Villeroy Says ECB Is Ready If the Euro-Area Downturn Worsens

(Bloomberg) -- The European Central Bank is hoping the economic situation will improve through 2019, but has the necessary tools to react if it worsens, Governing Council member Francois Villeroy de Galhau said.

Villeroy, who is also governor of the Bank of France, said the euro area is in a slowdown, but not a recession, and blamed trade tensions and worries about growth in China.

That bleaker economic outlook already pushed the central bank to promise a new round of loans to euro-area banks. ECB President Mario Draghi said earlier Wednesday that accommodative policy is still needed, even if the ECB is confident growth will eventually regain speed.

“We are continuing to follow the economic situation very closely, and without any doubt we have the tools and margins for maneuver that are sufficiently powerful to act as much as necessary,” Villeroy said in a speech in Geneva.

Still, the French central banker was also cautious about the ECB’s capacity to remain the “only game in town” for the euro-area economy, saying effort is needed to strengthen the banking union and to lift “political and regulatory” obstacles to creating pan-European banks.

“Monetary policy, if it is the only shared instrument, risks being too relied upon in the case of an economic downturn,” Villeroy said.

Villeroy also weighed into the debate on Modern Monetary Theory, describing it as “siren song.’’

“History, unfortunately, has shown again and again that countries that wanted to monetize their debt have been through very painful economic periods as a result,” Villeroy said.

©2019 Bloomberg L.P.

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