ECB’s Vienna meeting holds key to fragile European economy
Growing aversion to fiscal, structural reforms heightens political risks for policymakers
All eyes are on Vienna as the European Central Bank (ECB) gets ready to hold its regular interest rate-setting meeting.
Though it is one of the rare occasions when the ECB conducts a meeting outside of its headquarters in Frankfurt, the current deliberations are expected to have important economic ramifications for the euro zone.
Though the euro zone economic data, since the ECB launched its latest round of stimulus in March, has been fairly positive, the bloc’s inflation rate still remains woefully below the 2 per cent target. On the bright side, economic growth in the first quarter of this year, at 0.6 per cent year-on-year, even outpaced the expansions in the US and the UK, helping the economy of Europe’s single currency area regain the levels it achieved before the 2008 financial crisis.
But there have been concerns also. On Tuesday, Eurostat, the European Union’s statistical agency, warned that the euro zone was waddling in deflationary territory after the core inflation rate, which excludes volatile food and energy prices, stood at just 0.8 per cent, with wages growing at their slowest clip since the euro was launched in 1999.
Even as the ECB grapples with its inflation target — it will almost certainly have to provide further stimulus later this year — it faces another, potentially more serious, problem; the inability of European governments to undertake the necessary fiscal and structural reforms to put the bloc’s fragile recovery on a more secure footing and improve the effectiveness of the central bank’s own policies.
These are grave warnings from the institution that helped prevent the euro zone from breaking apart in 2012
In a sign of the extent to which Europe’s monetary guardian is concerned about the rising tide of populism and nationalism in many countries — the candidate of Austria’s far-right Freedom Party lost the decisive round of the country’s presidential election on May 22 by a mere 30,000 votes — political risks were cited as both a major impediment to reforms and a threat to financial stability in the central bank’s biannual Financial Stability Review, published on May 24.