Nagel addresses European monetary policy challenges in new geopolitical era

The geopolitical risk index, a news-based measure, reached 164 in January 2026, nearly matching its 2001 peak.

This reflects a period of high geopolitical risk, which can significantly elevate inflation volatility, as observed after Russia's invasion of Ukraine with spikes in energy prices and supply chain disruptions.

In response, the Eurosystem updated its monetary policy strategy to account for geopolitical and economic fragmentation.

The revised strategy emphasizes agile responses, proposing forceful or persistent measures for strong deviations from the inflation target, highlighting its symmetry.

Furthermore, the Eurosystem aims to reduce its balance sheet size to increase monetary policy leeway and will make greater use of scenario analysis in forecasting to systematically account for risks and uncertainty.

Central bank independence is fundamental for price stability, a principle backed by decades of economic theory and empirical evidence.

However, increasing geopolitical competition could lead to political pressure on central banks to prioritize fiscal objectives over inflation containment, as currently observed with the Federal Reserve.

Nagel emphasized the critical importance of upholding central bank independence, which for the Eurosystem is enshrined in primary EU law.

Despite this, vigilance remains essential to safeguard this crucial pillar of monetary policy, as political pressure in one country could make pursuing price stability more difficult for the Eurosystem.