PARIS (MNI)- Eurozone countries must push ahead with convincing
fiscal consolidation and internal rebalancing efforts to make the needed
adjustment process as short and painless as possible, European Central
Bank Vice-President Vitor Constancio said Tuesday.

Constancio also called for more ambitious Eurozone governance
reform to prevent current problems for resurfacing in future.

Some Eurozone countries “face a long process of adjustment to more
warranted levels of spending and debt in both the public and the private
sectors. These adjustments will inevitably entail a period of low growth
in domestic demand,” Constancio warned.

“To make this process as short and effective as possible, decisive
policy action is required on the part of governments,” he said, citing
first and foremost “convincing fiscal consolidation to redress the
fiscal imbalances.”

“Second, structural reforms should be introduced to increase wage
flexibility and the adjustment of wages to appropriate levels,”
Constancio, who previously headed the Bank of Portugal, said.

The adoption of measures to increase productivity growth is also
essential, he added. This is particularly the case as all advanced
economies “may face the threat of a protracted period of low growth.”

Finally, repairing the balance sheets of banks and making banks
more resilient are crucial prerequisites for the resumption of growth,
Constancio said.

Growing imbalances as a result of unsustainable positions in some
Eurozone member states must be averted in future, Constancio said,
calling for more aggressive Eurozone governance reform.

He reiterated repeated calls from the Eurotower for quasi-automatic
application of sanctions for countries violating the rules of the
Stability & Growth Pact and more automaticity in triggering analysis of
countries building up imbalances and sanctions for them if needed.

On a more global level, Constancio said that “as good start was
achieved” in efforts to reform the international monetary framework.

Nevertheless, “we are still far from the solution to the major
question of correcting global imbalances and promoting the mechanisms of
international adjustment that must be at the center of a proper
functioning international monetary system.”

However, Constancio said that while more work is needed to ensure
“a more cooperative system of exchange rate regimes” this does not
depend on “unachievable radical reforms.”

“I do not see a major reform of the international monetary system
on the horizon, as there is no real substitute for the US Dollar in
medium term. The special drawing right (SDR) is not a promising option,
and the insufficiently deep and liquid financial markets of emerging
market economies will limit the role that their currencies can play in
the foreseeable future,” the ECB’s Vice-president said.

Constancio also highlighted global progress on baking system
regulation. New Basel III rules “will substantially reduce the
probability of future banking crises, thereby improving long-term
economic and social welfare,” he said.

He also dismissed concerns that higher capital and liquidity
standards might choke off the recovery. “All of these new measures,
which will be introduced over a long transition period, should not have
any unduly severe implications for the ongoing economic recovery,”
Constancio said.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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