The difference between current and potential levels of output in the euro area economy could be greater than the European Central Bank (ECB) originally thought, its vice president, Vitor Constancio, warned on Tuesday.
“What we see, what we observe is that domestic factors of inflation starting with wage and cost developments and then also price decisions are not responding the way we would expect in view of our more common estimates of this slack. So we have to ask ourselves – are these measures of the slack of the economy correct?,” explained Constancio, speaking to CNBC from the ECB Forum on central banking in Sintra.
The board had therefore begun to ask themselves whether other variables should instead be considered to establish a more accurate view of the current economic situation.
“The unemployment rate now is 9.3 (percent) according to the normal international standard of measuring employment …. But if we adopt, as in the U.S., a broader concept of unemployment (which in the U.S. they call U6) then unemployment in the euro area is at 18 percent whereas it is at 9 (percent) in the case of the U.S. which would imply that the slack is then bigger than we could judge some time ago,” he noted.
“That being the case it justifies fully what the president (Mario Drahhi) said at the end of his speech (on Tuesday) that we need persistence. If we want to bring inflation to our target of below but close to 2 (percent) then we have to persist in the type of monetary policy that we been adopting,” he added.
Slack in the European economy looks worse than we thought, says ECB vice president