'Stagflation' is the greatest threat to Europe’s recovery, warns ex-Italian PM Monti

  • Monti said the "huge mass" of accommodative monetary policy by central banks and fiscal stimulus from governments "may well fire more inflation."
  • At the same time, Monti said there were "a number of constraints on the flexibility of production" to increase.

Former Italian Prime Minister Mario Monti told CNBC Saturday that he believes the greatest threat to Europe's economic recovery from the coronavirus pandemic is "stagflation."

Monti, now the president of Italy's Bocconi University, said the "huge mass" of accommodative monetary policy by central banks and fiscal stimulus from governments, implemented to support economies amid the coronavirus pandemic, "may well fire more inflation."

At the same time, Monti said there were "a number of constraints on the flexibility of production" to increase.

Stagflation is generally considered to be when the rate of inflation is high but economic growth has slowed and unemployment remains elevated.

The IHS Markit euro zone flash composite purchasing managers' index, which looks at activity across manufacturing and services, hit a two-month low of 59.5 in August versus 60.2 in July. A reading higher than 50 still represents an expansion in economic activity, but many economists have suggested that momentum may be slowing in the region.

There is also concern around the effect of supply chain issues from Asia hitting manufacturing activity in Europe, as well as the fact that higher wages could feed into inflationary pressures.

Speaking to CNBC's Steve Sedgwick at the European House Ambrosetti Forum on Saturday, Monti said that economies, not only in the EU, could start to experience elements of "stagflation" similar to that seen in many countries in the 1970s.

Monti said, therefore, it will be "very important to manage wisely and in a coordinated manner this transition from a needed abundance of monetary and financial support to a more ordinary situation."

Preliminary data released on Tuesday showed inflation in the euro zone hit a 10-year high in August, with consumer prices up 3% from a year ago.

The European Central Bank is due to hold its next policy meeting on Sep. 9 and is expected to discuss the path forward for its asset purchasing program. However, analysts told CNBC earlier in the week that they expect the ECB to hold off announcing a tapering of its Covid stimulus measures until December.  

— CNBC's Silvia Amaro contributed to this report.

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