–Adds Comments On European Systemic Risk Board

FRANKFURT (MNI) – Inflation expectations in the Eurozone are
anchored in line with the European Central Bank’s intentions, and the
ECB will continue to ensure price stability in the future, the bank’s
president Jean-Claude Trichet said Friday.

Giving the keynote address at a central banking conference here,
Trichet argued that the recent crisis in Europe is the result of unsound
fiscal policies in a number of EMU countries, bad macroeconomic policies
and inadequate surveillance of those policies by all member states.

“That is why we call for a very ambitious reform of euro area
governance — a reform that will address the root causes of the current
situation and make it simply impossible to happen again,” he said.

The solution to the current problems lies in ensuring that future
fiscal and macroeconomic policies are the right ones and they are
monitored with a “far more effective system of surveillance,” he said.

Trichet said there was some “good news,” which is that “all the
efforts to strengthen the economic attribute of our union will be
supported by a monetary policy that will ensure price stability.” He
noted the success of the ECB over nearly 12 years in keeping inflation
at under 2%, which is its inflation goal.

“What is more, looking ahead, inflation projections and inflation
expectations are well anchored in line with price stability,” he said.

Trichet spent most of his speech discussing the newly created
European Systemic Risk Board, which will be housed at the ECB and
chaired by the ECB President — namely Trichet himself, until his term
ends on October 31, 2011.

But he vowed that despite the close quarters and his own dual
functions, the ECB and ESRB would be two completely separate entities.

He described its creation as a “landmark event in Europe” and noted
that it is part of a wider global post-crisis phenomenon, including the
creation of the Financial Stability Oversight Council in the U.S. He
said the ESRB would “aim for close cooperation” with its trans-Atlantic
counterpart and other macro-prudential authorities.

The ESRB’s power will be largely limited to making warnings and
recommendations. But Trichet argued that despite its lack of enforcement
power, its authority might be nonetheless “quite significant.” Once it
has issued warnings and recommendations, “we assume that the addressees
will give careful consideration to the measures the ESRB will propose,”
he said.

“I am confident that the ESRB will quickly develop its credibility
through its work, its warnings and its recommendations,” he added. “Its
authority will draw on the quality of its analysis and its deep
understanding of the functioning of the financial sector.”

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