BERLIN (MNI) – Inflation risks in the Eurozone are on the rise, ECB
Governing Council member Yves Mersch said in a newspaper interview
released Friday, arguing that the economy would be able to absorb policy
tightening by the ECB.

“There are everywhere elements which lead us to reassess the
balance of risks and to consider that the risks for an increase in
inflation are on the rise,” the Luxembourg central bank governor
told the Belgium newspaper L’Echo.

The central banker noted that import prices have been rising very
strongly, which signals rising industrial producer prices in the
months ahead. “We’re taking this indicator seriously,” he said.

There are no widespread labor market bottlenecks in
the Eurozone yet, “but we are seeing pressure in certain professional
categories and some countries,” Mersch remarked.

“Pressure on the labor market is different across Europe, but we
have to conduct a policy for the whole of the Eurozone,” Mersch said.
“Over the medium term, developments on the labor market can turn around
quickly.”

In the monetary sphere, Mersch pointed to great excess liquidity
not only in the Eurozone but also at the global level. “That excess
can quickly be transformed into transactions,” he warned.

Asked by the newspaper if the Eurozone economy would be able to
cope with several ECB rate hikes, Mersch replied: “I would not say that
there is a risk for the economy if one proceeds with a normalization” of
monetary policy.

He reminded that real interest rates in the Eurozone have been
negative for more than a year now. “These negative interest rates are
really devastating for the proper allocation of capital,” he said.

Commenting on the state of banks in the Eurozone, Mersch said there
are still some banks with problems, but their number is shrinking. “It’s
not up to the ECB to assure the survival of every bank in the Eurozone,”
he stressed. Rather, this is a responsibility of governments, he argued.

Mersch was also asked by the paper how he viewed the decision by
Eurozone government leaders last week to allow the rescue funds EFSF and
the future ESM to buy bonds from ailing member states on the primary
market.

While it was only a small step, it was still better than the
proposals which circulated before the summit meeting, Mersch replied.
“Let’s see what they make of it.”

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

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