FRANKFURT (Reuters) - The euro zone’s economic expansion will persist despite a rough patch earlier this year but the bloc must do more if it wants to fight off the next crisis, European Central Bank Vice President Luis de Guindos said on Friday.
In his first public speech since taking up the ECB post this spring, de Guindos said the economy would motor ahead and underlying inflation would continue to rise just as the ECB predicted, but he added that institutional changes both on the national and European Union levels had some way to go.
The ECB has propped up growth with years of stimulus but with inflation now on the way up and much of its firepower exhausted, it is already dialing back stimulus, putting more pressure on governments to support growth conditions.
The ECB’s retreat comes just as uncertainties rise, a risk to business sentiment, which could quickly impact actual growth.
“While risks surrounding the euro area growth outlook remain broadly balanced, uncertainties emerging from increased global protectionism, the finalization of the Brexit negotiations and vulnerabilities in emerging markets, have become more visible than a few months ago,” de Guindos said at the University of Oviedo in Spain.
Still, de Guindos predicted that the labor market would tighten and underlying inflation would pick up toward the end of the summer, reversing an unexpected drop this month.
On the broader issue of Europe’s future, de Guindos said the EU still needed a capital markets union, an improved crisis management framework and a common stabilization function that could provide support in case of a recession.
Addressing the issue of spending just as Italy is debating whether to exceed EU deficit limits, de Guindos said it was “essential” that governments abided by the rules and also that they implement country-specific reform recommendations.
“Deep and well-integrated cross-border funding would improve the private sector’s capacity to absorb local shocks, reducing the burden on fiscal policies,” de Guindos said, arguing that a harmonized insolvency rule would make it easier for banks to deal with soured debt, the sector’s top challenge.
Reporting by Balazs Koranyi; Editing by Susan Fenton and Gareth Jones