Read the interview in Basler Zeitung
What is your view on the state of the global economy?
The global economy has been surprisingly resilient this year, partly because of optimism that artificial intelligence could increase productivity and boost economic growth. However, fragilities and profound challenges remain. One is whether the AI investment boom can continue. Another is the historically high level of public debt. And non-banks are taking an increasing role in the financial system, in some cases using very high leverage. On top of these, shifts in international trade, geopolitical conflicts, energy price shocks and technological innovation are creating risks that often build up in opaque ways.
The war in Iran has now been going on for ten months. How concerned are you?
At the outset, a key concern was that the energy price shock would spread and lead to higher inflation expectations. The latest price surge is still fresh in our minds: companies could raise the prices of their products again, and employees could demand higher wages. Fortunately, we have not seen these types of second-round effects so far. But initial hopes that the war would soon end, bringing down energy prices, have not materialised, so we must remain alert to the inflation risks.
Following the pandemic, inflation shot up to between 8 and 10 per cent in many industrialised countries. Could that not happen again?
The situation back then was unique. It was followed by several economic shocks – including supply chain bottlenecks and the war in Ukraine – at a time of very accommodative monetary policy and tight labour markets. Interest rates are now higher and inflationary pressures have mainly originated from energy prices. We also need to be alert to the possible short-term inflationary impact of AI. But we are not in the same situation as post-Covid.
How should governments and companies deal with high energy prices?
Over the medium term, through technological progress, such as the expansion of renewable energy, and by diversifying their sources of supply.
And in the short term?
In the short term, there is limited room to manoeuvre. Energy prices are a clear negative shock, especially for countries that depend on imports. Decision-makers should focus on providing temporary, targeted and tailored support to those sections of society most at risk from high prices.
Should central banks raise interest rates as a precautionary measure to guard against a rise in inflation?
Central banks are data-dependent and weigh up the evidence carefully. If they raise interest rates, it is because they see risks to price stability in the data.
Concerns about rising public debt are growing in the financial markets. Why is this?
A number of factors affecting debt sustainability are giving cause for concern. For instance, some countries continue to run high budget deficits even though public debt has already reached historic highs. Higher interest rates also increase the cost of servicing the debt. Another factor is the rate at which an economy is growing. Artificial intelligence may also play a role here.
In what way?
Some countries could grow more rapidly thanks to AI, which would make it easier to manage their debt burden. However, the overall economic impact remains highly uncertain, and governments may also need to spend more money to support workers who have lost their jobs. Growth-promoting structural reforms and credible fiscal plans therefore remain of crucial importance.
Experience shows that politicians only take tough decisions in a crisis.
This is indeed often the case, but it is not inevitable. The policy solutions are clear. We must find the political will and consensus to take action.
And if nothing is done, is another financial crisis inevitable?
High levels of debt, geopolitical conflicts, changes in global trade, rising leverage among some non-bank financial intermediaries, and AI exuberance have made today’s global economy vulnerable. At the same time, much has changed since the early 2010s. One key improvement is the greater resilience of the banking sector, largely as a result of the reforms promoted by the Basel Committee. This has already provided crucial support to the global economy on several occasions, for example during the pandemic.
Why is it so important for banks to hold sufficient capital?
Stable and secure banks protect customers’ deposits and can continue to lend to households and businesses even during a recession, which in turn supports the wider economy. The challenge now is to extend this same level of resilience to non-banks and, consequently, to the financial system as a whole.
Is the AI bubble about to burst?
Technological booms are often accompanied by over-investment – history has shown this time and again. If artificial intelligence fails to deliver on its economic promise, a correction could well occur.
And will a recession follow?
If there is a global market correction, it would reduce people’s wealth This can lead them to cut back on spending – which in turn weakens economic growth. Investment in AI would also decline, and there could be far-reaching consequences in parts of the financial system. However, it is difficult to say just how significant these effects would be.
During the financial crisis, it was the banks that dragged the entire economy into an abyss. Could the AI sector trigger a similar dynamic?
The macroeconomic consequences would be quite different today. In 2008, there was a property boom in some countries. Households and companies were more heavily in debt and the banking sector was weaker. All of this led to economic complications and knock-on effects.
However, just as the financial sector was back then, AI firms today are also highly interconnected. They take on debt and finance themselves through opaque instruments.
There is still limited insight into how the AI boom is being financed. Analyses by the BIS show that a growing proportion of investment relies on long-term debt and complex off-balance-sheet structures. We are also seeing circular investments, where AI companies invest in one another and supply each other. The use of debt capital is also rising. These aspects require close monitoring.
The Spanish government has put forward your name as a candidate to succeed Christine Lagarde. If appointed, are there any changes you would like to make?
I am flattered to be considered. However, I have nothing further to say. I am focusing on doing a good job at the BIS.
The BIS has been based in Basel for almost a hundred years. Will it remain here for another hundred?
Basel has always been good for the BIS – and I believe the BIS has also been good for Basel. The institution now has around 1,200 staff, most of whom are based here in Basel. They and their families enjoy the safety, the excellent education system and the cultural opportunities the city has to offer. We are here to stay.
What’s the most critical aspect of your job as General Manager of the BIS?
Our mandate is promoting global monetary and financial stability through international cooperation. We work with and through our member central banks to achieve these global public goods. Central banks continue to face many shared challenges. We convene meetings of Governors here in Basel every two months and it is important for us, and for international institutions more broadly, to continue bringing people together. This is more difficult at some times than at others, but that is precisely when our convening role proves its value. Serving the public interest, supporting central banks in delivering on their mandates through our services and providing rigorous analysis and a forum for discussion are central to our mission.
You yourself have been living here for nearly 1.5 years . How do you like it?
Very much so. The people are very hospitable and, thanks to its proximity to France and Germany, Basel has an international feel. I live in Binningen and enjoy being close to nature, with a dairy farm nearby. I come from northern Spain, where we also have plenty of mountains and a similar climate, and I feel very much at home in Switzerland.
How does Basel benefit from the BIS?
Every year, the BIS welcomes nearly 10,000 visitors from all over the world. Last year, we hosted 180 high-profile events, which generated revenue for local hotels, restaurants and businesses.
Centralbahnplatz is an area where many locals do not feel comfortable, because of the homeless people and drunkards outside the station. What is your view on this?
Central bank governors from all over the world come here for our meetings, and I can tell you that they really appreciate visiting Basel, as well as the discreet way in which they can move about the city and take part in city life. I myself walk across the station square almost every day. Compared with other cities, Basel feels very safe.
Is there any news regarding the planned new building at the southern tip of the site?
We are considering a second building to bring our staff together on a single campus and to provide modern meeting and workspaces for the international central banking community. No final decision has yet been made on whether to go ahead with the construction. The design phase will run until early 2028 and will show us what is feasible, how much a second tower would cost the BIS and what benefits it would bring. The consultation for planning permission will begin in November.
