ECONOMY

Garganas still unruffled

BASEL – The surge in oil prices has eurozone central bankers on red alert, but so far it has hurt neither growth nor inflation, European Central Bank Governing Council member Nicholas Garganas said yesterday. While risks to the inflationary outlook have clearly increased and require extra vigilance, the ECB remains confident that inflation next year will subside below its 2.0 percent ceiling, Garganas told Reuters in an interview. «I know some people are concerned,» he said on the sidelines of central bankers’ G10 meetings here. «Obviously, if we see second-round effects from the oil price increase, this would be very worrying. But we have not seen anything so far,» the Greek central bank chief said. That is why the ECB at its September 2 meeting kept interest rates unchanged at 2.00 percent for now, while sending a message of heightened caution to financial markets, he said. «The risks have increased, there is no question about it. That is why I think we must be more vigilant,» Garganas said. On the budgetary front, he warned that failure to stick to fiscal rules in the European Union’s Stability and Growth Pact risks higher interest rates – a warning already given by the German and Dutch central banks. «That could lead to either higher inflation or potentially to higher interest rates in the long run,» Garganas said. But he welcomed a new framework drawn up by EU finance ministers this weekend at meetings in Scheveningen, the Netherlands, for reforming the pact, which half the eurozone countries, including the biggest France and Germany, have violated or are heading toward. In particular, he noted that politicians in their guidelines for reforms had stepped back from European Commission proposals to make it easier to escape the pact’s penalties when a country breaches the pact’s 3.0 percent budget deficit cap. «It is an encouraging sign that ministers are apparently aware of the dangers of weakening the pact,» Garganas said. Sticking to the pact is important to the «cohesiveness and smooth functioning of monetary union,» he said. Exports still the driver As for the eurozone recovery, Garganas expressed cautious confidence. It remained primarily export-driven, fueled by the strong global upswing which he said showed no sign of faltering, despite some mixed signals from the United States, Japan and China. «There is noise in the system, and sometimes you get this pause. But I would not attribute it to oil prices, and I do not see any significance,» Garganas said. Eurozone business sentiment was starting to improve and there were the beginnings of an investment recovery, he added. Still, Garganas said recovery «won’t be spectacular… We have to be cautious on the basis of recent history.» «The critical component is the rate of growth of employment,» he said. This in turn would be the spark to revive consumer confidence and bolster incomes and thus strengthen domestic demand, which has not fully recovered. The ECB has just revised upward its growth forecasts for this year to roughly 1.9 percent from 1.7 percent. For next year, its sees growth in a range of 1.8-2.8 percent, up from its June projection of 1.7-2.7 percent. Inflation, currently running above 2 percent, is seen as falling in 2005 to within a range of 1.3 percent to 2.3 percent.