for high-deficit countries as aging populations lift pension and health spending, the working-age population shrinks, and defense investment needs rise, he wrote.
Müller also argued that the outlook will depend on adapting to a new trade reality, extending beyond US tariffs to intensifying competition from China inside Europe’s domestic market.
He wrote that euro area imports from China have risen by more than a third over the past two years, with cheaper goods benefiting consumers and lowering input costs while increasing pressure on European producers.
Market logic would imply closing production that has lost competitiveness, he said, but he cautioned that the decline of strategically important industries is not in Europe’s interest when competitors’ price advantages are backed by state support.
The central question, Müller said, is how European producers can maintain competitiveness at home as well as abroad, an issue he said is topical in Estonia and across Europe.
