• Eastern Europe, Germany and recovering nations drive growth
  • Advocates looking through current bout of low inflation

Europe’s pockets of strength may be enough to help the currency bloc withstand the financial turmoil stemming from China’s slowdown, European Central Bank Governing Council member Ewald Nowotny said.

“There are a number of bright spots,” Nowotny, said in an interview in Vienna on Wednesday, citing steady growth in Germany, Spain and eastern European states including Poland and the Czech Republic. “Some risks have increased, especially in emerging markets. We see on the other hand that we do have some elements that might have a positive effect on the real economy in Europe, such as the lowering of the energy prices, which increases real income.”

Ewald Nowotny
Ewald Nowotny
Photographer: Akos Stiller/Bloomberg

Nowotny, the 71-year-old governor of Austria’s central bank, added his voice to the debate over whether the Governing Council needs to boost its 1.1 trillion-euro ($1.23 trillion) quantitative-easing program. He told Bloomberg Television in a separate interview on Wednesday that he’s wary of expanding asset purchases now. With manufacturing growth holding up and economic confidence near record highs, ECB President Mario Draghi has said more time is needed to gauge whether the stimulus is boosting inflation.

Nowotny said policy should be guided by an expected pickup in consumer prices, even as the rate was just 0.2 percent in August. The ECB foresees price growth of 1.1 percent in 2016 and 1.7 percent in 2017. That compares with its medium-term goal of just under 2 percent.

Negative Inflation

There are a number of reasons why “we may have very low or even negative inflation in September and October,” Nowotny said. “Then those effects will have come to an end and we’re back in more normal territory. So in this case I’d recommend a look-through policy, not to be influenced by those very short-term effects.”

Nevertheless, growth strong enough to drive inflation back to safer territory may not arrive without an increase in investment. That’s being held back by a lack of certainty about the future, worsened by factors including news about emerging markets, he said.

“With developments in Russia, and in China, the real-economy effect on Europe is not that big, but the expectation effect may be really negative,” he said, adding that fiscal and energy policy are also factors. “The more we have an increase in uncertainty, the worse the investment climate will be.”

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