FRANKFURT (MNI) – The Eurozone is on a stable, albeit moderate,
recovery path, with “a significant degree of heterogeneity” between
member states, European Central Bank Governing Council member Axel Weber
said in a speech in New York on Tuesday, his second of the day.

However, while Weber said he was “confident” that the danger of
falling back into recession was “negligible,” he noted nonetheless that
“the Greek crisis in spring clearly demonstrated that a smooth recovery
cannot be taken for granted.”

Weber, who heads Germany’s Bundesbank, called for a stronger Growth
and Stability Pact to guarantee sound public finances in the long-term,
and suggested automatic sanctions to improve compliance with the rules.

He also stressed the need to “reinvigorate the ‘no-bailout’
principle” for the Eurozone, asserting that additional rules were needed
to minimize states’ incentives to over-spend and thus minimize the
probability of future crises.

Furthermore, the central banker said financial support to member
states should only be used as a last resort, “that should only be
implemented when there is a clear danger of contagion” and with strict
conditions.

The measures taken in May were justifiable given the risk, though
they still placed a “serious strain” on the Eurozone, Weber said.
“Therefore, these measures cannot be a long-term solution — they only
bought us some time, and it is crucial to regain lost confidence in
member states’ public finances by restoring sustainability.”

Turning to structural changes needed to address capital flow
imbalances, Weber dismissed the notion that “surplus countries” should
be the ones to make adjustments.

“As the deeper causes of the imbalances are domestic factors within
the deficit countries, it is mainly incumbent on them to take action,”
Weber argued.

He applauded the efforts of Greece and other EMU states in taking
steps to consolidate their budgets, and stressed the need to “maintain
the momentum.”

He also countered the arguments that fiscal tightening could hamper
economic growth, stressing that policies needed to be focused on
austerity when markets were less than confident regarding the
sustainability of public finances.

“In the longer term immediate consolidation prevents a negative
spillover from public finances to growth,” Weber said. “In other words,
credible fiscal consolidation could serve as a possible anchor in the
current uncertain environment.”

–Frankfurt bureau: +49-69-720 142. Email: frankfurt@marketnews.com —

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