–Double Dip Eurozone Recession Absolutely Not Credible Scenario

BRUSSELS (MNI) – The European Central Bank will do everything it
can to counteract the inflationary risks that could arise from its
sovereign bond purchases, and price stability remains its key target,
European Central Bank Governing Council member and Governor of the
National Bank of Belgium, Guy Quaden, said on Wednesday.

He also asserted that Germany’s restrained wage growth was a
competitive problem for other Eurozone economies.

He noted, as nearly all his Council colleagues have, that the ECB
was sterilizing its government bond purchases by withdrawing liquidity
to counteract any risks to inflation.

“It is a fear, I think, of at least some people in Europe and more
in particular in Germany…the fear is inflation,” Quaden said.

“It’s not the big problem today but it was in the past a big
problem in Germany but also in many European countries, and there is
always the fear that inflation one day will rise again, and in
particular in the case of the very strong extension of liquidity,” he
added.

With regard to the ECB’s bond purchasing program, “we want to
contribute to a better functioning of the markets…the markets for the
public debt in particular, but our main goal is, and will, remain price
stability — that means inflation below 2% but close to 2%.” Quaden
said. “And we will do in the area of liquidity, what we have to do in
order to counteract possible risks for inflation.”

A double dip Eurozone recession is “absolutely not the most
credible scenario,” he said. “The most credible scenario is a recovery,
not a double dip — but a recovery which remains relatively modest and
uneven. We have for the economic growth at the level of the Eurozone,
also in the particular case of Belgium, we have positive numbers, for
this year and next year,” he said.

“But the recovery remains modest and uneven, so the goal at the
level of the Eurozone, but also in my country, is to reinforce the
growth potential in Europe and Belgium,” Quaden added.

He hinted that competitive differences need to be addressed.

“In Germany there has been very restrictive wage costs which is a
problem for Belgium but also for other European countries,” he said.

There are two major challenges facing the Eurozone countries:
reducing their deficit levels and reinforcing growth, Quaden said.

High debt and deficit levels across the 16 country currency club
have pressured the euro, which has shed around 14% of its value since
the start of the year, as markets fear that high debt levels will put
the Eurozone’s economic recovery at risk.

Quaden said there is a need to “decrease the public deficit and we
have to purify the public finances.”

In addition, there is a need to “reinforce the potential growth and
the real growth, so [those are] two large challenges for the euro area,”
he said.

“There is a link between those two objectives,” Quaden said. “We
would like to decrease the public deficit which means we will have to
stabilise spending and increase the revenue…and we will have to work
on economic growth.”

Deficit reduction is key, Quaden said, “not only to please the
markets, not only to please the European institutions, but also to
reassure the economic actors, most of all in order to reassure the
families.”

“The (global growth) numbers for 2010 and for 2011 are positive…
these projections show a positive trend,” Quaden said. He added that
growth in emerging economies like China, India and Brazil were
initiating the global economic rebound.

Quaden said he sees “a positive trend in the EU and in the euro
area as well.”

“There is a recovery, a rebound in Europe, a very small recovery
but then again in 2009 we had negative economic growth of more than 4%
in the euro area. We now have a modest recovery,” he said.

This is a “modest recovery compared to the growing countries but
also in comparison to the North American countries,” he said. “The
performance in Europe compared to many other regions in the world is
modest, too modest,” he said.

And he doesn’t see a deflationary risk, he added.

“There is no deflation, so there is no permanent negative inflation
which can be expected,” the governor said.

“Since the high point of the crisis, the prices of raw materials
and oil have risen and have brought slightly more inflation to the
Eurozone, but this inflation stays under the limitations imposed,”
Quaden said. The European Central Bank targets an inflation rate below
2% over the medium term.

Quaden was presenting the National Bank of Belgium’s spring
economic forecasts, in which he revised up the central bank’s
predictions for growth and inflation this year and gave projections for
2011 for the first time.

The Belgian central bank said it expected the domestic economy to
grow 1.3% this year and 1.7% next year, after contracting by 3% in 2009.
The 2010 figure marked an upward revision.

2011’s growth prediction is slightly better than projections by the
International Monetary Fund, which sees expansion of 1.3% in 2011, and
of the European Commission, which predicts GDP growth of 1.6% next year.

It expects consumer prices to rise by 2.0% this year and 1.9% next
year.

The budget deficit will be 5% of gross domestic product in 2010 and
5.3% in 2011, the central bank predicted. That makes the 2011 forecast
higher than the European Commission, which predicts a budget deficit of
5.0%. European Union rules stipulate that countries should keep their
budget deficits below 3% of their annual gross domestic product.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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