Vítor Constâncio warns over stagflation risk

The ex-governor of the Bank of Portugal and vice-president of the European Central Bank, Vítor Constâncio issued a warning at the end of last week that the Euro Zone is facing stagflation and recession.

“I think that the euro area is very close to a recession, which despite not being very marked, will create a stagflationary situation (inflation and recession) that is the most difficult macroeconomic situation to deal with”, he said in an interview with the Lusa news agency.
Vítor Constâncio recalled that since the euro was created there has never been a situation of stagflation and that this would put the European Central Bank in a position of difficulty.
Stagflation is an economic cycle characterised by slow growth and a high unemployment rate (not in the case of Portugal at present) accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.
Vítor Constâncio said that stagflation would hamper the ECB’s monetary policy given that keeping inflation to a maximum 2% limit is at the heart of its core policies, unlike the US where the Fed has a double mandate of controlling inflation and preserving employment.
The economist says that the slowdown of the largest European economies has started to set in adding that in the first half of 2023 eight countries had negative growth in relation to 2022 and nine in comparison to the first quarter.
Vítor Constâncio said that taking into account the latest Euro Zone macroeconomic data, the ECB should opt to pause any further increases in interest rates at its next meeting of the Council of Central Bank Governors (Eurogroup) on Thursday.
“I don’t believe that a new raise in interest rates will be necessary, but the possibility of this happening is more than 50%”.