The Governor of the Central Bank, Mr John Hurley, has warned that unless consumer spending improves, economic recovery in the euro zone will remain unconvincing.
Mr Hurley said that, in his view, the current stance of monetary policy in the euro zone was appropriate, but he said the ECB governing council remained vigilant and would closely watch developments in coming months.
Financial markets are looking for any clues on whether a softening growth outlook for the euro zone will prompt the European Central Bank (ECB) to cut interest rates, with European debt futures pricing in a 50 per cent chance for a cut in June.
Mr Hurley's comments will be interpreted as signalling that interest rates will remain at current levels for some time, due to the poor growth performance in the euro zone. His statement that the ECB governing council will "closely watch developments" suggests that a further reduction in rates cannot be ruled out, if the euro economy weakens further.
Mr Hurley said last night that, in the euro area, "the recovery has clearly lagged that of most of the other major economies".
"These strong gains in euro area business confidence, from last summer onwards, suggested that growth was going to gather momentum."
He said that, while the "recovery scenario" remains broadly in place, progress has been slow. In particular, he said, domestic demand remains subdued.
"To a large extent, this reflects the weakness of consumer spending, which has yet to show much sign of improvement."
He said there has been only a modest recovery in consumer confidence since the middle of last year.
Economic growth across the euro zone will only materialise through the active support of fiscal policy and structural reform, according to Mr Hurley.
He said that, while the first five years of Economic and Monetary Union had delivered price stability, low interest rates and a single currency for 300 million consumers, signs of strong economic growth had been slow to emerge.
Addressing ACI Ireland, the financial markets association, in Dublin yesterday, the Governor said there was a growing awareness across the euro area of the need for both fiscal policy and structural reform to play their part in addressing current problems and to prepare for the coming challenge, especially that of ageing populations.
"I expect these issues to be centre-stage over the next five years," he said.
Mr Hurley said the euro had very quickly become an important part of the global financial system and the evidence of the past five years was that its role would continue to grow for some time.
The key challenge had been to formulate and implement the single monetary policy, he said.
"Since it is a 'one-size-fits-all' policy, many doubts were initially expressed about whether it was possible to formulate a common monetary policy for such a diverse area.
"I think our experience to date is that the policy is successful," he said.
