BRUSSELS (MNI) – European Central Bank Executive Board appointee Yves
Mersch Monday night gave a competent, though unexciting, performance in front of
the European Parliament’s Economic and Monetary Affairs Committee, answering
questions about inflation and bank supervision in a hearing overshadowed by a
power play between the Parliament and EU governments over gender equality.

Softening slightly his image as an inflation hawk, Mersch cautioned against
taking an overly “mechanistic” approach to controlling inflation, saying it is
important to understand the underlying forces behind generalized price
increases.

“The reaction function of a central bank also has to make an analysis of what is
the origin of inflation,” Mersch said. “If you have inflation caused by indirect
tax increases, it is not something that necessarily has to be considered by
central bank under the fight against inflation by monetary policy.”

The same is also true for factors outside the reach of central banks such
as oil and agricultural commodity prices, he said.

“That is why we tolerate a slightly higher inflation rate, because we know
this above 2% inflation rate will come to an end at the beginning of next year,”
Mersch said.

The ECB governing council member did however rule out an idea suggested by
one MEP that a higher eurozone inflation rate could help countries such as
Greece, Portugal and Ireland. Stable prices are the best foundation for
sustainable growth, he argued, also dismissing the political viability of the
suggestion.

“I don’t think we have a consensus in Europe for an inflation rate target
above the one member states have been use to for so many years. Particularly in
Germany I think it would be extremely difficult to convince people that higher
inflation rates should be accepted as a way to bring Europe back to a common
denominator.”

Highlighting the importance he attaches to the ECB’s role in protecting
financial stability, Mersch said although price stability is the ECB’s
“overriding objective” in most cases the two are “in line.”

“If national policies drift so far apart that the transmission mechanism of
monetary policy breaks down, then there is a problem for the survival of the
currency union,” he warned. “But in individual cases where this may not be the
case the treaty requires us to give priority to price stability.”

Asked for his views on plans to make the ECB the top supervisory authority
for banks in the eurozone as the first step towards creating an EU banking
union, Mersch said the European Commission, the executive branch of the EU,
needs to rewrite its plans for a European fund to wind down failing banks.

“We need the European Commission to put a suitable proposal on the table,”
he said, arguing that the existing proposal for a common resolution fund based
on national funding was flawed. “There has to be a single bank resolution
authority and fund, but not one funded from national taxes but the banks
themselves.”

More work was also needed to establish the supervisory tasks that the ECB
could delegate to national supervisors, takes center stage in eurozone bank
supervision over the course of 2013.

Mersch, a long-time member of the ECB’s governing council, promised to be a
team player on the six-member board, and respect the central bank’s collegial
decision making process, saying it was “important to keep cohesion”.

Asked about the apparent isolation of the Bundesbank on key policy issues,
especially the ECB’s stated willingness to buy unlimited amounts of government
bonds under certain conditions, Mersch said “the analysis of the Bundesbank on
some proposals that come forward can be shared by many on the governing council
without sharing the same conclusion.”

While the majority of committee members that questioned Mersch said they
thought him amply qualified for the post, not all were impressed.

“All I can see is another version of the same format we’ve seen before,”
said Belgian Green party MEP Philippe Lamberts. “What you’ve written here could
have been written by any of your current of past colleagues,” he said referring
to Mersch’s opening statement.

“I didn’t come here to excite you Mr Lamberts, believe me,” Mersch
retorted.

Mersch also downplayed German fears about the build-up of imbalances in the
ECB’s so-called “target 2″ system of payments, arguing that such imbalances were
also of concern if they were always being built up by the same countries.

In the ECB’s first year, Germany and Luxembourg were responsible for far
greater deficits than those seen by Greece and other countries today, he pointed
out.

Nevertheless governments must continue to reform their banking systems to
break the unhealthy links between weak banks and weak sovereigns, he said
warning against “renationalization of banking systems.”

Some national central banks already are accepting as collateral national
instruments unaccepted elsewhere in the eurozone, he stated.

In a move unrelated to his credentials or performance at the hearing, the
Economic and Monetary Affairs Committee voted against recommending Mersch for
the ECB Executive Board position, a decision that can’t block his appointment
but which does ratchet up the battle between EU parliamentarians and national
governments

Committee members said they were miffed with eurozone governments and
Eurogroup President Jean-Claude Juncker in particular for ignoring their request
for a female candidate to be considered for the ECB job.

EU lawmakers are currently locked in a debate over planned legislation to
enforce a quota for women on company boards, a proposal that also has divided
the European Commission. Whether the entire parliament will back the committee’s
stance may depend on how convincing EU Council President Herman Van Rompuy can
be when he addresses the plenary Tuesday, committee members told MNI.

Mersch said he too supports equal opportunities but the problem could not
be addressed by making his appointment as an example. The lack of women at the
ECB is likely also a reflection of the lack of women at national central banks,
so a broader strategy is needed to tackle the issue, he said, ruling out
voluntarily withdrawing his candidacy.

“An engine with six cylinders that only runs on five, is suboptimal,” he
said.

–Brussels Newsroom, +324-952-28374

–email: pkoh@mni-news.com

[TOPICS: M$E$$$,M$X$$$,M$$EC$,MFX$$$,MGX$$$]