HELSINKI (MNI) – The European Central Bank’s injection of E1
trillion in three-year cash at a record low 1% has had a “decisive
impact” on developments in financial markets, but a genuine solution to
the Eurozone debt crisis will require steadfast implementation of fiscal
and structural reforms by political leaders, ECB Governing Council
member Erkki Liikanen said Thursday.

“Slippages in the implementation of political decisions in the
current fragile economic and market situation would be dangerous and
costly,” Liikanen said in a statement accompanying the release of the
Bank of Finland’s quarterly bulletin.

“Central bank measures can be used to calm the financial markets,
but a permanent solution to the debt crisis will require both successful
fiscal and structural policies and a controlled and timely exit from the
temporary central bank measures,” said Liikanen, who heads the Finnish
central bank.

In its bulletin, the central bank noted that the 3-year ECB
operations – one on December 21 and the other February 29 — had “calmed
the worst fears of the markets and began to narrow risk premia that had
recently grown very large.”

The bank also said that the ECB policy measures introduced last
December — which included the 3-year operations, a reduction in the key
policy interest rate, and a loosening of collateral rules to allow
greater access of financial institutions to the long-term refis — “were
necessary in order to break the negative spiral and restore confidence.”

The Bank of Finland projected that global growth this year would be
“very sluggish” at “just over 3%,” and noted that risks even to that
somewhat downbeat forecast were “predominantly on the downside.”

It added: “The most significant positive risk relates to the
forecast trend in the U.S. economy. Better-than-expected growth in U.S.
demand would bolster the entire global economy both directly and
indirectly.”

Liikanen reiterated the ECB’s new baseline scenario, that inflation
in the Eurozone would now stay above 2% through 2012. But in the
medium-term, inflation risks are balanced and inflation expectations
“firmly anchored,” he said.

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

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