HELSINKI (MNI) – The impact on markets of spiraling public deficits
could lead to a new recession and must be addressed, European Central
Bank Governing Council member Erkki Liikanen said here Wednesday.
“We must stop the negative spiral of the public deficit problem
affecting the financial system,” Liikanen told an audience at a seminar
hosted by the Council of Finnish Chambers of Commerce. “This might
trigger a new recession,” he warned.
Liikanen, who heads the central bank of Finland, noted that the
current debt crisis affected the most vulnerable countries first,
particularly Greece. “Greece has a bad history and its statistics
weren’t trusted. That is why it was affected first,” he said.
He warned that under the current circumstances, a “crowding out
effect” in credit markets decreases the possibility for growth.
Nonetheless, “there is a lot of solid data to show the world economy is
in recovery,” Liikanen said, though he noted that it is imbalanced among
different economies with the emerging markets growing fastest and the
U.S., Japan and Europe lagging behind.
He asserted that the overall situation in financial markets has
recovered to the situation that existed prior to the crisis, “when the
last couple of weeks of volatility is excluded.” He warned, however that
global imbalances between surplus and deficit countries “haven’t changed
Liikanen repeated in the question and answer session what he had
stressed in his prepared remarks, reported earlier — namely that the
ECB’s current monetary policy stance is “appropriate,” and that “we will
never renounce our main principle of price stability.”
He warned that the safety net that has been cast over the financial
system “generates the problem of moral hazard.” Banks should have more
and better capital to guarantee solvency in times of stress, he said.
He noted that regulatory reform efforts, particularly the
imposition of new bank taxes “is hampered by the conflicting views of