WARSAW (MNI) – Increasingly large rescue packages could solve some
problems but create other, worse challenges, European Central Bank
Executive Board member Juergen Stark said Friday.

Speaking on a panel at a conference of the National Bank of Poland,
Stark urged politicians to restore confidence.

“With ever larger rescue packages,” he said, “there is a risk that
in the end the water damage is much more significant, much larger than
the damage done by the fire.”

In terms of the European project, he said, “we have achieved a lot
and we should not allow what we have achieved…to be put at risk, so we
have to do all we can…to tackle the crisis.”

“Some are of the view that” the ECB is “close to the red line” with
respect to what it is allowed to do, Stark said. “But on the other hand
what is still lacking is, first, political leadership in Europe, and
second, based on this leadership, political decisions in order to
restore confidence.”

It is above all a crisis of confidence, he argued: “Confidence has
to be restored and this can only be done by politicians.”

For the ECB, “what is absolutely key,” Stark said, “is inflation
expectations.” The ECB has delivered on its mandate of price stability,
but if the bank were to be given more tasks and capabilities, it could
lead to excessive proximity to politics, he warned.

One-size-fits-all monetary policy “means that the central bank,
which has a clear mandate, has to fulfill this mandate, and this mandate
says to deliver price stability in the medium term. And that’s what we
have done,” he said.

“But what is needed is adjustment at the national level…and this
is exactly what has not happened,” Stark added.

“The ECB is still blamed in at least one country that is under an
EU/IMF program,” Stark said, noting that the country in question claims
“that the monetary policy was too lax for this particular country, that
the ECB did not warn…about the longer-term impact of relatively low
interest rates, and the ECB has failed in supervising the banking
system.”

“We are not in charge either of regulation or supervision,” he
added.

“The current account is broadly balanced in Europe, but we have
imbalances within the euro area, and the institution I represent here
was the only one that raised this issue many, many years ago,” he said.
“We know that current account imbalances don’t emerge overnight. It is a
longer-term issue.”

However, “there was no urgency” about the issue on the part of
policymakers, he charged.

“The fundamental logic of the Maastricht Treaty is still valid,
it’s still correct, and nobody should put in question what was achieved
in Maastricht for monetary union,” Stark said, citing the no-bailout
principle, avoidance of fiscal deficits and the prohibition on monetary
financing of governments.

European integration “cannot stop with a fiscal union,” he said,
calling for a “financial union.”

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

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