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MNI (London)
--Clearer Reading Maybe In October; Trade Wars Key Factor
--Uncertainty Raises Risks For MonPol Transmission
--Germany, France Deceleration Poses Growth Issue For Entire EU
     LONDON (MNI) - The European Central Bank still faces the conundrum of
whether the current eurozone-wide economic slowdown is temporary and, if it is,
how this could affect monetary policy goals, a Eurosystem source told MNI. 
     "Even if the downturn is only temporary, it sill raises risks for the whole
bloc and by extension to monetary policy transmission," the source said. 
     The nature of, as well as the duration of, the downturn is a matter of
concern, whether attributing it to a rise in global trade tensions or if there
are other "endogenous" factors at play, yet to be fully framed. 
     The official was keen to stress that even if the ECB had not been
"premature" in announcing the likely end of its asset purchase program (APP) in
December, economic growth, though progressing, remained subdued across the union
and this was not an encouraging sign. 
     "We made it very clear at the June meeting that progress towards our
inflation target remains substantial but at the same time the core (inflation)
component remains low and uncertainty has not been fully dispelled. Wide margins
of uncertainty do persist so its best be cautious and keep our feet on the
ground," warned the source.
     Recent data is far from reassuring. Eurosystem central bank projections
published in June indicate that for 2018 as a whole GDP should grow by 2.1%, a
slight downward revision on the March estimate. European Commission forecasts
published last week offered a similar outlook to the updated Eurosystem
     But what is a major concern to policymakers and Eurosystem officials is
slack in the two main economic engines of the union -- France and Germany -
rather than in the usually sluggish and indebted southern periphery. 
     "Latest indicators suggest that GDP will continue to expand at a subdued
pace in the second quarter of this year as well, but what is really of concern
is the ongoing deceleration occurring in France and Germany, which in the first
quarter was more marked than in other members states," noted the source. 
     So the fact that the slowdown is affecting the whole eurozone and not just
the margins is even more alarming, leading policy makers at the ECB to start
questioning the existence of a growth "problem", even if momentary and primarily
tied to a slowdown in global trade. 
     The ECB certainly has concerns over the impact of a trade dispute, with
sources at the recent European Council meeting in Brussels noting President
Mario Draghi expressed concerns for the Eurozone economy, particularly if the
dispute expanded into the auto sector.
     MNI has been told by summit insiders that Draghi stressed there is no
scientific way of measuring the impact from any disruption in the global
production and supply chains that underpin the sector, as it was impossible to
tell whether global supply chains could be recreated on a more local footing.
     --MORE TIME
     It is clear that more time will be needed to fully read and frame the
extent of the slowdown, with a clearer picture available not before September or
October and perhaps even later. 
     "It is quite hard to interpret growth dynamics during the summer ... to
whether this slowdown is temporary or not," said the official, adding that
sometimes it takes years to get a clear reading into certain lesser-performing
economic phases. 
     Asked whether the Governing Council had perhaps been too confident
announcing in June the APP tapering and December end given the uncertain
outlook, the official replied that it had been a wise and well-studied move.
     "It is crucial to prepare the ground by communicating the APP termination
well ahead of time so to avoid triggering market turmoil. This too is part of
our gradual approach". 
--MNI London Bureau; tel: +44 203-586-2225; email:
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