Stagflation is the greatest risk to Europe’s recovery

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Former Italian Prime Minister Mario Monti told CNBC on Saturday that he believed the greatest threat to Europe’s economic recovery from the coronavirus pandemic was “stagflation”.

Monti, now president of Bocconi University in Italy, said the “huge bulk” of central banks’ expansionary monetary policies and government fiscal incentives put in place to support economies amid the coronavirus pandemic “could well trigger more inflation.”

At the same time, Monti said there were “a number of restrictions on the flexibility of production” that needed to be increased.

Generally speaking, stagflation is when the rate of inflation is high, but economic growth is slowing and unemployment continues to rise.

The IHS Markit Flash Composite purchasing managers’ index for the euro zone, which tracks activity in manufacturing and services, hit a two-month low of 59.5 in August, compared with 60.2 in July. A value above 50 still means that economic activity is expanding, but many economists have suggested that dynamism in the region may slow down.

Former Italian Prime Minister Mario Monti will perform on “Porta a Porta” on October 11, 2018 in Rome, Italy.

Massimo Di Vita | Massimo Di Vita Archive | Mondadori portfolio | Getty Images

There are also concerns about the impact of supply chain problems from Asia affecting manufacturing in Europe, as well as the fact that higher wages could lead to inflationary pressures.

Speaking to CNBC’s Steve Sedgwick at the European House Ambrosetti Forum on Saturday, Monti said that economies, not just in the EU, may begin to experience elements of “stagflation”, similar to what happened in many countries in the 1970s.

As a result, Monti said it was “very important to manage this transition from a needed abundance of financial and financial support to a simpler situation with caution and in a coordinated manner.”

Preliminary data released on Tuesday showed that inflation in the eurozone hit a 10-year high in August, with consumer prices up 3% year over year.

The European Central Bank will hold its next policy meeting on September 9th to discuss the way forward for its asset purchase program. However, analysts told CNBC earlier this week that they expect the ECB to suspend its announcement of tapering its Covid stimulus measures until December.

– CNBC’s Silvia Amaro contributed to this report.