FRANKFURT (MNI) – The purchasing power of the euro is not in any
danger at present and the European Central Bank will make sure this
remains the case, ECB Executive Board member Juergen Stark said in an
interview published over the weekend.

Stark told Germany’s business weekly Wirtschaftswoche that markets
do not adequately reflect the Greek austerity program.

Tighter monetary policy in the Eurozone depends on real economic
developments, financial market stability and the price stability
outlook, Stark said. But he suggested that the looming maturity of a
one-year refinancing operation from last June could offer a first
opportunity for borrowing costs to rise.

“The ECB has no exchange-rate target,” Stark reminded. “The
exchange rate is one of many indicators that have to be observed to
assess risks to price stability.”

“The decisive thing is that the purchasing power of the euro is
preserved, and this is not in danger at the moment,” Stark, who is the
ECB’s chief economist, continued. “The ECB will do everything so as to
ensure price stability in the future as well.”

Against the backdrop of a “new, critical phase” of the global
crisis, confidence is suffering from the “explosion” of public debt, he
said. However, the intense scrutiny to which markets are subjecting
Europe reflects insufficient acknowledgment of Greece’s “drastic” and
long-term austerity plan, he argued.

“That is no sprint, but rather a marathon,” he said. “Portugal and
Spain have likewise announced savings measures; now deeds must follow.
Both governments know that they have a central responsibility for the
euro.”

Stark sought to dispel inflation fears, noting the “nearly zero”
growth of money supply at present. Still, interest rates are “very low”
and the supply of liquidity is generous, he said.

In this context, the ECB’s declaration last December that it would
unwind special measures should prevent the emergence of distortions and
false incentives in markets, he said.

“The citizens are concerned about the dimensions of these measures
and about the public debt,” Stark affirmed. “We take these concerns very
seriously, he added. “We will not tolerate any monetarization of
governments debts. There will not be any inflation that could lighten
the debt burden of the euro states.”

Although the ECB is purchasing government bonds, the extent of
these purchases is “limited” and there is no subsidization of government
debts, he assured.

“We are only mitigating the market exaggerations of the last weeks
and contributing to the smooth functioning of the money markets,” he
said. The eventual tightening of monetary policy “depends on how the
economy develops and how that affects prices…And on how quickly the
financial markets stabilize again,” Stark said.

The expiration in a month’s time of E442 billion worth of
refinancing agreements from the one-year LTRO conducted in June 2009,
“would be a possible beginning for the gradual exit” from loose monetary
policy, he said.

However, the ECB would “smooth out” a shift in policy stance, he
said. “The danger is not yet gone that banks begin not to trust each
other anymore and not to lend each other any more money.”

The possibilities the ECB disposes of to stabilize markets further
“are now largely exhausted,” Stark said. Governments must now regain
control over public finances, he insisted. “There is no alternative to
that.”

To this end, he called for a new Growth and Stability Pact to
feature “more automaticity, faster decisions and harsher sanctions.” In
particular, sanctions should apply as soon as a member state’s budget
deficit exceeds 3% of its GDP and should increase in magnitude as the
deficit grows and persists, he said.

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

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