Eurozone in the spotlight

Speaking on Bloomberg’s The Tape, London Business School’s Professor Richard Portes said that faced with continued weak economic growth it would have been better for the European Central Bank (ECB) to hold off on further interest rate hikes. “Presented with mixed inflation data, it would have been better to hold off.”

With the ECB having raised interest rates to its highest level yet in an attempt to reduce consumer prices, London Business School’s Professor Richard Portes was interviewed on Bloomberg’s The Tape podcast to discuss the state of the Eurozone, the world's third-largest economy.

The latest rate increase has seen the ECB’s deposit rate rise from 3.75 per cent to 4 per cent – the highest since the euro was launched nearly a quarter of century ago.

The European Central Bank’s president, Christine Lagarde, has hinted that this may be the upper limit for interest rate rises, but news of that the cycle of rate increases was near its end was met by a fall in the euro.

Speaking to Bloomberg journalist Paul Sweeney LBS’s Professor Richard Portes said that he had been disappointed by the ECB decision to raise interest rates.

“I do not think they should have hiked today. The pressures on European economies are very great and growth forecasts are just falling and falling,” he said.

“The latest growth forecast for the Eurozone are not great, therefore pushing the Eurozone toward a recession seems to be unwise. What [the ECB] should have done is wait in my view. The inflation data are mixed and it would have been better to hold on.” 

Bloomberg’s Sweeney put it to Professor Portes that unlike the Fed, the ECB only has one mandate – to get inflation down irrespective of its impact on labour markets and economic growth.  

“Excuse me, I disagree with this. The ECB promotes its climate credentials; they are criticising the Italian government for their windfall profit tax on banks – in sum, their ‘single mandate’ does in fact have a very broad scope and they are required to take account of their actions on overall economic activity within the Eurozone.”

Overall, in terms of economic prospects across the Eurozone, Professor Portes said there was no indication whatsoever of a soft landing. “Economic activity is slowing down considerably and with European elections coming up – in individual countries and in the European Parliament – there will potentially be a lot of criticism levelled at the ECB if we find that the Eurozone goes into a full scale recession.”