Update: Weber: Bailouts Were Needed But Strained Basis Of EMU

–Adds Comments On Stability and Growth Pact, Future Bailout Fund

FRANKFURT (MNI) – EU bailout measures were necessary in the face of
spillover risks but have strained the very basis of the European
Monetary Union, European Central Bank Governing Council member Axel
Weber said Wednesday.

Weber nevertheless said that he is optimistic that the Eurozone can
emerge stronger from the current crisis if the right lessons are drawn.

In addition to problems in individual EMU member states, “there is
a risk of spillover effects into other countries that could endanger the
financial stability of the entire euro area,” the head of the Bundesbank
said.

“However, the necessity of the measures taken must not obscure the
fact that they have significantly strained the basis of the currency
union,” Weber warned.

To reinvigorate EMU, a reform of EU rules is inevitable, Weber
asserted.

In particular, he called for a strengthening of the Stability and
Growth pact, including more automaticity in punishing countries that
violate the limits on deficits and debt. He also called for more
intensive surveillance of macroeconomic imbalances and the creation of a
crisis mechanism.

Weber welcomed the Eurogroup’s preliminary decision for a
permanent crisis mechanism but warned that in finalizing the details,
significant deviation from that decision must be avoided. In particular,
he
said that the seniority of the European Stability Mechanism over private
creditors must be maintained to minimize the risk for taxpayers.

If the necessary and right reforms are pushed through, “and in that
respect I am optimistic, the crisis might yet result in a strengthening
of the currency union,” Weber said.

Weber also said that the ECB is optimistic that support extended to
Ireland “will contribute to the stability of the Irish banking system.”

He confirmed the Bundesbank’s recent upbeat growth outlook for
Germany and said the country should be able to reduce its deficit to
around 2.5% in 2011. Given high debt levels, however, Germany must stick
to its consolidation course, Weber asserted.

“Germany should be conscious of its position as a role model in the
euro area,” Weber said.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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