José Luis Escrivá: ‘There is less confidence in the dollar and in US assets’

José Luis Escrivá, 64, is an economist and Governor of the Bank of Spain, a position he has held for close to nine months. He previously served as Minister of Digital Transformation after holding the Social Security portfolio in the Socialist government of Pedro Sánchez. He was also the first President of the Independent Authority for Fiscal Responsibility (AIReF) under the conservative prime minister Mariano Rajoy. In this interview, conducted Thursday at the Bank of Spain headquarters in Madrid, Escrivá analyzes global uncertainties, advocates for the continuity of European monetary policy, and explains why the days of the dollar as a safe haven may have peaked.

Question. The decision to lower rates was fairly automatic at the European Central Bank (ECB) Governing Council meeting on Thursday. Will further rate cuts require much more discussion?

Answer. Since I joined the ECB, I’ve perceived a broad consensus on how to approach monetary policy. I see no reason for that approach to change. It’s an approach based on continuous assessment of the data, and one in which we do not pre-commit to any path for future interest rates. In any case, inflation is now around our 2% medium-term objective, and expectations are anchored at that level. That gives us some comfort.

Q. So will it be more difficult to continue on the reduction path?

A. The scenario has become more complicated since Donald Trump became president of the United States. New risks are emerging. On the one hand, demand could weaken in this context of financial market volatility and uncertainty among financial agents. This could be compounded by a drop in energy prices and a stronger euro. All of this could drive inflation down, especially in the short term. This could be reinforced by the impact of tariffs on external demand. Conversely, a disruption in global trade relations and an increase in defense and infrastructure spending could raise inflation in the medium term.

Q. You arrived in Frankfurt with a restrictive approach to monetary policy. Some perceived you as not exactly a dove.

A. I’m neither a hawk nor a dove. I form my opinion based on an exhaustive analysis of all macrofinancial dynamics, whether domestic or external. As a result of that analysis, I may sometimes consider a less restrictive monetary policy more appropriate, but at other times I’ve held the exact opposite view. I’m very comfortable with [current] gradualism, that is, accompanying improvements in inflation with successive 25-basis-point rate cuts. And I verify its effectiveness each time, with the most recent data in hand, in consolidating that 2% inflation rate. When the situation is full of uncertainties, it’s wise to keep all options open. The central scenario we’re operating with — GDP growth around 1%, 2% inflation — could require, if it is confirmed, some fine-tuning.

Q. One new development is the depreciation of the dollar, which has retreated 10% since Trump took office.

A. In times of rising uncertainty and global risk, the dollar has traditionally been a safe haven currency. Since April, it hasn’t been. There’s less confidence in the dollar and in U.S. assets being as safe as they once were. The dollar’s dominance as an international reserve currency appears to have peaked.

Q. Christine Lagarde emphasizes that she is opening up avenues for the euro as a trading currency.

A. That’s right. The euro has the potential to compete with the dollar, especially if it maintains its macroeconomic and institutional stability. With a solid economy and a trade volume greater than that of the United States, Europe has room to strengthen the euro’s role as a reserve and reference currency in an international trade still dominated by the dollar.

Q. That requires a common safe asset. Eurobonds are one, but in limited quantities and they were issued only once, to combat the Covid pandemic.

A. That’s true, although they may not be the only determining factor. We also have assets such as the German Bund and the sovereign bonds of the rest of the eurozone, which trade at relatively narrow spreads. The real imbalance with the United States lies in the scale of its financial market: it’s deeper, more liquid, and broader than ours. In contrast, our capital markets remain fragmented. We must move toward a true capital markets union.

Q. We’ve been talking about this for years. Is a Big Bang necessary?

A. We need a clear timetable, with conditions and dates, for the introduction of all the common elements, as was done for the introduction of the euro. At the ECB, we keep insisting on this point before all the various European authorities with responsibilities in this area. In Thursday’s Governing Council statement, we again called for an ambitious timetable, since there is currently no real program with binding commitments that demonstrate that all this will occur in predictable stages and on predetermined dates.

Q. There are 15 months left to implement the Next Generation program, and only half of the €740 billion [$844 billion] initially planned has been spent. Do you foresee a failure, or a last-minute acceleration?

A. The plan takes a fantastic leap forward from its very conception, as it allocates funds in a novel way, as goals are met. The milestones and objectives require tangible results in both material investments and accompanying policies. But it has caught all administrations, including the European Commission itself, unprepared: they were not used to operating this way.

Q. And now comes spending on security and defense. The 5% of GDP target puts the cart before the horse, with the “how much” coming first without clearly establishing “what” to spend it on...

A. That’s probably true. I doubt that the benchmark being talked about, 5% of GDP in the medium term, is based on a very rigorous analysis. Security is a common European public good and must be approached from a holistic perspective. Sometimes we are right to identify a common cause that unites us to drive the European project forward. We didn’t do that during the 2008/2012 financial crisis, but we did with the Covid pandemic. Now the threat is to European security, due to the new global geopolitical situation and the continued war in Ukraine. We need to commit. And it’s worth remembering the role of military spending as a driver of growth, especially if it’s focused on activities related to R&D and technology.

Q. Would 5% spending mean gutting social spending and the welfare state? U.K. Prime Minister Keir Starmer proposed it and has since backed down.

A. Central bankers must be prudent and cannot be prescribers in these matters related to the distribution of public spending, since we lack the democratic legitimacy to do so; we have no specific mandate in this area. But as an economist, I can point out that Spain, which has very limited fiscal wiggle room, may still have some ability to increase investment in various activities, including defense.

Q. The growth of the Spanish economy is expected to be the most significant among developed countries in 2025. Is it sustainable?

A. Next Tuesday, we will publish a downward revision to GDP for this year. It will be a few tenths of a point lower [from the 2.7% published in March]. This revision is compatible with the fact that Spain has generated some very powerful competitive advantages since the pandemic.

Q. You point out some of them in the annual report for 2024.

A. European consumers have shifted their spending propensity toward leisure, and this benefits countries with a greater tourism offering [like Spain]. Furthermore, other non-tourism services are growing significantly: consulting, auditing, legal, and so on. This increases the demand for skilled workers, especially in technological activities. Another comparative advantage is energy. Before the war in Ukraine, the cost of electricity for companies in Spain was higher than in neighboring countries. Since then, it has fallen further in Spain and by the end of 2024 it was 30% below that of the eurozone, largely thanks to the deployment of renewable energy, as highlighted by a recent study by the Bank of Spain.

Q. In banking, are there precedents for national consolidation driving cross-border, intra-European mergers?

A. I don’t think so. They are, for the moment, two different directions. The European banking market remains segmented. Very significant and important milestones have been reached to ensure the Banking Union, such as the Single Supervisory Mechanism, but important elements are missing to complete the process, in particular the absence of a deposit guarantee fund at the European level. Difficulties in achieving cross-border mergers persist. Given this, attempts to gain scale in national domestic markets are proliferating.

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