Caution was the main message delivered by the president of the European Central Bank, Jean- Claude Trichet, when addressing the Economic and Monetary Affairs Committee of the European Parliament earlier this week.
According to the ECB boss, while the economic and monetary situation may be less worrying than a few months ago, “it would be premature to declare the crisis over”.
He said that the bank believes the “free fall” in the world economy has come to an end but the recovery will be “very gradual” over the coming quarters, indicating that the time had not yet come to give up the exceptional measures put in place by various member states.
“Now is not the time to exit”, he said, referring to the non-standard measures the ECB has been using to support the financial system, but he warned that it was not possible to maintain this strong intervention in the euro area money market forever.
“The ECB has an exit strategy and stands ready to put it into action when the appropriate time comes.”
The aim of these non-standard bank support measures is to support the real economy, and in particular SMEs, Mr Trichet said, urging banks to provide funding for their activities. Moral persuasion had to operate as strongly as possible with regard to banks he said. He called on them to “Do your work!” acknowledging that increasing numbers of SMEs were saying that their requests for finance were being met.
The same message was given by the president of the Eurogroup, Luxembourg’s Prime Minsiter Jean Cluade Juncker. “The economic situation has largely stabilised” but it remains “fragile and volatile”, Mr Juncker warned.
He said that prudence still had to be the watchword with the strength and sustainability of the recovery still uncertain.
“This is still not the time for exit strategies,” he said, forecasting that exit strategies could come into play from 2011 onwards as 2010 seems to him to be too early.
Mr Juncker also called for structural reforms to be pursued by member states although he cast doubt on how realistic is the current timetable for the implementation of the Lisbon strategy.
“We need to be more realistic and the idea is to extend the period beyond 2010 without slowing down the implementation of the various parts of the strategy,” he said.
Potential growth in the euro area, which was already low before the crisis – below 2.5 per cent – is expected to fall to around 1.5 per cent over the next five years.
According to the President of the Eurogroup, “this is far too low.”