Stagflation Repeat of 1970s Seen by Issing as ECB’s Biggest Risk
(Bloomberg) -- While the euro zone should enjoy a robust recovery when the shock of war dissipates, a stagflation scenario is the biggest risk to that view, former European Central Bank official Otmar Issing said.
The one-time Bundesbanker and long-time critic of loose monetary policy in the region gave his warning on Bloomberg Television hours before the Governing Council is due to give its initial collective response to the economic consequences of the conflict in its neighborhood.
“This is the biggest risk, that we might repeat the experience of the 70s,” Issing, the ECB’s first chief economist, told Francine Lacqua on Thursday when asked if stagflation could take hold. “And this is the worst combination for a central bank.”
The 85-year-old German economist, whose life experience spans both World War II and the 1970s, said officials should concentrate on containing inflation, starting with a cutback in asset purchases. Observers anticipate the ECB will delay stimulus withdrawal to gauge spillovers from Ukraine.
Goldman Sachs Group Inc. economists predicted on Thursday that the euro-zone economy will shrink in the second quarter. By contrast, Issing highlighted the overall strength of the underlying rebound from the pandemic.
“Unemployment is now at its lowest level in the euro area, since the start,” he said. “The recovery was very strong, the order books are full. So once the shock from the war fades out, I would expect a robust recovery.”
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