Andreas Dombret is a former member of the Deutsche Bundesbank’s executive board where he was responsible for Banking and Financial Supervision. He started his career working for private banks in Europe including Deutsche Bank, JP Morgan and Rothschild, and went on to serve as vice chair of Bank of America Global investment Banking. He continues to watch the European and global economy, and markets, at Oliver Wyman, a global management consulting firm.
When we meet at the Reinventing Bretton Woods Commitee’s conference during the annual meetings of International Monety Fund and World Bank, it’s just two days after the IMF released its World Economic Outlook report. The gist of it is that the global economy is growing faster than expected and not as much as it needs to be.
As for Europe, the IMF forecast 1.2% GDP growth in 2025 and 1.1% growth in 2026. No doubt one of the reasons why European Central Bank officials say the EU economy is in a “good place.” Germany, by far Europe’s biggest economy, and the world’s third biggest, is not in such a good place: the IMF is forecasting that growth will be pretty much flat this year and next.
Enter Andreas. He points out that one reason Europe is still growing at a slow albeit steady a pace is that it has weathered the tariffs put on its exports to the U.S. better than has been expected. Lacking the AI investment boom that is boosting the U.S. economy, European growth is much slower than in the U.S. In fact, he says “Germany has…three years of slight movement in GDP, with not necessarily a recession, maybe a technical recession but no growth.”
When I ask him what Germany needs to do about this he is quick to respond with his three-step plan: reform the welfare system, raise the retirement age, and reduce investment barriers. In fact, he says that this is what France must do too.
So dive in and hear Andreas explain in detail what each of his three step entails. And how Germany’s progress stacks up against France in taking the needed steps. Spoiler alert: he says Germany is behind France on boosting investment, while Germany has a better welfare system.
“In fact my strong feeling is that, if you look to France, which has been widely discussed at …these meetings, that France has a chance, of course, to get back and that we should all support France so that it becomes a happy camper in the European Union.”
Globally a lot of sluggishness 00:01:08:12
If you would have asked me in January, I would have told you the U.S. economy is going to do very well, and, Europe is going to be, overlooked. It looks a little bit like it is a little bit different now. Look where the euro is. The euro is strong, and, investors are moving towards the euro. No doubt in my mind. But Europe still has a lot of things to do because the, the tariffs are not that much inflation. They are not the US not felt that much in growth. And Europe is not growing as much as it potentially could. And Germany is, by the way, lagging most.
Pleased by how the ECB has handled things- 00:02:45:02
So I am quite complimentary about where the ECB is. And I repeat the ECB is in a good state. All right. So and you mentioned tariffs. I this event today reinventing Bretton Woods annual event here in Washington. There was more than one person who mentioned there’s a theme that’s out there. You know, six months ago we really thought it was going to be a drag.
Little tariff impact so far but it is still expected 00:03:30:17
But tariffs will be felt. It’s very clear that they have to have an effect on inflation. Everybody is talking, at these annual meetings about AI and not that much about tariffs, because there’s not that much new in the meantime, the, unpredictability, the uncertainty about the tariffs has also gone away a little bit because now maybe 80% of the tariffs are in place.
Tariff talk is out of favor AI is ‘in’ 00:03:54:19
There are lots of deals, but all of them are good. But, you know, it’s not as, when we talked about this in April of this year, it’s more certainty there, more predictability. And that it’s that’s why people are talking about AI and, and not that much about, about, tariffs. But of course, that’s another thing, you know, on whatever panel it is that AI comes up over and over and over.
Is AI real or in a bubble? 00:04:50:03
As you rightly say, there’s a lot of money going into AI, no doubt about it. And I will be very successful. It’s a, transforming new technology and it’s very, very, very important. Having said that, not every investment is going to be perfect. And there, you know, and the question about the bubble is justified because if you look at it, the market cap of the so-called Magnificent Seven is round about one third of the entire market cap of the S&P 500. So you can argue that, there is a certain bubble and not every single investment will be as profitable as the others. But nevertheless, AI is very important.
AI trumps tariffs! 00:06:33:23
What do you tell them to do now? First of all, when you talk about Europe and growth in Europe, you also have to talk about growth in the US. And again, the, tariffs, they’re not taking that much of a toll. Nevertheless, if you look at the 3% growth in this country, you have to say that quite a big portion of that is actually derived from investments in AI.
Data centers are a one-off spur to growth 00:06:59:09
And I mean, the data centers. And they won’t be investing in data centers for the next ten years. That’s going to be it’s right now, it’s a major investment to set all these data centers up in order for AI to be operational. But this is, of course, most of that is a one time effect. And that growth is, a little bit artificial.
Germany is making some progress…00:07:18:07
Pull out Europe. We don’t have those investments into AI, so we also don’t have the benefit of this, extra investment at the time. Okay. Nevertheless, our growth is, is not as strong, and we are not this year, not at our potential. And again, Germany is lagging most. What does Germany need? Okay, so Germany has, you know, three years of slight movement <in GDP> with, not necessarily a recession, maybe a technical recession, but no growth this year. Germany, which is a very large economy, third largest economy in the world, is growing 0.2 percent, which is far below its, potential. Having said that, though, it’s going to grow more next year, and it’s projecting 0.9 percent, the German government is projecting 1.3%, with that we’re getting much closer to the potential. What does Germany need to do?
What Germany needs to do: Three things 00:08:10:07
Germany needs to do, I believe, three things. And most countries need to do the same. France, of course, also needs to be the same. First. You have to really, <First> reform the welfare system. Okay. Yeah. And you have to do it in a way that you make it much more pointed and that the money reaches the right people. Second, you have to link the retirement age to the, life expectancy. You know, I’m trying to be very diplomatic, but, yeah, if we get it, if you’re getting much older, you probably have to work somewhat longer in order, to do that. And third, <investment>, that’s where France is doing quite well. The others are not. So, convincing. And Germany needs to do all three things. You have to try to reduce investment barriers as much as you can. And these are the three things. Now, you know, President Macron has done a lot, you know, in order to get investment into France.
Common problems/issues for France and Germany 00:09:12:10
But the, you know, the retirement age issue is a big one in France. And, the issue of, you know, the reform of the welfare system, mostly the pension system is also a big one. It’s the same in Germany. We have less investments in Germany, but we have a better, welfare system, a little bit better under control. And also we are we are doing quite well in, retirement age. So these are the two things which have to be done all over Europe. We have to be, we have to do these structural changes in order to get more efficient and get pension. Yeah. I can only tell you that, somebody like me who has a French last name, would never look with any schadenfreude to, France having any problems.
What France needs 00:10:21:20
The big issue here is not only the, welfare system, but also the indebtedness. And, France needs to get back on a trajectory in order to address that. And for that it needs reform. And for that, it needs political will. And that is missing right now. And, the president, is trying his best, I understand, to make sure that this political will is coming back to get France back on a positive trajectory.
Dollar slipping; euro not particularly gaining 00:11:19:01
…From a monetary policy point of view, of course, the ECB does not have a foreign exchange, target in its mind or, you know, it’s pursuing a foreign exchange target They’re pursuing a place to target. So that so I have to answer this from a non monetary policy point of view. Okay. First of all, it’s not bad to have a strong euro. On the other hand, the reserve currency proportions are not moving. The US is still the dominant country with like 60%, of the reserve currencies and Europe has 20. And although the dollar has gone down, the euro hasn’t really gone up that much. So I must say, you know, there are more things which have to do with the strength or the dominance of a currency. The dollar is the dominant currency in the in the global arena, for all the reasons we know now in terms of, the attractiveness in the future. And your question now we are seeing interest rates, in the United States, arguably, more going down than staying where they are at the neutral rates, if you think about it, in the US, dollar is below the present rate. So there are you could envisage some more, steps, you know, decreasing interest rates in this country.
US-Euro-Area interest rate cycle dynamics 00:12:45:18
That is not true in Europe anymore. We have gone down eight steps and obviously the cost twice, whereas the US has paused for a long time. It’s going down. So the US, you know, the interest rates in this country are coming more towards, where Europe is. And if Europe gets back to its strength and is growing, more rapidly next year, also helped by the German economy, you know, getting some traction, then, you know, interest rates in Europe in the future could rather rise than fall.
Inflation politics midterm elections…groceries 00:14:20:21
You know, looking at today when you interview me, we are in a shutdown and it’s very clear to me that we don’t have the data as, pronounced as we would normally have that. So the data, they’re a little bit foggy right now in the United States also because of the shutdown. Second, you mentioned exactly the right thing, the question of employment and if the immigration number, which right was easily was 3 million, is going down to a number like zero. Yeah, that will have an effect, as we would expect. So, inflation, in Europe, as we, said at the beginning of this interview, is a pretty, pretty comfortable place right now. And that’s not necessarily in this country. This country needs to be careful as to, you know, watching inflation going forward… So the fiscal policy makers, the government officials, they are very much looking also to the midterm elections in this country and very much looking towards, inflation. Groceries play a big role. Yes. For the happiness or not. So happiness of the electorate in this country too.
Fed Vs ECB face very different issues and environments 00:16:00:21
The ECB is can afford to have a steady hand right now and let’s this year at least, and let’s see what we’re going to do next year, depending on how growth actually will develop and how inflation will develop. Whereas in this country it is very different. This country is, as I said, has a foggy picture, has big changes in its immigration numbers, is, having a higher inflation and a half is having a neutral rate, which is below the market rate. So there are more things which need to be done than necessary in Europe. I just also a couple more things I want to get on the table
Geopolitics: the rubber meets the road over Russia-Ukraine 00:16:24:02
In terms of, defense spending, in terms of how big of a role that’s playing, again, for the central bank, for, you know, the European Union itself. The recent incursions of, Russia into NATO airspace. Now they say it was accidents, drones, etc.. I think some people are very close to that country within, the, the European Union are kind of nervous about that. Again. How do you put that. Where do you put that on the on the scale of what what has to be watched where things are going. Is that just something that’s going to continue to sort of bubble in the background and people live with it? Or is there a point where, where it’s it becomes an issue? I don’t know, but it’s disturbing. You know, many people are saying that, President Putin is actually, trying to find out… yes… How far can he go? And, so I don’t think this is accidental, you know, their military, data is quite pronounced, and they know where they’re flying and where they’re not flying. So I’ve had some thought, and they have been flying, into Poland.
Incursions over Poland are no accident and require a response 00:17:34:12
And Poland is actually a direct neighbor of Germany. So we are getting, we’re getting we’re getting quite close. And, we need to do something, quickly and also wisely, in terms of defense. So, the defense spending is not at all, critically debated in, in Europe. I think it’s widely accepted. There are always going to be enemies to that, but mostly it’s widely accepted.
Europe need to stand up for itself 00:17:59:11
And actually, Europe has been living off the United States for quite some time and needs to do something here. So, these, this military spending needs… need to go forward and will, you know… need to be financed not only publicly but also with private sources.
Final thoughts 00:18:19:04
The main topics this year are AI, indebtedness of countries, and, my, my strong feeling is that, if you look to France, which has been widely discussed at this, at these meetings, that France has a chance, of course, to get back and that we should all support France so that, it becomes a, a happy camper in the European Union.
Andreas Raymond Dombret
Andreas Raymond Dombret is German-American banker who served as member of the executive board of the Deutsche Bundesbank from 2010 until 2018. In that capacity, he held responsibility for Banking and Financial Supervision, Financial Stability, Markets, Risk Controlling, Statistics, Economic Education and the Bundesbank’s representatives abroad. From 2014 until 2018 Andreas served as a founding member of the Supervisory Board of the European Central Bank, and from 2012 until 2018 on the Board of the Bank for International Settlements. During his term, Andreas acted as the Bundesbank deputy at the IMF, the OECD, the G7 and the G20 and represented the German central bank on the Basel Committee.
Earlier in his career, Andreas was Vice Chairman of Bank of America Global Investment Banking in Europe, the Middle East and Africa. Prior to this, he served as co-head of Rothschild Germany after having spent 10 years as Managing Director with JP Morgan in London and Frankfurt. Andreas started his career at Deutsche Bank headquarters.
After retiring from public office, Andreas Dombret continued to serve on the board of Basel-based Bank for International Settlements until the end of 2018 and subsequently assumed a portfolio of advisory mandates at various firms including Oliver Wyman, Santander, Sumitomo Mitsui Bank and Houlihan Lokey, the US investment bank. Andreas teaches at Columbia University in New York City as well as at the European Business School in Wiesbaden while serving on the Board of the European School for Management and Technology in Berlin. He holds dual German and American citizenships.
He is also a member of the CFA Institute’s Systemic Risk Council.
