LONDON (MktNews) - Disappointing levels of economic growth within the eurozone have not been a consequence of the European Central Bank's monetary policy but reflect other problems in the area such as the structural rigidities within some parts of the economy, said ECB Vice President Lucas Papademos on Monday.
He argued in a speech that price stability on its own was not sufficient to achieve a higher rate of growth. He said the ECB's monetary policy stance had been accommodative and supportive of growth, although it has faced challenges from external factors such as stubbornly high oil prices. The relatively low levels of growth achieved in the eurozone reflected other factors, including "market rigidities", he said. The lacklustre performance of the euro area cannot be explained by monetary policy, he said.
The 50-basis point cut in official interest rates at the ECB's latest meeting reflected the fact that the chance of achieving the inflation objective had improved at a time when the chance of stronger growth had not, he said. The strengthening of the euro had also helped reduce inflationary pressures, he added. Papademos strongly rejected the argument that the ECB would be able to help achieve higher levels of growth within the eurozone if it raised the upper ceiling of its inflation target to, say, 3%, compared with the current limit of 2%.
He said all the evidence overwhelmingly showed that raising the ceiling would have no positive effect on long-term growth. He added that while it could theoretically help short-term growth, it "would not contribute to securing a higher rate of economic growth in a sustainable way." Papademos also rejected calls for the ECB to factor asset prices explicitly into its policy goals. "Asset prices are not a suitable goal for monetary policy," he said. He advanced a number of arguments to support this view. These included the fact that monetary policy cannot control prices over the longer term, in part because asset prices are influenced by investor preferences. He also warned there was an element of "moral hazard" in central banks seeking to influence asset prices. He meant that they may be providing a degree of insurance to investors and reducing investor risk.
He also argued that it was also very hard to identify asset price bubbles as they built up and central banks were no better able than the private sector to do this. Papademos also used the speech to sharply criticise the budgetary policies of some eurozone member states and to defend the spirit of the Stability and Growth Pact. He said the budgetary policies of several eurozone countries are a "source of concern". He said that current lax budgetary policies reflected both broken fiscal promises in the past and countries' failure to set fiscal policy correctly during the good years. The European Commission has warned some countries, including Germany, France, Italy and Portugal over their fiscal policies and potential breaches of the stability pact rules on budget deficits.
Papademos argued that the stability pact was in fact compatible with the drive for higher levels of growth rather than a threat to it. He said countries that had pursued sound fiscal policies and budgets close to balance or in surplus now enjoyed a wider margin of flexibility in setting fiscal policy than those countries that were close to the deficit limits. He noted that the ECB had welcomed the recent proposals of the EU Commission over the operation of the Stability and Growth Pact. These proposals make explicit the pact can factor in cyclical adjustments of deficit limits and differentiate between current and capital expenditure. Papademos said that in order to achieve higher growth the eurozone had to embrace structural reform and the removal of rigidities and that this should be a top policy priority.//www.marketnews.com