Seeping pessimism holds back euro zone recovery - ECB's Praet

MANNHEIM, Germany (Reuters) - Pessimism is holding back the euro zone's economic recovery as firms withhold investment, and reforms, particularly to boost productivity, are needed to shift long-term expectations, European Central Bank chief economist Peter Praet said. The ECB's job is to support demand as long as necessary to work through weak cyclical conditions, but its accommodative policies can only buy time for policymakers to address real institutional weakness, said Praet, who also sits on the ECB's executive board. Euro zone growth is picking up pace but only slowly, a process the ECB has called "disappointing". The IMF sees GDP expanding by just 1.6 percent next year, up from an expected 1.5 percent this year, far below levels seen before the bloc's double-dip recession. "The economic environment is characterised by seeping pessimism about the prospects for long-term growth," Praet told an economic conference on Thursday. "It holds back a stronger recovery, as uncertainty about the future can feed back into weaker investment today through expectations and confidence channels." Hoping to kick-start inflation and growth, the ECB launched a 1 trillion euro plus asset-buying programme earlier this year. But the results have been modest so far, especially as oil prices lower inflation and China's slowdown reduces growth. Greece, Cyprus, Italy, Portugal, Slovenia and Spain - all considered laggards in the bloc - have taken vital measures to improve competitiveness but it is not yet enough, Praet said. "Further reforms will be needed to decisively shift expectations, in particular in the priority area of raising total factor productivity, which is ultimately what drives long-term growth," Praet said. The euro area needs to remove regulations that encourage firms to stay below a certain size and has to make it easier for new firms to enter markets and non-productive ones to exit, Praet said. Capital markets also need to be reformed so capital can be more easily reallocated between growing and shrinking firms, he added. While the ECB's measures, including its quantitative easing scheme were unprecedented for a relatively young institution, they were necessary given that the bank found itself in a situation when some observers considered it “the only game in town”, Praet added. The ECB's job is to support demand for as long as necessary to work through weak cyclical conditions, but governments need to use this time to enact the measures that make growth sustainable, he said. (Reporting by Balazs Koranyi; Editing by Hugh Lawson)