ECB’s Constancio: “We Will Do Something” About Low Inflation

The Wall Street Journal, April 10, 2014. All Rights Reserved.

The European Central Bank is poised to take action to tackle the problem of low inflation that continues to consistently undershoot its official target, ECB Vice President Vitor Constancio said Thursday.

Mr. Constancio said policy makers are still trying to figure out which measures to take, adding that bond buying is a possibility.

“We will do something because the situation is that inflation is indeed very low, and even considering only our primary mandate of price stability we are clearly not achieving our target of having, on a medium-term basis, inflation below but close to 2%. So we do take seriously our mandate,” Mr. Constancio told a conference in Washington sponsored by the Levy Economics Institute.

During his prepared remarks, Mr. Constancio argued returning Europe’s banking system to full health would not be enough to ensure economic growth picks up.

The ECB has placed great emphasis on its assessment of banks’ balance sheets, which it is carrying out before becoming the single currency’s banking supervisor later this year. It is hoped that the exercise, culminating in a stress test, will force banks to clean up their balance sheets, raise capital, which should put them in a stronger position to lend to the real economy. But Mr. Constancio suggested this story line is too simplistic.

“Bank balance sheets in the euro area have to a large degree already been repaired,” he said. Furthermore, he said it was “far from clear that finance is a sufficient condition for jump-starting growth in Europe.”

“Even a complete rehabilitation of the euro area’s banking system…will not guarantee a quick return to high growth and low unemployment,” he added. The euro zone’s economy faces numerous issues, he said, that are “are potentially more serious than the damage inflicted by the financial crisis and the subsequent euro area crisis on the euro area banking sector. These issues are also far more difficult to address.”