Mario Centeno, a member of the Governing Council of the European Central Bank (ECB), told colleagues that it was highly likely that the consequences of excessive tightening for the European labor market could be rapid during the recovery of the economic system of the region.

Mario Centeno, a member of the Governing Council of the European Central Bank (ECB), told colleagues that it was highly likely that the consequences of excessive tightening for the European labor market could be rapid during the recovery of the economic system of the region.

Mr. Centeno, who is governor of the Bank of Portugal, in a research article published on the website of the mentioned financial institution on Monday, December 4, noted that the employment rate of EU residents is not adjusted at a gradual pace when the downturn in the economy begins. According to him, the destruction of jobs and the freezing of the recruitment process are more synchronized during the recession than during the positive dynamic economic system.

Mario Centeno says that it took three years for employment levels to return to those recorded before the coronavirus pandemic. In this context, he noted that much less time is needed to start moving the relevant process in the opposite direction.

At the same time, the unemployment rate in the eurozone is currently at an all-time low. Last week, ECB President Christine Lagarde told lawmakers that there are some signs of a weakening of the employment growth process. Her predecessor Mario Draghi this year assessed as a realistic potential recession scenario in the EU.

Mario Centeno is a representative of the group of ECB officials who are not inclined to radical decisions and extreme measures within the framework of the actions of the financial regulator. His warning about the prospects for the development of the situation in the labor market was made public at a time when politicians were faced with a rapid inflation downturn, which is combined with investors’ gradually forming expectation that interest rate cuts will begin in April next year. At the same time, some of Mr. Centeno’s colleagues are convinced of the need for another increase in the cost of borrowing. If this position determines the ECB’s policy next year, the expectations of optimistic investors will be defeated.

At the end of November, Mario Centeno said that the current macroeconomic conditions will lead to the fact that the recent cycle of interest rate hikes will be canceled in the near future. During a speech at a press conference after the publication of the stability report prepared by the Bank of Portugal, he stated that the monetary policy implemented in the EU contributed to the fact that the reduction in the growth in the cost of goods and services was sustainable, fast, and effective.

Mr. Centeno also said that the ECB should maintain current rates until all signs appear that inflation is approaching the 2% target.

The governor of the Bank of Portugal noted that expectations of positive dynamic inflation are increasing, but stressed the need for caution in assessing the further development of the situation.

Mario Centeno insists that the monetary strategy and the set of measures in the fiscal sphere should take into account the problems that are observed in the labor market. According to him, the preservation of investments and the hopes of employees are incompatible with the practice of excessively harsh decisions.

At the same time, the analysis conducted by Mario Centeno, who previously worked as a labor market economist, generally indicates an improvement in the situation in the employment sphere. He notes that employees have become more flexible and mobile. In this context, Mr. Centeno mentioned concerns about the lack of desire and ability of EU residents to move in search of work, which were observed during the introduction of the euro. According to him, the shift contributed to the effective containment of the consumer price pressure factor.

The governor of the Bank of Portugal says that recently the European labor market has functioned as a guarantee of income protection from the unpredictable consequences of exogenous inflationary shocks. According to him, in the absence of new jobs, inflation and stagnant growth would provoke stagflation.

The ECB is currently studying the reaction of wages to the shock of an increase in the cost of living, a process that has been observed over the past few years. Mario Centeno says that the fight against inflation requires market adjustments that do not involve increased price pressure. According to him, a more flexible and adaptable labor market is promising news for the eurozone, which is already confirmed by salary data.

As we have reported earlier, Eurozone Inflation Shows Decline.