November 21, 2013 / 7:51 PM / 6 years ago

UPDATE 1-Euro zone doesn't face Japan-style lost decade-ECB's Asmussen

NEW YORK, Nov 21 (Reuters) - The euro zone does not face a “lost decade” like Japan experienced in the 1990s, and reforms will help support a gradual recovery that is already taking hold, a top European Central Bank policymaker said on Thursday.

Joerg Asmussen said that euro zone was using this decade well and “fixing our problems at the root.”

He called for the bloc to build a banking union with a strong resolution mechanism to deal with problem banks, and to pursue economic reforms and closer political integration.

“The latest economic data suggest that the euro area is gradually advancing on the road to recovery - but doubts remain about where that road is leading,” he said in a speech at the Council on Foreign Relations in New York.

“Some commentators think that the road will be so long and difficult that Europe will face a ‘lost decade’, like Japan experienced in the 1990s. Yet this is not my view,” he added.

Monetary policy is not the solution to structural problems in the euro zone, Asmussen said, though he added that “maintaining price stability through a period of adjustment is essential.”

Earlier this month, the ECB cut its interest rates to a record low and said it could take them lower still to prevent the euro zone’s recovery from stalling after inflation tumbled.

Asmussen reiterated that the ECB still has a host of standard and non-standard measures at its disposal to maintain price stability, including charging banks to deposit spare cash with the ECB.

“I would be very cautious to use it but it cannot be ruled out,” he said.

The euro zone recovery, he added, remained gradual and unemployment “unacceptably high,” but he said export growth and improving domestic demand would help growth in 2014.

The European Commission sees the 17-country euro zone growing at a 1.1 percent rate next year.

Turning to next year’s bank stress tests, Asmussen said it is crucial for authorities to know in advance what they will do to address capital shortfalls if the tests are to gain credibility with financial markets.

“If you have no idea what to do, financial markets will not trust you,” he said. “They will think you’ve simply fudged outcome in a way so you can deal with it.”

Asmussen cited bank shareholders, national budgets and the European Stability Mechanism as the three layers of protection for troubled banks.

Banks are eager to raise capital before the Europe-wide stress tests next year, though many do not want to sell properties which are on their books at steep discounts.

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