The European Central Bank has room for action to spur the euro-area economy and could at the same time weaken the currency, according to New York University Professor Nouriel Roubini.
“You need to have some degree of monetary easing and credit easing, possibly negative deposit rates, to weaken the euro, to ease financial conditions, to jump start credit growth,” Roubini, the co-founder of Roubini Global Economics LLC, said in an interview with Bloomberg Television in Rome today. “I don’t expect action in this direction very soon, but I would say some things the ECB can do are not controversial.”
ECB President Mario Draghi put investors on a month’s notice on Feb. 6 for further monetary stimulus, saying policy makers need more information on the “complex” economic picture before taking any decision. Economists surveyed by Bloomberg are divided on whether action will be taken in March as an improving economic outlook is undermined by slowing inflation.
Roubini said as recently as October 2012 that Greece would probably depart the common currency as a sovereign-debt crisis fueled speculation the euro area would fracture. He said last month that the situation in the currency bloc has improved and the risk of a breakup has receded.
Draghi remains cautious about the euro area’s economic prospects. Gross domestic product expanded 0.3 percent in the fourth quarter, beating economists’ estimates. Yet inflation slowed to 0.7 percent in January, matching the four-year low in October that spurred a surprise November rate cut. Unemployment is close to a record high and bank lending is shrinking.
Roubini said the Frankfurt-based ECB also needs to consider the strength of the euro. The currency has climbed 3 percent against the dollar in the past six months, threatening to curb the competitiveness of exporters in the 18-nation bloc. Policy makers have repeatedly said the exchange rate is not part of the ECB’s mandate.
“The value of the euro is too strong,” Roubini said. “Additional monetary easing, conventional and unconventional, could weaken the euro.”
Roubini said the ECB will eventually have to consider direct asset purchases, similar to the quantitative easing by the U.S. Federal Reserve, the Bank of England and the Bank of Japan. Purchases of government bonds by the ECB have proved controversial in the past, even if policy makers stress that they can be carried out without violating European Union laws.
“The ECB is still several quarters away from considering seriously that option,” Roubini said. “But you never know that maybe by the end of the year that option, that I think is one of the useful things that the ECB could do, may eventually materialize.”
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