ECB Policymaker Warns of Real Recession Risks for Euro Zone Amid Middle East Conflict
Euro Zone Faces Economic Uncertainty Due to Middle East Tensions
ECB Policymaker's Warning on Recession Risks
NICOSIA, May 3 (Reuters) - Concerns that the euro zone could slip into recession if the conflict in the Middle East continued are "real and justified" and talks to end the Iran war will be key for the ECB monetary policy, Bank of Greece governor Yannis Stournaras said.
Stournaras, who is also a member of the European Central Bank's Governing Council, said in an interview published on Sunday in Cyprus's Phileleftheros newspaper that while the euro zone economy was resilient, its momentum has weakened.
Impact of Middle East Conflict on Euro Zone Economy
"Concerns about the possibility of a recession in the euro zone are real and justified, given the new negative supply-side disruption caused by the conflict in the Middle East," Stournaras said. "Rising energy prices and increasing uncertainty directly affect growth and inflation, given the euro zone's high energy dependence," he said.
Inflation and Growth Challenges
"In contrast to 2022, the rise in inflation is occurring in an environment of already weaker growth, tighter financial conditions and reduced fiscal space, which limits policy space and makes economies more vulnerable," Stournaras said.
Potential Spillover Effects and Policy Response
So far there has been no significant spillover effect from higher energy prices on inflation, but damage to energy infrastructure could bring inflationary pressures over the medium term and uncertainty could hurt investment and growth.
ECB's Approach to Monetary Policy Adjustments
"Our response will depend on the intensity, duration and transmission channels of the shock. If it turns out to be transitory and without significant second-round effects, no adjustment of monetary policy will be required," he said.
A large, but temporary overshoot of the ECB's target might require a "measured adjustment" to limit the second-round inflationary effects.
"If it leads to a large and persistent deviation of inflation from the target, then the response should be robust," he was quoted as saying.
Editorial Note
(Writing by Michele KambasEditing by Tomasz Janowski)
