ECB Executive Board Member Isabel Schnabel on Growth, Inflation, and the Euro's Resilience
The eurozone's economic resilience is remarkable, but challenges and uncertainties remain.
In a candid interview with Bloomberg, Isabel Schnabel, a key figure on the European Central Bank's Executive Board, shared her insights on the euro area's economic performance, inflation, and the impact of global events. The interview, conducted by Jana Randow and Mark Schrörs on December 3, 2025, offers a comprehensive overview of the ECB's perspective on these critical issues.
Euro Area's Resilience and Growth
The euro area economy has demonstrated remarkable resilience, outperforming expectations despite the significant disruption in international trade since World War II. The ECB upgraded its 2025 growth projection, and incoming data indicates continued growth in the fourth quarter. The European Commission's Economic Sentiment Indicator is at its highest since April 2023, and Purchasing Managers' Indices point to solid expansion, led by services while manufacturing lags.
But here's where it gets controversial: Despite headwinds, the euro area is on track to grow above potential. Strong domestic demand, fueled by a robust labor market with low unemployment and rising wages, is a key driver. Fiscal policy is expanding, with Germany's special fund for infrastructure and climate neutrality and increased defense spending across Europe. Private investment is supported by favorable financing and AI-related activities.
Inflation and Monetary Policy
Inflation is currently around 2%, and medium-term projections are similar. However, volatile energy prices and the EU Emissions Trading System 2 (ETS2) may temporarily push headline inflation below the target. Schnabel emphasizes that underlying inflation is the best predictor of future price pressures, and she sees challenges, particularly in services inflation, which is higher than expected and above pre-pandemic averages.
And this is the part most people miss: Wage growth, stronger than anticipated, is a significant factor. While negotiated wage growth has decreased due to base effects, compensation per employee has not decelerated as expected. Surveys indicate rising wage growth expectations, influenced by demographic factors like baby boomer retirements and slower immigration.
Global Trade and Uncertainty
The impact of tariffs has been milder than expected, as uncertainty has decreased, supporting economic activity. The global economy and trade have proven resilient, adjusting to the new trade system with new patterns and agreements. This reduction in uncertainty is a positive sign for the future.
Risks and Outlook
Compared to September projections, risks are tilted to the upside. Inflation risks are also skewed upwards, with ECB projections showing undershooting in 2026 and 2027. Schnabel highlights the importance of the overall macroeconomic narrative rather than specific numbers, emphasizing the ECB's tolerance for moderate deviations from targets as long as they are not sustained.
Interest Rates and Policy Cycle
Interest rates are stable, and Schnabel expects them to remain so without significant shocks. The distribution of inflation risks has shifted upwards, and markets and surveys anticipate a rate hike, though not imminent. The ECB must focus on the medium term and assess the degree of accommodation for the macroeconomic environment.
Schnabel suggests a potential increase in the natural rate of interest due to AI developments and public investment. She notes the challenge of estimating r* in real-time but warns that a constant policy rate could lead to increased accommodation if inflation does not drop simultaneously. Monitoring the policy's accommodative nature over time is crucial.
AI, Simplification, and the Digital Euro
AI investments are increasing in the short term, but long-term estimates vary widely. AI presents an opportunity for euro area firms to boost productivity, potentially impacting the central bank's policy. Schnabel supports simplification in the banking sector, reducing bureaucracy and excessive regulation, but cautions against loosening bank regulation, citing the success of tighter post-crisis regulations.
The introduction of a euro-backed stablecoin is on the horizon, offering use cases like cross-border payments. Schnabel believes the digital euro will dominate domestic payments in Europe, reducing the risk of replacement by stablecoins. She also addresses the ECB Executive Board's revamp, expressing her readiness to lead if asked.
This interview provides a comprehensive insight into the ECB's perspective on the euro area's economic resilience, inflation, and the evolving global trade landscape. It highlights the bank's commitment to monitoring and adapting its policies to ensure a stable and prosperous economic environment.
