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Nowotny Says Euro Area Faces Recession in ‘Phases’ of 2012

January 31, 2012

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Jan. 30 (Bloomberg) -- European Central Bank council member Ewald Nowotny said the euro region faces a recession this year and said the ECB mandate extends beyond price stability.

“It is my view that we could have stagnation in the euro region as a whole or recession in certain phases” of the year, Nowotny, who heads Austria’s central bank, said at an event in Berlin today.

Nowotny said the ECB has the primary mandate of securing price stability. Once that goal has been achieved, the ECB is free to support economic growth as long as meeting the primary goal isn’t at risk. Central banks can’t “watch as Rome burns,” he said.

The Frankfurt-based ECB kept its benchmark interest rate unchanged at a record low of 1 percent this month after two reductions. President Mario Draghi said while the economy is showing “tentative” signs of stabilizing, “cost, wage and price pressures in the euro area should remain modest.”

The International Monetary Fund on Jan. 24 predicted the economy of the 17-nation euro area will contract 0.5 percent this year as the debt crisis prompts governments and consumers to cut spending.

Nowotny said the ECB has to fight inflation and deflation alike, over the medium term. Fighting deflation is more difficult because there’s an interest rate limit of zero percent, he said.

The ECB lent euro-area banks a record 489 billion euros ($641 billion) for three years in December to ward off a funding squeeze caused by a worsening in the two-year-old sovereign debt crisis.

Since then, bond yields across the region have dropped and the bond market has shown signs of reopening, prompting Draghi to say on Jan. 19 that 2012 will be a “much better” year for Europe. The ECB will offer a second batch of unlimited three- year loans on Feb. 28. The three-year tenders aren’t a “new normality” for the bank, Nowotny said.

--Editor: James Hertling

To contact the reporter on this story: Rainer Buergin in Berlin at

To contact the editor responsible for this story: James Hertling at

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