SHANGHAI (MNI) – A discrepancy between hard and soft economic data
underlines the high level of uncertainty and difficulty faced by the
Eurozone on its road to recovery, ECB Governing Council member Yves
Mersch told Market News International Tuesday.

Speaking on the sidelines of a conference here, Mersch, who heads
the Central Bank of Luxembourg, said the Eurozone economy was performing
in line with the ECB’s baseline scenario of growth that will slow in the
second half of this year and become more uneven. But the recovery
remains in tact, he said.

“[There] are indicators based on hard data which seem to contradict
previous indicators based on surveys, so from that point of view this
confirms the high uncertainty which we are confronted with and it also
confirms that we might have a bumpy road ahead out of the recovery,”
Mersch said. But it does not put into question the recovery itself.”

He added that, “our baseline scenario has been, since the beginning
of the year, one of strong growth in the first [half] which might then
over the year, especially in the second half, become more uneven
geographically and sectorially as well before resuming slowing during
2011 and gaining momentum towards the end of next year.”

Mersch also suggested that the ECB is taking its cues from
financial markets when it comes to setting monetary and liquidity
policies. “If you read carefully the communiques of the European Central
Bank, we reaffirm every month that we continue in our process of
monitoring the markets,” he said. “Along the line of this monitoring we
will adjust our monetary policy stance, our liquidity provisioning, and
the allottment mode in order to be in tune with the rest of the market.”

The ECB Council member said that given the uncertainty and
volatility associated with the financial crisis and the recovery from
it, it might make sense to lengthen the monetary policy horizon in order
“to take noise out of short-term developments.”

He added: “That’s why I think there might be a reason to increase
the studies taking into account the possibility of a longer policy
horizon [for the transmission of monetary policy signals] than the [12
to 18 months] we usually have…It might be [worth] looking more into
the upper bound of this horizon, let’s say 18 months, or trying to
lengthen it a bit, because there might be an unduly high level of noise
in a crisis [and] in the upturn of a financial sector-originated
crisis.”

Mersch would not directly respond to questions about whether or how
the ECB planned to wean banks on the Eurozone’s periphery off of
emergency liquidity provisions.

He noted that in some countries banks are tainted by the poor
quality of their governments’ sovereign debt, while in others the banks
are less sound than the sovereign paper. “So each country has different
problems,” he said.

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