‘Best is over’ for Europe but there’s no crisis, head of bailout fund says
Klaus Regling, the managing director of the European Stability Mechanism, said stellar euro zone growth in 2017 could not be sustained and believes it was inevitable that economies would stall as central banks began to normalize policy.
“We will not see in the next two, three years the growth rates of 2017. It’s quite OK to say that the best is over, but it doesn’t mean that there is a crisis,” he told CNBC’s Joumanna Bercetche in Washington, D.C.
The European Stability Mechanism, or ESM, is a crisis resolution mechanism set up for euro area countries and generates money by selling bonds in the global financial markets. Following the euro zone sovereign debt crisis of 2011 it became an integral part of the system as bailouts were dealt out to ailing economies.
However, Regling doesn’t believe there could be any further crisis in the coming years, despite a recent downtick in growth for both the euro zone and the wider world.
“I am not surprised that growth is coming down because in 2017 the growth rate in the euro area was almost twice the potential growth rate, that could not continue very long,” he said, adding that the output gap — the amount by which the actual output of an economy falls short of its potential output — had been closed during this recovery.
The European Central Bank (ECB) pumped trillions of euros into the economy in the past few years to boost inflation and promote growth. But despite winding down its bond-buying program in December it has shied away from any rate hikes after disappointing economic data.
Regling underlined that temporary factors could be at play for Germany’s recent weakness. Economists have highlighted new regulations for its autos sector and a knock-on effect from the U.S.-China trade war.
On Tuesday, the International Monetary Fund again reduced its global economic growth forecast for 2019, citing risks like increasing trade tensions and tighter monetary policy by the Federal Reserve.