FRANKFURT (MNI) – The absence of inflation risks makes official
interest rates in the Eurozone appropriate, even if authorities must
unwind their crisis-induced liquidity-providing measures in light of
improving financial markets, European Central Bank Governing Council
member Axel Weber said in an interview published over the weekend.

The head of Germany’s Bundesbank told Japan’s Nikkei that the
unwinding of those measures does not constitute a monetary policy
signal of any kind.

The austerity plan promised by Greece to get its fiscal house in
order will prove effective, and its effectiveness will be acknowledged
by markets, Weber said.

There is “no reason for euphoria” despite improvement in the
economy and financial markets, he said. Eurozone growth this year will
be “moderate and very uneven in the individual countries,” he cautioned.

Asked if Greece’s fiscal woes have influenced the ECB’s exit
strategy, Weber asserted that monetary authorities are guided by risks
to price stability in the euro area as a whole.

“At present no inflation risks are apparent; therefore, the level
of interest rates is appropriate,” he said. “Because of the recovery of
the financial markets, it would not, however, be appropriate to leave
the special measures of liquidity supply unchanged.”

The ECB has thus commenced its “gradual” unwinding of these
measures, he noted, even as it continues to ensure ample liquidity in
the short term.

“Moreover, we have made clear that the withdrawal of the liquidity
measures is no signal of our monetary policy stance — i.e., the
appropriateness of the interest rates,” he added.

Weber praised the euro as “very stable,” noting, for example, that
Denmark needed to secure its currency during the crisis via foreign
exchange market intervention and borrowing costs that were higher than
in the Eurozone.

The euro’s future role internationally will be determined by
markets, Weber said. And in any case monetary policy focuses not on the
exchange rate but on price stability at home.

Weber asserted that Greece “has no solvency problem, but rather
less favorable financing conditions than the rest of the monetary
union.” This, he said, calls for “speedy and credible [budget]
consolidation” to boost market confidence and for “strict” adherence to
the EU Stability and Growth Pact.

The steps Greece announced early this month underscore its
determination to slash deficits and respect the Pact, Weber affirmed. “I
am sure that the measures will be effective. The financial markets will
reward this and the refinancing costs will improve as these measures are
implemented,” he said.

“But no quick improvement can be expected,” The Bundesbank head
cautioned. “Rather, the loss of credibility that was triggered in the
markets by dwindling competitiveness over the course of years must be
continually regained.”

Discussion of how to improve Greece’s financing conditions is
“important to be sure, but it has to concentrate on budget consolidation
by the Greek government,” he emphasized.

Noting that most Eurozone member states currently face an excessive
deficit procedure, Weber urged that “the consolidation of budgets has to
be credibly tackled now” throughout the area.

Germany itself must start not later than 2011 and get its deficit
to below 3% of GDP in 2013, he said — “though because of the more
favorable starting situation distinctly [sooner] would be possible.”

Indeed, Germany could be in compliance with the Pact by 2012, he
said. Consolidation should focus on expenditure reduction, Weber said.
He added: “The current situation and the tax estimate in May are likely
to show relatively clearly that at the moment no appreciable tax relief
is feasible.”

First quarter growth in the Eurozone’s largest economy would
“presumably” be weak in part because of severe winter weather, though
“the underlying trend of recovery is still intact,” and thus “for 2011
we see a continuation of the recovery,” Weber said.

Indeed, weakness in 1Q should make 2Q and 3Q “all the stronger,” he
suggested. “It’s remarkable that the labor market so far has hardly
shown a slump,” he said, predicting “only a very moderate” further rise
in joblessness.

However, potential growth in Germany is probably at around 0.75%
and thus only half of its pre-crisis level, he said.

Weber called the profitability of German banks “still
unsatisfactory,” despite the “clear improvement” seen in 2009. Credit
risks loom largest among a series of risks facing the banks this year,
he said.

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

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