GENEVA (MNI) – The European Central Bank must avoid circumventing
the EU treaty’s prohibition of monetary financing, because to violate
that principle could cause inflation risks and create moral hazard in
the fiscal policies of sovereign governments, ECB Executive Board member
Peter Praet said Monday.

In a text for delivery at a conference here, Praet said it was
particularly important for the ECB to stand firm in the face of the
Eurozone debt crisis, which has led many outside of monetary
policy-making to voice demands that are inconsistent with the central
bank’s primary mission of maintaining stable prices.

“At this stage it is essential to counteract any attempts that aim
to burden monetary policy with tasks that are beyond its mandate of
maintaining price stability or violate the principles enshrined by the
[EU] Treaty,” the ECB’s chief economist said. “This is a key condition
for monetary policy to remain an anchor of stability in turbulent
times.”

Because during this crisis the problems of financial stability and
public finances are so intertwined, “we have to be especially vigilant
to shield monetary policy from attempts to engross it into inappropriate
financial stability tasks,” he explained. “For such attempts may turn
out to be disguised aspirations to drag the well-established paradigms
of monetary dominance towards the realm of fiscal dominance.”

Though many analysts and political leaders have encouraged the ECB
to be the lender of last resort to troubled peripheral Eurozone
governments, “such activities are not legally within the reach of the
ECB, since the Treaty clearly imposes the prohibition of monetary
financing,” Praet continued. “There must not be any circumvention to
this prohibition.”

Failure to uphold that prohibition, he added, would lead to moral
hazard that “could weaken incentives for governments to pursue fiscal
consolidation to safeguard or restore fiscal sustainability. This will
ultimately endanger price stability, and macroeconomic stability more
generally.”

On the economic front, Praet repeated the ECB’s current baseline
scenario that “inflation is likely to stay above 2% for several months
to come, before declining to below 2%.”

With regard to growth, he said the most recent data “confirm some
tentative signs of a stabilization at a low level around the turn of the
year, but the economic outlook remains subject to high uncertainty and
downside risks.”

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

[TOPICS: M$$EC$,M$X$$$,MGX$$$,M$$CR$,MT$$$$]