ECONOMY

Eurozone growth prospects dim, recovery next year, says Garganas

Eurozone economic prospects have dimmed further in the past weeks, while the uncertainty plaguing world markets is set to persist as long as the Iraq crisis remains unresolved, ECB council member Nicholas Garganas said yesterday. Garganas, who is also the head of Greece’s central bank, told Reuters in an interview that it was a widely held view by the members of the European Central Bank’s rate-setting 18-member governing council that growth in the 12-nation single currency area will remain sluggish this year. He said he expected 2003 growth to be close to the bottom of the 1.0 to 1.5 percent range and not return to its cruising speed of 2 to 2.5 percent until early next year. «I personally believe that this will occur in the early months of next year,» he said. Asked whether the outlook for the euro area and the world economy has worsened further since the ECB last discussed interest rates in early February, Garganas said: «Yes it has. The ECB hasn’t published its forecasts yet, but we have forecasts from other international organizations and the consensus forecasts have been revised downward, there is no question about that.» Not a rosy picture «We have this terrible problem of uncertainty, which will not be significantly reduced unless the crisis in Iraq is resolved,» Garganas said. Since 2001, the world economy has been plagued by uncertainty as the September 11 attacks, high-profile corporate scandals and the standoff over Iraq’s alleged weapons of mass destruction have all sapped consumer and investor confidence. «I don’t think the picture we see is very rosy,» he said. When the ECB decided to keep rates unchanged at its February 6 meeting, ECB President Wim Duisenberg cited this persistent high uncertainty as one of the reasons for holding off, saying a cut might be a drop lost in a sea of uncertainty. Asked whether this assessment was still valid today, Garganas said he would not make any comments that could be seen as pre-empting the decisions of the bank’s next meeting tomorrow. The ECB has kept its benchmark rate unchanged at 2.75 percent since last December. Financial markets now price in at least a quarter-point rate cut this week, with investors convinced by recent bankers’ comments that concerns over growth outlook outweighed worries that the bank might be wasting its rate ammunition in the face of global political jitters. Commenting on the euro’s performance, Garganas reiterated that the ECB did not have any exchange rate target. But the euro’s strengthening was welcome as it helped soften the impact of rising oil prices on inflation as well as helped to reduce global imbalances, such as the gaping US current account deficit. «So a realignment of the key currencies should be welcome because it helps reduce those imbalances,» he said. Asked what is the impact of the ongoing debate over the European Union’s Stability and Growth Pact on monetary policy, Garganas reiterated that no bending of its rules should be tolerated. «If we violate the Stability and Growth Pact, we jeopardize the stability of the single currency. I’m against bending the rules because then you hurt credibility.»