SINTRA, Portugal May 27 Nobel Prize-winning
economist Paul Krugman challenged the ECB on Tuesday to act to
stop the euro zone slipping into Japan-style deflation, saying
it risked sitting still while the economy became "persistently
Speaking at the ECB's inaugural Forum on Central Banking,
Krugman suggested the euro zone could sleep walk into
Japan-style deflation - a challenge to which European Central
Bank President Mario Draghi will have an opportunity to respond
to at the conference in Portugal later on Tuesday.
It would be easy to convince oneself there is no problem,
Krugman said, adding: "There is not that explosive downward
dynamics in the euro area, or in the United States.
"But then there has never been explosive downward dynamics
in Japan either, and yet we do think that Japan has had a
persistent deflation problem."
The ECB is getting increasingly uncomfortable with the euro
zone's persistently low inflation, which has been stuck in what
Draghi has called the "danger zone" below 1 percent for seven
Opening the ECB's Sintra Forum, billed as the European
version of the Federal Reserve's renowned Jackson Hole
conference, Draghi said on Monday that there was a risk of
disinflationary expectations taking hold.
His comments came after he said at the ECB's May meeting
that the Governing Council was "comfortable with acting next
time" - its June 5 policy meeting - but wanted to see updated
economic projections from the bank's staff first.
Since then, data has confirmed a slight increase in euro
zone inflation in April to 0.7 percent, from 0.5 percent the
previous month, but also shown that the economy grew much less
than expected at the start of the year.
Krugman said a fully fledged deflation was very rare.
"If you are only going to get really ... compelled to do
something when it turns into a 1933-type deflationary spiral,
you are not going to get that and yet you are going to be
sitting there with an economy that is persistently depressed,
because inflation is too low," he said.
He renewed his call for central banks to target a higher
inflation rate than, for example, the ECB's goal of just below 2
percent, to avoid getting trapped in a period of low inflation.
Olivier Blanchard, the International Monetary Fund's chief
economist, had suggested a 4 percent target.
The ECB is preparing a package of policy options for its
June meeting, sources have told Reuters, including cuts in all
its interest rates and targeted measures aimed at boosting
lending to small- and mid-sized firms (SMEs).
Five people familiar with the measures being prepared have
detailed plans involving a potential rate cut, including the
ECB's deposit rate going negative for the first time, along with
the targeted measures aimed at boosting lending to SMEs.
(Reporting by Eva Taylor; Editing by Ruth Pitchford)