PARIS (MNI) – The unwinding of debt in the banking sector and
tighter government fiscal policies are constraining the economic
recovery in Europe, European Central Bank Governing Council member
Michael Bonello said Friday.

Bonello, who heads the Central Bank of Malta, said his own
country’s economic prospects were dampened by the shaky economic
condition of its European partners.

“In the present period of renewed crisis, the risk to the
projections is clearly on the downside, mainly because of the clouded
outlook for demand in Malta’s main trading partners and the likely
spillover from the deflationary fiscal policies being adopted in many
countries,” he said in the text of a speech provided by the bank.

“The recovery in Europe is also constrained by the deleveraging
process currently underway in the banking sector and in the private
sector generally,” he added. “Together with the fiscal tightening, this
balance sheet consolidation largely explains why the [European
Commission] is forecasting only a modest recovery in the euro area and
the EU this year, with growth rates of 0.9% and 1.0%, respectively.”

Bonello noted that one of the key lessons of the current crisis is
“a universal law that often tends to be forgotten: like individuals,
countries cannot afford to live beyond their means indefinitely. Sooner
or later, the excesses of the past have to be paid for, often at a high
economic and social cost.”

Recent proposals by the Commission to strengthen economic policy
coordination among EU members are intended to acknowledge that fact,
he said.

Bonello noted that the spate of proposals aired in recent months
aim to improve implementation and enforcement of EU fiscal rules and
extend peer surveillance beyond the traditional domain of budgetary
policies to address other macroeconomic factors, including competitive
differences, asset price booms and rigidities in both product and labor
markets.

“While Malta’s situation is clearly less worrisome than that of
some of the peripheral euro area countries, these proposals would
benefit our economy as well,” he said.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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