PARIS (MNI) – Industrialized countries across the globe should
embark immediately on fiscal tightening, including spending cuts and tax
increases, as signs of a healthy economic recovery grow, European
Central Bank President Jean-Claude Trichet said in an opinion piece
published late Thursday night on the website of the Financial Times.

Trichet said he disagrees with those who want to prolong the fiscal
stimulus measures introduced during the height of the financial crisis
and argued that cutting public borrowing would have only a “very
limited” effect on growth.

“With the benefit of hindsight, we see how unfortunate was the
oversimplified message of fiscal stimulus given to all industrial
economies under the motto: stimulate, activate, spend,” the ECB chief
said. He argued that, “we must avoid an asymmetry between bold, if
justified, loosening and unduly hesitant retrenchment.”

Trichet seemed to be targeting the U.S. and the International
Monetary Fund in his criticism of a headlong global rush into budgetary
stimulus last year, the FT said in a separate story contrasting
Trichet’s opinion with the recently expressed views of U.S. Federal
Reserve Chairman Ben Bernanke.

Indeed, Trichet’s views are starkly at odds with those of U.S.
Federal Reserve Chairman Ben Bernanke, who just this week aired a
somewhat pessimistic view of the economy and argued that stimulative
policies should be maintained for now.

“It is reassuring that the consensus on the need for credible
fiscal exit strategies, along with profound financial sector reform, is
very broad. But the timing remains disputed,” Trichet noted. He argued
that given the unprecedented size of public deficits and debt, which
have hit the highest levels on record in peace times, a more cautious
approach like his own might be warranted.

“Given the magnitude of annual budget deficits and the ballooning
of outstanding public debt, the standard linear economic models used to
project the impact of fiscal restraint or fiscal stimuli may no longer
be reliable,” Trichet wrote. “In extraordinary times, the economy may be
close to non-linear phenomena such as a rapid deterioration of
confidence among broad constituencies of households, enterprises, savers
and investors.”

He added: “My understanding is that an overwhelming majority of
industrial countries are now in those uncharted waters, where confidence
is potentially at stake. Consolidation is a must in such circumstances.”

Trichet said that he was “convinced that we will succeed” in
avoiding “a future economic catastrophe resulting from the extreme
malfunctioning of the financial sector,” but he warned that other
emergencies might eventually require fiscal spending. Therefore, “sound
public finances are a decisive component of economic stability and
sustainable global growth,” he said.

He said the ECB will continue to do its part to ensure such
stability and sustainable growth in the Eurozone, and that he expected
the governments in the single currency bloc to do the same.

“The ECB will contribute to consolidate a confident economic
environment by ensuring price stability in the euro area as we have done
for more than a decade. We expect governments to confirm their
determination to consolidate their public finances,” Trichet admonished.

“That commitment is as important today for the G20 paradigm of
‘strong, sustainable and balanced’ growth as it was yesterday” when
officials took “exceptionally bold decisions to avoid a depression,” he
added.

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

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