ECB warns complacency is the enemy as euro region recovers

(Bloomberg) -- With the euro-area economy at its strongest in almost 20 years, now is the time to prepare for future slumps, European Central Bank policy maker Benoit Coeure said.

The region’s expansion is proving increasingly balanced and robust, much like its upturn in 1999, according to the ECB executive board member. But that success must be nurtured by policies that will better equip the region for the next shock, he said.

"This recovery is carried in no small part by monetary policy and the exchange rate and equally by low commodity prices," Coeure said in Lyon, France, on Thursday. "These are factors that won’t last forever. And if we accept this, the states of the eurozone will find themselves unarmed when the next crisis arrives."

The ECB has spent years pumping cash into the economy to revive inflation and growth, and last month pledged to keep doing so until at least September 2018, albeit at a slower pace. Yet with the economy on track for its strongest performance since at least before the financial crisis, the debate over when the central bank should step back is gaining intensity.

Continued Support

Coeure is one of the heavyweights leading this debate, and indicated earlier on Thursday that "nothing" justifies ending their support just yet. The ECB will continue providing stimulus until the euro area can generate its own momentum, he said, while stressing an urgency to have growth policies that work independently.

His concerns echo worries expressed by the institution’s chief economist Peter Praet, who warned a day after the ECB’s last meeting that it’s difficult to imagine that the central bank would have the space to be able to combat a new shock.

"The ECB has done what it can do and will continue to do what it can do but within the constraints of a mandate that is tightly defined," Coeure said. "We need to build up new firepower and for that we need reforms."

The euro-area economy has proven stronger than anticipated. The European Commission raised its growth forecasts on Thursday, predicting gross domestic product will expand 2.2% this year.

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Coeure, who runs the ECB’s market operations, was among those at the October policy meeting said to have advocated tying the overall stimulus -- rather than just the bond-buying program -- to the inflation outlook. The Governing Council ultimately decided to pledge to keep buying debt until consumer-price growth is back on track toward its goal of just under 2%.

The French official said the ECB is monitoring the risks to financial stability, including the ones resulting from low interest rates. He noted concerns in some countries and asset classes such as an increase in French corporate debt, but said there are no signs of financial bubbles at the euro-area level.

He also added that when the next crisis comes, it might not be foreseeable.

"The crisis will necessarily arrive because that is how the economic cycle works. We don’t know where it will come from," Coeure said. "It might come from China, it might come from the US, or from within the euro zone."