Rehn Urges ECB to Act on Inflation

24/1/2014

'Greece Needs to Do Its Homework,' Says EU Economics Chief

DAVOS, Switzerland—European Union economics chief Olli Rehn on Friday called on the European Central Bank to act on its 2% inflation target, warning that very low inflation in the euro area doesn't support the bloc's nascent economic recovery.

Euro-zone inflation has been declining for months and was 0.8% in December 2013, down from 2.2% a year earlier, according to Eurostat, the EU statistics agency.

"It's important that the ECB continues its supportive monetary policy and aims at its inflation target," Mr. Rehn said in an interview on the sidelines of the World Economic Forum in Davos.

He noted this view wasn't advice to the ECB, which is independent of other EU institutions, but rather based on analysis from the commission's economists.

Banks across the euro area should also start addressing any capital shortfalls before they undergo a review of the quality of their balance sheets and stress tests later this year, Mr. Rehn added, noting that Italian banks are among those already doing this.

And while stressing that the euro zone no longer faces the risk of falling apart, Mr. Rehn said there was no space to slow down reforms, neither in larger euro-zone economies such as France and Italy nor in bailout countries.

Greece's fraught bailout review, currently suspended for the third time, will be completed "in the next few months," Mr. Rehn said. His comment will add to concerns that the country's €240 billion bailout—financed by the euro zone and the International Monetary Fund—is veering off track.

A team of experts from the three international institutions that manage the bailout—the European Commission, the European Central Bank and the IMF—has been due back in Athens for weeks, but no date has been set for their return. Mr. Rehn said he hoped they would resume their review mission before the end of January, while the more senior team members would return a little later.

"Greece needs to do its homework," Mr. Rehn said, citing delays in preparation for negotiations over fiscal and structural reforms as the reason for the stalled progress in the review.

Greece can't get more cash out of its bailout unless the review is completed.

Covering Greece's financing needs for the second half of 2014 and completing the recapitalization of its banks are the short-term goals, Mr. Rehn said.

But its creditors will only start talking about Greece's 2015/16 fiscal plans and what holes they may burn into its budget, as well a way to reduce its government debt, "over the summer," Mr. Rehn said. Those talks had been expected to take place in the spring, once Eurostat corroborates Greece's fiscal performance for the previous year in the second half of April.

The timing of the talks on the Greek bailout is important not least because of the EU elections in May, in which conservative Greek Prime Minister Antonis Samaras faces an increasing chance of a defeat by the leftist opposition party Syriza. A successful conclusion of the debt and fiscal talks before the elections could have given the Greek premier a boost, but Mr. Rehn's comments imply that that won't happen until after Mr. Samaras faces the polls.

Mr. Rehn said the commission would support Portugal if the country opted to secure a precautionary credit line—a pot of aid only drawn on if market conditions or state revenues disappoint—after its own bailout runs out in mid-2014.

"I believe in the principle of better safe than sorry," Mr. Rehn said, "and the precautionary line…is precisely for the purpose to be rather safe than sorry."

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