Eurozone economic slump could last until 2010, says ECB

AFP - European Central Bank vice president Lucas Papademos sees weak economic activity extending though most of this year at least and says the ECB is ready to cut lending rates further if needed.

With the outlook for growth highly uncertain, "it's quite possible that the recovery won't start until the beginning of 2010," Papademos told the German weekly WirtschaftsWoche in an interview published on Monday.

The ECB director defended rate cuts of 1.75 percentage points since October, which some have criticized as too timid, but said the bank could lower its main lending rate from the current level of 2.50 percent if the situation called for it.

"If, in our assessment, the risks to price stability change further in the coming months, monetary policy could be eased further and we will act appropriately," he said.

Papademos said the ECB did not expect the 16-nation eurozone to suffer from deflation, but noted that inflation could fall sharply in 2009 and could briefly dip into negative territory in some countries before picking up again later in the year.

"By the end of 2009, inflation is likely to rise again and remain at levels consistent with price stability. Hence, the expected price developments entail no risk of deflation," he said.

The ECB director also said it was possible that the bank "together with national central banks of the Eurosystem (would) take on the supervision of banks with cross border activities."

It has been suggested that some individual eurozone members would be hard pressed to deal with the failure of a major bank with cross-border activities.

Commenting on economic rescue plans outlined by several eurozone countries, Papademos stressed that "it is vital that any government stimulus shouldn't undermine confidence in the long-term soundness of public finances and shouldn't impair the credibility of the Stability and Growth Pact."

Under the pact, eurozone members are bound to maintin public deficits below 3.0 percent of gross domestic product and public debt of no more than 60 percent of GDP.