MNI INTERVIEW: ECB Should Not End APP, 1 More Year - Fitoussi

--Eurozone Recovery Remains Fragile, Premature To End APP: Fitoussi

By Silvia Marchetti

     ROME (MNI) - The European Central Bank should not terminate its asset

purchases program but extend it beyond December for another year in order to

truly consolidate growth and reach optimal inflation targets, leading French

economist Jean-Paul Fitoussi told MNI in an exclusive interview.

     Fitoussi, a former economic adviser to the French government, warned that

the current economic outlook was still too weak for the ECB to to start

unwinding the  accommodative policy that had supported the Eurozone's pick-up.

     In his view, it would be both premature and highly counterproductive to

terminate the asset purchase programme not only in September, but in December

also.

     "Considering the actual outlook, it would be appropriate if the asset

purchases continue for at least one more year" well into mid-2019, he said. 

     "We remain in a very uncertain phase. Growth is soft and subdued, but above

all, the recovery across the bloc is recent, as opposed to growth revival in the

U.S. that started in 2011 and has benefitted for many years of expansive

monetary policy," said Fitoussi, currently senior fellow at Sciences Po

University and Rome's LUISS University. 

     "We must therefore be very careful in bringing any change to this still

fragile system," he added. 

     --ONGOING CONCERNS

     Fitoussi argued that "many negative events could happen in coming months"

delaying hitting monetary policy targets and setting back the recover. A main

concern would be a rise in global trade tensions and the risk of a new era of

trans-Atlantic commercial friction. 

     "Trade duties could spark a series of trade wars, and not just between the

US and the EU. There are risks linked to the folly of certain world leaders,

while military tensions could rise and stall growth, generating a new depression

and undoing economic progress achieved so far," said Fitoussi. 

     In order to strengthen the Eurozone's resilience to such potential shocks,

the ECB should pursue its accommodative monetary policy stance until growth

fully consolidates and inflation hits optimal levels. 

     "We must bear in mind that the Union is still below the required inflation

target of 2%, we are still stuck at roughly only 1.3%," he warned, calling for

caution. 

     --BANK SECTOR RISKS

     Critical factors-- mainly bank-related risks -- persist that require the

APP as a parachute through this delicate phase. 

     "Considering the picture, I see no need at all to interrupt the asset

purchases program that has significantly supported, and is still helping the

Eurozone in tackling the large volume of non-performing loans sitting on banks'

balance sheets that are stifling a full credit flow revival to the real

economy," said Fitoussi. 

     "The persistence of bad loans in the banking system requires a prolonged

APP that must continue well beyond so far expected termination dates," he added.

     The APP has been acting as a sort of 'antibiotic' for the Eurozone in

giving it a better shape to solve current risk-related issues and face future

challenges. 

     Regarding the timing of the ECB's APP exit, in his view it should be guided

by "relativity" rather than pre-set strategies (like forward guidance) before

having reached specific goals.

     "I believe the unwinding back to normalization should primarily rely on the

economic and inflation trend outlook observed step by step and in real time, and

on the level of resilience developed in the meantime by the Eurozone," he

argued.

     "But considering the current scenario, it would be best to extend the APP

for at least another year to give Europe more oxygen," he said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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