FRANKFURT (MNI) – Keeping low interest rates for too long creates
new risks, European Central Bank Executive Board member Juergen Stark
warned Tuesday.

Inflation expectations remain well anchored in most countries and
the inflation rate in the Eurozone is in line with the central bank’s
definition of price stability of close to but below 2%, the ECB’s chief
economist observed on a panel during Euro Finance Week here.

“Low interest rates for too long a period of time create new
problems,” he said. “We live in a world in which inflation expectations
are well anchored in most advanced economies, in particular the euro
area.”

“Inflation in the euro area is fully in line with our definition of
price stability,” he underscored.

In addressing efforts to reform budget surveillance and reduce
heterogeneity in the Eurozone, Stark said, “I think we have to
strengthen economic governance. I think this is undisputed.”

“However, as the politicians always behave, as the heat of the
crisis seems to be over, they again become more relaxed and less
ambitious,” he remarked.

“And for this reason we are very critical of what has been decided
so far in the enhancement of economic governance,” he reiterated. “It
falls short of what we call a quantum leap in economic governance for
the euro area in particular.”

The central bank’s Executive Board, in particular, has repeatedly
expressed its disapproval of recently agreed proposed changes to fiscal
rules in the European Union, which they regard as lacking automaticity
and leaving politicians too much leeway to decide whether to impose
sanctions or not.

Conflict has also erupted surrounding a plan endorsed by some
European leaders, such as German Chancellor Angela Merkel, to oblige
investors to shoulder some of the risks of any future government
solvency problems in a permanent crisis mechanism to replace the current
European Financial Stability Facility, which expires midway through
2013.

It has been suggested that this proposal was at least a catalyst in
the recent run on Eurozone peripheral bonds, which seems to be reaching
an apex, as it appears increasingly likely that Ireland will be the next
Eurozone country to require outside assistance.

–Frankfurt bureau, +49-69-720142, tbuell@marketnews.com

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