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Lagarde will have 'very little' left to tackle any euro zone weakness, bank CEO says

Key Points
  • ECB President Mario Draghi said Thursday that the euro zone still needs ample monetary stimulus and hinted that a package of measures will be announced in the near term.
  • Such a package, according to Draghi, could include a rate cut before mid-2020.
VIDEO2:4902:49
ECB will have no firepower left to support the euro zone: Erste Group CEO

The next European Central Bank (ECB) chief will have "very little" ammunition left to prop up the euro zone in times of economic stress, according to the CEO of Austrian banking group Erste.

After five years of negative interest rates in the euro zone coupled with other monetary stimulus measures, there are concerns that the ECB is running out of tools. This could put the euro zone in a vulnerable situation as growth in the region remains dormant.

"We are now present in a situation where the new governess of the ECB will take over on November 1 and will be in situation that she (President-elect Christine Lagarde) has very, very little that she can still do," Andreas Treichl told CNBC's Geoff Cutmore during a panel event at the Salzburg Summit on Friday.

This is "because we already heard yesterday (that) we will, most likely in September, move down another 10 or 20 basis points, which will move the euro into even more negative territory," he added.

Managing Director of the International Monetary Fund Christine Lagarde speaks during the Bloomberg New Economy Forum in Singapore on November 7, 2018.
Roslan Rahman | AFP | Getty Images

ECB President Mario Draghi said Thursday that the euro zone still needs ample monetary stimulus and hinted that a package of measures will be announced in the near term. Such a package, according to Draghi, could include a rate cut before mid-2020.

"The ECB has nothing left other than trying to move again into monetary easing and I think that is not good for the companies in Europe … It is a tax on the population in Western Europe, and this burden becomes extremely negative for the development of the European economy overall," Treichl added.

Lower interest rates help companies that borrow in euros given that the loans become cheaper. However, lower rates can traditionally be bad for European companies that don't borrow in the single currency. They are also seen as bad for the region's banks as they cap the gains that these firms make when lending money, thus shrinking their margins.

We need a more concerted effort in Europe to bring ourselves forward.
Marcus Wallenberg
Chair of the SEB banking group

Draghi's comments on Thursday fueled further concern for European banks. The German banking association said that what's already "a very expansionary monetary policy" is raising risks and side effects. "We can say goodbye to the prospect of a return to a normal interest world for several years," the group warned Thursday.

"I think now it is a really, really tough situation and it has very, very dire consequences for the European banking system. And I would like the ECB and the regulators in Europe to take a look at the European financial services system, which is a lot more important for Europe than the American financial services industry is for America," Treichl also said during the panel in Salzburg.

The euro zone has struggled to grow since the sovereign debt crisis of 2011. Different European countries even requested external financing to keep their institutions afloat. Despite an overall uptick in growth since the height of the crisis, recent data is again pointing to an economic deterioration.

Data out of Germany earlier this week showed German manufacturing PMIs (Purchasing Managers' Index) falling to 43.1 in July from 45.0 in June. At the same time, new orders in the country dropped at their fastest pace since July 2012, on the back of weakness in Chinese demand and in the auto sector.

Marcus Wallenberg, chair of the SEB banking group, also told CNBC Friday that European economies are still "very much dependent on traditional industries."

Speaking at the same CNBC panel in Salzburg, he warned that the euro area is still not operating as one and the difference between the various economies is still large.

"We need a more concerted effort in Europe to bring ourselves forward...We are spreading our investments, our focus in too many areas," he said.

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