By David Barwick

WASHINGTON (MNI) – Diminished demand for liquidity by Eurozone
banks suggests improvement in the economy, European Central Bank
Executive Board member Lorenzo Bini Smaghi said Sunday.

Speaking to journalists on the margins of the semiannual meeting of
the IMF and World Bank, Bini Smaghi said that Chinese authorities have
told the ECB that China would continue on its path of foreign exchange
reform gradually.

He reminded his listeners that “the U.S. authorities are saying
that a strong dollar is in the interest of the U.S. economy … and I
think it’s important for all who doubt this to know.”

Asked if he is concerned about further monetary easing in the U.S.,
Bini Smaghi noted the “different conditions across the globe” and
“different mechanisms of transmission of monetary policy,” with
transmission in Europe mainly via the banking system.

He continued: “We provide unlimited liquidity to the banks based on
what they ask. So when they ask for less liquidity, we give them less;
when they ask for more, we give them more. And the last few weeks we
have seen that they are asking for less liquidity, which means that the
economy is slowly improving and the financial markets are improving and
functioning in the transmission.”

Things in the U.S. “may be a bit different,” he said, but in any
case “each central bank has its own responsibility to make sure that the
liquidity is coming through to the real economy.”

Europe agrees with China “that protectionism is not the answer,”
Bini Smaghi said. Chinese authorities “have told us that they intend to
stick with this reform” of their foreign exchange system “and to
implement it in a gradual way, like the Chinese have always done.”

“We have to encourage this and make it easier for them to implement
this, and we are confident that this commitment, they will stick to it,”
he said. Threats would not help, he added. Asked if pressure applied by
U.S. Congress was misguided, he observed that history shows that “all
major crises have started from protectionist reactions.”

The ECB is monitoring euro-area banks’ liquidity needs and “of
course we know how much liquidity each bank is asking for,” he said. “I
think we need some kind of normalization. Some of that normalization is
happening, some we need to make sure happens.”

The ECB is “putting pressure on the national authorities to make
sure” that banks that need to restructure and recapitalize do so, “and
we are confident that this is going to take place in the next few weeks
and months,” he said.

European monetary authorities “don’t see risks of a double-dip in
the world economy,” according to Bini Smaghi. “We are working on the
basis of a gradual recovery which may be bumpy. Actually, we’ve seen
some good news in the last few months.”

Declines in unemployment in some countries in Europe is among the
good news, he elaborated. Nonetheless, risks include still-fragile
financial markets, he said, so that “we live in a very uncertain world
and we have to be ready to take that into account in the way we conduct
our policies.”

Bini Smaghi refused to identify a strong euro as a risk to Europe’s
economy, saying merely that “the exchange rate is one of the variables,
like all the others that we take into account. It’s part of the elements
in formulating our monetary policy.”

There are “some countries which have grown, which have become
systemically relevant” and yet “are not exactly playing by the rules of
a flexible and floating exchange rate system,” he complained.

He continued: “And they now see the problems that this implies for
their own economies. So we need to involve them in a dialogue, in a
cooperation framework in which they participate with a floating system,
they do not intervene, they do not accumulate foreign exchange reserves.
And this implies that they become more responsible for the world
economy.”

For these countries, which he did not identify explicitly, to make
such a transition, it is necessary that they “abandon some of their
domestic rigidities and their unwillingness to let their exchange rate
float.”

Bini Smaghi disputed the need for a new global currency system,
arguing instead that more countries need to be fully included in the
present system.

–Frankfurt bureau tel.: +49-69-720142. email: dbarwick@marketnews.com

** Market News International Washington Bureau; 202-371-2121 **

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