WASHINGTON (MNI) – If Greece were to restructure its sovereign
debt, this would trigger the total collapse of its economy, European
Central Bank Executive Board member Lorenzo Bini Smaghi warmed Saturday.

Bini Smaghi argued that the ECB is “doing the right thing” by
providing banks with the liquidity they need.

In this way “we are helping the transmission mechanism of monetary
policy work better,” he explained on a panel sponsored by Germany’s DZ
bank.

“What we know today is that there is no transfer union” in the
Eurozone, Bini Smaghi said. “If things get terrible this could
happen,” he conceded. “But we have to make sure that this doesn’t
happen.”

Speaking about Greece and its IMF/Eurozone-sponsored recovery
program, the central banker said, “We have to make sure it works,” since
“if Greece restructures it would have a total collapse of the economy.”

Bini Smaghi reminded that before the crisis, critics worried that
Italy, Germany and France were not growing up to potential, while the
peripheral countries were zooming ahead. He added that he was “not sure”
that the current situation, where growth patterns are reversed, “is so
different.”

In the past, interest rates might have been too high for Germany,
whereas now they might be too low, he said. “Germans are starting to buy
houses,” he pointed out. Nevertheless, “we have a single monetary
policy.”

Still, he cautioned that German wage increases should not get out
of control.

“All governments are determined … to make the euro a success. In
spite of all the difficulties, many, many countries in Europe will not
make the same mistakes as they made in the past,” Bini Smaghi said.

Speaking on the same panel, ECB Governing Council member Yves
Mersch said that the European Financial Stability Facility — the E440
billion fund established in May to rescue troubled Eurozone states — is
still in its infancy.

“For me, what is much more important is that the crisis-prevention
mechanisms are being strengthened,” Mersch said.

The process of integration within Europe is not finished and
remains “dynamic,” Mersch said.

Bodies researching reforms within the EU, such as the Van Rompuy
task force on ways to improve fiscal and economic coordination, should
“come up with stronger recommendations than what is currently on the
table,” he said.

Asked whether the next president of the ECB would come from a large
or a small country, Mersch responded, “You know that the principle is
one country one vote, so there are no large or small countries on the
ECB.” The answer brought applause from the audience.

Hungarian Central Bank Governor Andreas Simor, also speaking on the
panel, declined comment on when his country would join the single
currency area.

——–MNI Washington; tbuell@marketnews.com; 202-213-7496————

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