(Bloomberg) -- European Central Bank chief Christine Lagarde reckons the fight against inflation is going well but the lack of a regional deal on fiscal rules is turning into a headache, according to people familiar with the matter.
In a call on Monday, she told the presidents of the European Commission, the European Council and the Eurogroup that the euro-zone economy faces stagnation for the next few quarters and downside dangers, though risks to prices have become more balanced, the people said, insisting on anonymity as the discussion was confidential.
Lagarde's sense of confidence in the progress against inflation contrasts with recent comments suggesting underlying price growth remains “elevated.” On the economy itself, she remarked that employment is holding up, but is showing signs of weakening, according to the people.
The ECB chief observed that markets tend to instantly react to European divisions over the Middle East or other such stances, and said spreads between different countries will be wider if the bloc doesn't coalesce more, the people said.
She complained that not having an agreement on how to interpret the EU's Stability and Growth Pact in time for January, when the rule limiting deficits to 3% of output will be reinstated, is a problem because it risks putting pressure on monetary policy to do more.
Paschal Donohoe, who leads the Eurogroup of finance ministers, responded that the stakes are really high to reach an accord this year, and it's doable but very hard, according to the people.
Meanwhile, he pledged to ratchet up pressure on Italy to ratify the European Stability Mechanism treaty, saying there's a real risk the step won't happen and other governments can't currently use that rescue tool if a banking crisis happens, they said. Donohoe said the issue will be raised at this week's EU summit.
On that and on the fiscal talks, he reckons the country needs to make an effort, according to the people.
European Council President Charles Michel said it will be very difficult to reach a compromise on the fiscal rules as positions remain far apart.
The remarks provide a crucial insight into discussions between top officials just days before an ECB meeting where officials are expected to keep interest rates on hold after 10 straight hikes, and an EU leaders' summit.
Spokespeople for the ECB, and for Donohoe and Michel declined to comment on the contents of the call.
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