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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."
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
--MNI London Bureau; +44 203 865 3829; email: email@example.com