MNI INTERVIEW:Eurozone Slowdown Likely Temporary:Cenbank Chief

By Luke Heighton

     FRANKFURT (MNI) - The eurozone slowdown may prove temporary, the governor

of the Bulgarian National Bank told MNI, but whether Europe emerges from the

current soft patch by the second half of 2019 is uncertain.

     "The euro area's economy beat many economists' expectations in the first

quarter. But the pace and direction of the economy over the coming months and

quarters are yet to be seen," said Dimitar Radev, a member of the European

Central Bank's General Council since his 2015 appointment, noting the

persistence of global trade tensions and "political developments" in Europe.

     "Recent data may be interpreted as signs that the region's slowdown may be

temporary," he said in an emailed response this week to questions.

     Asked whether slow eurozone growth pointed to 'Japanification', he replied:

"comparisons with previous historical episodes and other economies do come to

mind when we observe prolonged periods of slow growth, very low interest rates

and aging population in Europe."

     "Policy responses may be effective only as long as they target structural

areas, such as education, labour market and pension reforms. The focus needs to

remain clear: to stimulate productivity and competitiveness," he said, calling

for more growth-oriented fiscal policies.

     "This does not necessarily mean higher spending. Moreover, higher spending

would be counterproductive in countries with no fiscal space."

     --POLICY REVIEW

     Radev, was circumspect regarding recent calls for a review of the ECB's

monetary policy strategy. He also expressed caution in response to suggestions

the institution should lower its mandated medium-term inflation rate target from

close to but below 2% to around 1%.

     "There may be reasons to start thinking if an overhaul needs to be

considered," he said. But he added: "Whatever, if anything, the ECB decides in

this regard should be shaped into a carefully communicated process. I cannot but

fully agree with a recent comment by Peter Praet who warned that such public

announcements may be misread and, furthermore, interpreted as the ECB admitting

to having failed on its mandate, which is not the case."

     The ECB has "plenty of instruments" at its disposal in the event of a

severe economic downturn, he said, adding: "The door is not closed to asset

purchases, and there is no rule-set limitation on moving rates such as those on

the standing facilities or the regular open market operations.

     "We know there may be varying degrees of support within the Governing

Council for certain especially non-standard measures, if those are to be

considered. Hence it is also true that the effectiveness of any firepower of the

ECB ultimately depends on its determination and leadership rather than variety

or size of the tools."

     Offsetting the negative effects of sub-zero interest rates has been a key

topic for discussion since March, when remarks made by ECB President Mario

Draghi in Frankfurt led to speculation he was considering the introduction of a

tiered central bank deposit rate.

     --NEGATIVE RATE CONCERN

     "There are good reasons to be concerned about the very low or negative

rates, particularly if they persist. Banks may be less motivated to improve

efficiency, given their low funding costs. At the same time, the asset side of

their balance sheets may erode and is exposed to a future turn of the cycle, and

this risk needs to be adequately priced."

     Bulgaria, which joined the European Union in 2007, already meets key

criteria for adopting the euro, and its national currency is expected to enter

the EU's Exchange Rate Mechanism II later this year.

     Nevertheless, the country is unlikely to enter the currency union until at

least mid-2022, Valdis Dombrovskis, EU Commission Vice-President for the euro

said in January, with Radev agreeing that obstacles to accession remain.

     "We need to speed up the process of real convergence," he said. "The

challenges we face are structural, rather than fiscal or monetary ones. More

needs to be done also on the institutional front. While the institution of

public financial management is exemplary, as evidenced by results, some other

institutions need major improvement."

     In Bulgaria popular and political support for further deepening European

integration "remains above the EU average, despite, and probably, to some

extent, because of recent developments," Radev said.

     "It is becoming a rational rather than an emotional choice, and this is

good news."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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