Reuters - Video

Edition: US | UK | IN | CN | JP

Video

Will the ECB ride to the rescue?

Tuesday, September 02, 2014 - 02:26

France may have appointed a new pro-reform government but it's still calling on the ECB to stimulate the euro zone's economy. As David Pollard reports, with inflation dangerously low the pressure on the ECB President has rarely been greater.

▲ Hide Transcript

View Transcript

Just days to go before the most closely-watched ECB meeting of some time - and a handshake that could yet turn out to be historic. Calls by Mario Draghi for more fiscal flexibility in Europe move him much closer to France and Italy - away from Germany and strict austerity. And are finding resonance in academic circles too. Professor Richard Portes of the London Business School says the euro zone's recovery story is long over-hyped. Recent signs of economic weakness accompanied by the threat of sinking prices. SOUNDBITE (English), Richard Portes, Professor of Economics, London Business School: ''Mr Draghi made it very clear that inflation expectations have lost their anchor. Inflation expectations are going down. They used to be saying, 'oh, they're firmly anchored'. Now finally they're recognising they aren't firmly anchored - they haven't been firmly anchored for a while in fact, and we are slipping towards deflation and Japan's lost decade and more is an example of how dangerous that is.'' European yields are already at record lows as markets factor in an ECB bond-buying programme or 'QE'. Draghi's new eye on fiscal stimulus came as something of a surprise. But looser budgetary controls and higher public expenditure could, it's argued, boost growth - and ultimately make reform easier. Even for France - which may be in better shape than many think. SOUNDBITE (English), Richard Portes, Professor of Economics, London Business School: ''Manufacturing productivity: as good as the US. Current account deficit: lower than the US. The French situation is nowhere near as bad as some people pretend. That said, there are huge vested interests that are blocking reforms, especially in the services sectors, various areas where the government has indicated it is willing to take some risks and plough ahead with reforms. That's what we have to hope.'' Germany insists on budgetary discipline - it says the ECB is running out of monetary policy options. 'Magic Mario' may have no other option left but to pull another trick out of the bag. But those who see it coming at the next meeting could be disappointed. Preparations for any form of asset-buying measures are still a work in progress. And the ECB wants to work through an already-announced programme of targeted loans first. Either way, the ECB chief faces a tough and uncomfortable call.

Press CTRL+C (Windows), CMD+C (Mac), or long-press the URL below on your mobile device to copy the code

Will the ECB ride to the rescue?

Tuesday, September 02, 2014 - 02:26