Klaas Knot: Agnostic or preaching the gospel - what the state of the world implies for ECB monetary policy and the role of the euro

Thank you for the invitation to speak here in front of such a distinguished audience and at a time of great consequence for the US and European economies. We surely live in interesting times. After the Covid pandemic and the Russian invasion of Ukraine, history is taking a new turn. It is clear that the new US administration has pressed the reset button in its relations with many parts of the world, including Europe. Where these relations will go is still unclear, although I remain hopeful that 'reset' will not become 'eject'. It will probably take some time before we will see the full economic effects of the seismic changes that have taken place over the past few months. Or, as the American rock band The Eagles sang in the 1970s: 'we'll find out in the long run.' 

But as a central banker, just as other policy makers, you cannot always wait for the long run. So what I would like to do today is to discuss with you some of the implications of the latest developments for the European economy and inflation, for monetary policy and for the role of the euro, based on what we now know.

In the euro area, after a couple of years of high price increases, we have finally left the inflation surge behind us. Looking at our projections, the ECB's inflation target of 2% is within reach. So one would expect monetary policy to return to stable waters. But then somebody threw a stone in the water.

Basically, we are talking about two stones here. First, the imposition of significant import tariffs and the pretty extreme uncertainty surrounding it, and second the prospect of higher defence spending in the euro area. Given that the situation has not yet stabilised, it is difficult to estimate precisely what the impact of both developments will be on growth and inflation.

With that disclaimer in mind, let me give it a shot.