BERLIN (MNI) – Inflation risks in the Eurozone could move to the
upside and price developments must therefore be monitored “very
closely,” ECB Governing Council member Axel Weber said Friday.

In remarks prepared for delivery later today, Weber noted that the
recent increase of inflation in the Eurozone above 2% is “largely the
result of short-term upward pressure on prices, mainly owing to energy
prices.”

Thus, “inflationary pressures over the policy-relevant medium term
are expected to remain contained and in line with price stability,”
Weber, who is president of the Bundesbank, observed.

“Nevertheless, risks to the medium term outlook for inflation which
are so far still broadly balanced could well move to the upside,” Weber
cautioned. “Thus, price developments have to be monitored very closely.”

Turning to the economy, Weber remarked that “the beginning of a new
year lends itself to looking back and reflecting on the past year, which
turned out satisfactory – all the more so as the economic outlook has
brightened considerably.”

This is not just true for Germany but also for Eurozone in general,
he said. “Hence, even though for the euro area, risks for the economic
outlook are still tilted slightly to the downside, the recovery should
continue,” Weber asserted.

Still, “in spite of the favourable economic outlook, the financial
and economic crisis is not over yet,” he cautioned, noting that “the
sovereign debt crisis still poses a serious challenge for the euro area
as a whole.”

The debt crisis “needs to be resolved before it potentially becomes
a more serious threat to the recovery,” the Governing Council member
warned.

Policymakers have already taken important first steps in this
regard, both to embark on “ambitious and timely consolidation” as well
as to strengthen the institutional framework within the EU, he remarked.

Key in this context are a strengthened Stability and Growth Pact,
better enforcement measures to correct excessive macroeconomic
imbalances, and a crisis resolution mechanism that helps to deal with
future crises but does not undermine the incentives to rein in public
deficits, he said.

Summing up, Weber argued that the major drivers of growth for the
world economy have not been impaired by the financial crisis. “Emerging
markets are still undertaking great efforts to catch up, and
technological progress will continue,” he said.

Moreover, “even the regulatory measures already implemented, as
well those measures that will be implemented once the discussion process
has come to an end, will not hamper fundamental economic growth,” Weber
reckoned.

“The crisis has warned us of the risks of exaggerated growth and
has painfully demonstrated some major weaknesses of the regulatory
system,” Weber noted.

“But the crisis does not mark the end of the world as we know it.
If we manage to improve the regulatory framework for the financial
system and maintain well-disciplined government budgets, we will be well
on the way towards strong, sustainable and balanced growth in the
future,” he insisted.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

[TOPICS: M$X$$$,M$$CR$,MGX$$$,M$$FX$,M$G$$$,MT$$$$,MFX$$$,M$$EC$]