European Central Bank officials were downbeat on Tuesday about the outlook for euro zone growth, with one flagging the risk of recession, but said weaker activity did not dissipate their concern about inflation.While the policymakers welcomed U.S. plans for a $700 billion bank rescue plan, they saw no quick end to the financial turmoil which worsened after U.S. investment bank Lehman Brothers filed for bankruptcy protection last week.
Slovenian newspaper Delo reported the country’s central bank chief had told a panel discussion late on Monday that Europe was facing a recession.
“It is difficult to say what sort of recession but obviously there is a slowing down of activity. People are purchasing in discount shops,” Kranjec was quoted as saying. The central bank could not immediately confirm whether he had made the comments.
Governing Council members Nout Wellink and Lucas Papademos have also pointed this month to the risk of a recession in the euro zone, at least on the technical definition of two consecutive quarters of contraction.
The euro zone economy shrank by 0.2 percent between March and June.
Kranjec said he did not believe a $700 billion U.S. government package designed to stop the banking system rot was a panacea for economic ills.
The U.S. plan “will somewhat calm down nervousness on financial markets but slower growth, recession and problems in companies that have even a normal amount of debt are inevitable. It is difficult to say when this will end,” he said.
Kranjec’s Finnish counterpart, Erkki Liikanen, described financial market turmoil as the biggest threat to the Finnish economy in a central bank report and Greek central bank chief George Provopoulos was also gloomy.
“We are concerned about macroeconomic developments and are monitoring them carefully, as whenever there are revisions to growth forecasts, these are downward,” Provopoulos said.
“The economic environment remains particularly difficult. We are taking all the necessary actions to help normalise the situation.”
INFLATION CONCERN
One step the ECB does not seem in a hurry to take is to cut interest rates.
The bank raised its benchmark rate to a seven-year high of 4.25 percent in July to tackle record 4.0 percent inflation, which only eased slightly to 3.8 percent in August.
ECB members fear high inflation could spark a domino effect of wage and price rises that could damage the economy.
Germany’s Axel Weber said weaker growth did not remove inflation risks and he remained worried about rising prices.
“We are still concerned that rates of inflation in the euro zone are significantly higher than in the past,” Weber told reporters after a meeting of Chancellor Angela Merkel’s conservatives in the Bundestag lower house of parliament.
“The economy is weakening, which we’ve taken note of. That hasn’t solved the inflation problem. We’ll look closely at (inflation and growth), but I don’t see a conflict here.”
Liikanen said it was “absolutely essential” to keep inflation expectations firmly anchored and prevent increases in energy and food prices from having second-round effects on overall inflation and pay.
His comments came as Germany’s biggest trade union IG Metall demanded an 8 percent wage rise for 3.6 million engineers and metalworkers, the highest rise since 1992.
ECB Executive Board Member Jose Manuel Gonzalez-Paramo shared Liikanen’s view.
“We are dissatisfied with European inflation of 3.8 percent when our objective is 2 percent. The situation is one of alert,” he told Spanish television. “Our job is to keep prices stable.”
Gonzalez-Paramo also forecast big changes in global finance after years of inadequate risk management which culminated in the U.S. subprime mortgage crisis.
“The financial system we’ll see in a few years will be significantly different to that of today, it will be characterised by a greater degree of transparency,” he said.
“We’ll certainly see a reduction of so-called shadowy banking.”