PARIS (MNI) – Eurozone inflation over the medium-term will remain
moderate as economic activity continues to recover both domestically and
globally, European Central Bank President Jean-Claude Trichet said on
Saturday.
But economic and financial authorities must remain on guard, and
they should not relax their efforts to fix the problems exposed by the
financial crisis, he warned in the text of a speech delivered in
Tutzingen, Germany and published on the ECB’s website. In particular,
the EU should take steps that go beyond what is currently being proposed
by European leaders to strengthen compliance with fiscal rules and the
competitiveness of member nations, Trichet said.
He said that the central bank’s adherence to a quantitative price
stability goal — close to but below 2% — as well as its medium-term
focus, “significantly reduce the likelihood of either deflation or
inflation scares…Indeed, recent data releases and survey evidence
confirm our view that expected price developments will remain moderate
over the policy-relevant medium-term horizon.”
At the same time, Trichet added, “the positive underlying momentum
of the economic recovery in the euro area remains in place,” which means
ongoing GDP growth in the second half of this year. The global recovery
should continue to boost exports from the euro area, he said, and
domestic private demand will also contribute to economic growth,
“supported by the accommodative monetary policy stance and the measures
adopted to restore the functioning of the financial system.”
However, the ECB chief warned: “Complacency would be
inappropriate.” The economic economic model is “in need of considerable
strengthening,” and European leaders know it, he said.
Recent proposals for fiscal and macroeconomic surveillance, put
forward by EU Council President Herman Van Rompuy and adopted by
European leaders at their summit last month, constitute a strengthening
of current rules, Trichet conceded. “But as I have said before, the
Governing Council of the ECB considers that they do not represent the
quantum leap in economic governance that is needed to be fully
commensurate with the monetary union we have created.”
He argued, as he has repeatedly in recent weeks, that shorter
deadlines are needed under the EU’s excessive deficit procedures, along
with quasi-automaticity in the imposition of penalties on fiscal rule
breakers, “based on clearly defined criteria and with less discretion
over outcomes.” In addition, “ambitious” targets are needed for reducing
public debt below the EU’s 60%-of-GDP ceiling, Trichet said.
Moreover, there should be a new system of mutual surveillance in
the Eurozone focusing on countries with large current account deficits
that have sustained significant losses of competitiveness. Here, too,
there should be “effective trigger mechanisms,” clearly specified
sanctions in case rules are violated, and “full transparency,” Trichet
said.
“We are now at a stage where we need to remain bold and enact those
reforms that we envisaged when the crisis was at its deepest. It was
then that we witnessed the clearest manifestation of risks and our
judgement was sharpest,” Trichet said.
“It would be a big mistake if, with gradually improving conditions,
we fell back into accepting the status quo. I therefore call on all
parties to remain as bold in their reforms as they were when we were in
the eye of the storm.”
In other comments, Trichet repeated that the ECB’s government bond
purchasing program is intended to help restore more normal monetary
policy transmission, given the important role that government bonds play
in money markets. The program, he said, “is not to be confused with
quantitative easing policies that aim to reduce longer-term interest
rates by expanding the monetary base.”
He repeated that all the ECB’s non-standard measures, implemented
since the onset of the financial crisis, “are temporary in nature.”
–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com
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