MNI INTERVIEW2: Europe Must Act To Boost Growth-ECB's Kazaks

The eurozone will struggle to grow enough to maintain its position as a global powerhouse barring decisive action to establish single markets for banking, services and capital, Bank of Latvia head and ECB Governing Council member Martins Kazaks told MNI.

“If we do not fix the capital markets union, if we do not fix the single market in services, it we do not fix banking union and we remain fragmented, we will under-invest and we will lack scale which will undermine future growth,” Kazaks said in an interview on the sidelines of the ECB's policy forum in Sintra.

“I'm not only worried about short-term growth, for this year and next year, but more worried about the medium to longer-term growth prospects,”

The political will to drive the longer-term growth agenda may be lacking, he said, with decisions taken to address short-term interests of electorates.

“We need decisive decisions for growth to happen. We need growth to grow out of debt which is better than hitting the ceiling and restructuring the debt,” he said.

“We need strong-minded politicians to take decisions that are growth friendly. The problem of course is that if you have a short-term focus, you will not do that – which is a risk for growth.”

DEFENCE

Boosting defence spending is also essential, he said.

"In this geopolitical situation, defence should be seen as an investment that underpins confidence. If there is no confidence, it weighs down on economic growth,” Kazaks said. “In short there are so many investment needs. The green transition, defence, infrastructure in general, artificial intelligence, digitalisation.”

Still, while near-term growth risks are to the downside, Kazaks does not see the eurozone slipping into recession or for the ECB to cut rates more steeply or more aggressively that currently seen.

“Do I see growth being that weak that we may be forced to cut rates much swifter and in much larger instalments than the baseline shows? I would say no. Baseline of course is only one scenario, but currently, the risk of recession is very low,” he said.

“If growth is weaker, and the labour market is somewhat weaker, it may mean less transmission from wage growth into prices, helping inflation back to target more quickly,” Kazaks said. But, he added: “The growth we expect this year, around 1%, is very weak and given the hardships people have had through inflation, this is not sufficient.”