Euro-Area Slowdown Is No Longer Temporary, ECB’s Rehn Says

(Bloomberg) -- The slowdown in the euro-area economy should no longer be considered a “temporary dip” and the European Central Bank should prepare in case it gets worse, according to Governing Council member Olli Rehn.

“Growth in the euro area has slowed significantly recently,” the Finnish governor told Boersen-Zeitung in an interview published Thursday. “We cannot deny that there are doubts among market participants and the public about the ability of the central bank to achieve the price stability target.”

The 57 year-old -- who until recently was seen as a leading candidate to replace ECB President Mario Draghi before IMF chief Christine Lagarde was nominated earlier this week -- stressed that the Governing Council is analyzing what options are best in terms of a policy response. The region's slowdown has lasted for more than a year, and has been exacerbated by global trade tensions and political uncertainties that have weighed particularly on manufacturers.

“We have a number of instruments which are very effective and which, as a package, have even greater effects than isolated,” he said.

In June, ECB officials indicated that they're willing to cut interest rates further and possibly even restart asset purchases if the economic situation fails to improve. While the prospect of further monetary easing was welcomed by markets, some observers have questioned the feasibility of such moves given the weak profitability of banks, who struggle with negative interest rates. There are also legal limits on the share of a country's bonds which can be purchased by the ECB.

Rehn suggested these constraints can be overcome.

“We have clearly indicated that we will consider measures to mitigate the possible negative side effects of negative interest rates in the event that we continue to cut interest rates or hold on to very low rates for much longer,” according to Rehn. Policy makers “can also resume buying new assets at any time” and there is a “certain degree of flexibility” on the legal limits to bond-buying.

The Finnish governor added that the euro area would need a better mix of fiscal and monetary policies to respond to a slowdown or to a recession.

“We're also in favor of a fiscal capacity for the euro zone which for me should focus on investments to fund economic reforms in member states,” he said in a separate interview to the Italian newspaper La Repubblica.

--With assistance from Alessandro Speciale.

To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Marco Bertacche

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