Eurozone to grow modestly in second half of the year

But the European Central Bank (ECB) president warned that unacceptably high unemployment and continued weak credit growth are likely to curb the strength of the recovery.

The recovery in the Eurozone continues to falter, with a gauge of manufacturers dropping back to its lowest level this year on Tuesday, growth stagnating in the second quarter and Italy falling back into recession.

Business confidence in Germany, the bloc’s biggest economy, has fallen more than expected.

“There are clear risks in sight. In particular, heightened geo- political tensions could dampen business and consumer confidence,” Mr Draghi said in an interview with a Lithuanian newspaper, reproduced on the ECB website yesterday.

“Furthermore, the risk of insufficient structural reforms could weigh on the business environment.”

Mr Draghi said the ECB took “decisive action” at an early stage in the crisis and therefore he does not see the 18-member bloc at risk of a period of Japan-style deflation. Inflation, he said, would remain low before rising next year and 2016.

Growth in the Eurozone economy ground to a halt in the second quarter and, with markets’ belief in the ECB’s ability to avert deflation diminishing, the bank launched new measures in June and earlier this month to boost growth, while urging governments to implement their share of reforms.

“It is now in the hands of governments to act decisively on further structural reforms,” Mr Draghi said. “Governments should not unravel the progress made in fiscal consolidation, but use any leeway to make fiscal policies more growth-friendly.”

He also pledged the ECB would do more should it be necessary. “We stand ready to use additional unconventional instruments within our mandate, and alter the size or composition of our unconventional interventions should it become necessary to further address risks of a too prolonged period of low inflation,” he said.

Earlier this week, Mr Draghi signalled that he intended to keep interest rates low for a protracted period of time in a bid to boost inflation in the 18-member bloc.

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