–Adds comments on fiscal policy, surveillance, the euro

PARIS (MNI) – Those who argue that the fiscal austerity measures
being implemented by many European governments will lead to economic
stagnation are wrong, European Central Bank President Jean-Claude
Trichet said in an interview published Thursday morning.

To the contrary, countries must begin cutting their deficits in
order to restore confidence, which is necessary for economic growth,
Trichet told Italy’s daily newspaper La Reppublica.

Trichet was asked about the view of some economists that there is a
threat of deflation hovering over Europe. “I don’t think that such risks
could materialise,” he said. “On the contrary, inflation expectations
are remarkably well anchored in line with our definition — less than
2%, close to 2% — and have remained so during the recent crisis. As
regards the economy, the idea that austerity measures could trigger
stagnation is incorrect.”

He added, “everything that helps to increase the confidence of
households, firms and investors in the sustainability of public finances
is good for the consolidation of growth and job creation. I firmly
believe that in the current circumstances confidence-inspiring policies
will foster and not hamper economic recovery, because confidence is the
key factor today.”

Trichet said it is a “good” thing that Germany is taking measures
to cut its deficit. “I am pleased that the German government is
concentrating on discipline. And what I think about Germany also applies
to the others,” he said. “The delicacy of the current situation requires
credible measures; this is very important,” he added. “Sustainable
fiscal policies will help to consolidate the recovery.”

Trichet also said the measures announced by Italy late last month
“go in the right direction.”

He lauded the fact that governments have brought consolidation
measures forward. “But the credibility of their measures will be subject
to constant scrutiny,” he said, noting that the European Commission
would be monitoring fiscal policies in liaison with the ECB. “We are
very attentive in this respect,” he said.

Asked whether the euro was at risk, Trichet gave his standard line
that “the euro is a very credible currency.” He argued that it has
ensured price stability since the beginning of EMU, keeping its value
“in a way that is remarkable.” He added: “A currency which safeguards
price stability is a major asset in the eyes of investors, both domestic
and international.”

He went on to say that, “when you have a single currency you need a
set of very strict fiscal rules.” In this context, he said, the
Stability and Growth Pact “should be the equivalent of a federal budget
in terms of ensuring sound policies.” The pact should be “strong, solid,
and fully respected,” he said.

The ECB president said there needs to be a “quantum leap” in
multilateral surveillance among the 16 Eurozone countries as well as all
27 European Union countries, of which the Eurozone is a subset. In
addition to fiscal performance, authorities must also “look very closely
at the evolution of competitiveness.” In particular, this means
monitoring competitiveness indicators such as unit labor costs and the
divergence of national inflation levels from the Eurozone average.

Trichet said that cooperation among the ECB, the European
Commission and the International Monetary Fund in the current crisis
“has been excellent.”

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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