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In the Media | April 2014

ECB's Peter Praet Says Euro-Zone Economies "Will See Economic Slack until 2017"

By Brian Blackstone and Christopher Lawton
The Wall Street Journal, April 10, 2014. All Rights Reserved.

WASHINGTON—The euro zone economy will see economic slack persist until 2017 at least, European Central Bank executive board member  Peter Praet  said Thursday, suggesting that the ECB will maintain its easy-money policies well into the future.

Still, Mr. Praet signaled that the ECB is in no rush to provide additional stimulus through rate cuts or other measures, saying that the bank's inflation outlook remains in place despite a string of weak reports.

"The degree of slack in the economy is very high," Mr. Praet said in a speech at a conference in Washington, D.C., sponsored by the Levy Economics Institute. "Whatever the measure you take of output gap, this output gap is unlikely to be closed in the euro zone before 2017."

The output gap refers to the difference between the present level of gross domestic product with where it should typically be based on the economy's growth potential. When economies experience recession, as the euro zone did from late 2011 until early last year, this gap rises, limiting inflationary pressures and giving central banks added leeway to ease monetary policy.

Mr. Praet, who heads the ECB's economics department, also noted that bank lending to the private sector remains weak in the euro zone, although there seems to be some substitution toward greater debt issuance in the capital markets.

Mr. Praet is in Washington, D.C. for the spring meetings of the International Monetary Fund, which brings together top central bankers and finance ministers from around the world. The IMF has in recent weeks pressed the ECB to consider more dramatic stimulus measures to keep inflation from staying too low. But outside of a small rate reduction last November, the ECB has largely resisted such steps, saying inflation should gradually accelerate toward its target of just under 2%.

Annual euro-zone inflation was 0.5% in March, more than a four-year low.

"We have a sequence of monthly inflation that have been weaker than what we have expected. But we are still in our base scenario," Mr. Praet. The ECB expects a gradual acceleration in annual consumer-price growth toward 1.7% by the end of 2016.

"There is a lot of noise also in the monthly figures," he said.

At its monthly meeting last week, the ECB held interest rates steady, but it beefed up its commitment to ease policy if needed. The ECB's rate board "is unanimous in its commitment to using also unconventional instruments within its mandate to cope effectively with risks of a too prolonged period of low inflation," the bank said in its policy statement last week.

Mr. Praet called this signal "quite important." Still, he added that expectations of future inflation remain well anchored.
The design of any future ECB stimulus program will depend on the problem the bank is trying to tackle, he said.

In his speech, Mr. Praet said divergent economic growth and productivity continues to plague the euro zone, and urged the monetary bloc's various members to embark on reforms to narrow the gap between richer and poorer countries.

"The first decade of Economic and Monetary Union failed to produce real convergence," Mr. Praet said.

"What the euro area needs, in my view, is to 'rerun' the convergence process."

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