FRANKFURT (MNI) – Eurobonds would not free the Eurozone from
capital market pressure and would set the wrong incentives over the
medium term, Bundesbank board member Andreas Dombret warned Wednesday.

In the short run, the momentum of the crisis must be arrested and
“countries must be given the necessary time to consolidate public
finances,” Dombret acknowledged in comments prepared for a lecture at
the Center for Financial Studies here.

Over the longer term, however, it is essential to ensure that each
country remains solely responsible for its own fiscal situation, he
stressed.

Eurobonds would weaken that responsibility and remove key
incentives for austerity, he warned. “Any introduction of a Eurobond
should thus be viewed very critically.”

At the same time, expectations that a common bond would free the
Eurozone from capital market pressure are not realistic, as doubts over
the sustainability of public finances in the euro area would be
reflected in the yield of a common bond, he argued.

Dombret reminded that excessive sovereign debt is not a problem
unique to Europe. The U.S. will have to deal with the consequences of
high debt built up before and during the crisis for some time, he said,
voicing unusually frank criticism of U.S. policy.

“The U.S. countered not only the threatening great recession after
the Lehman failure but also the slowdown in the upswing already under
way via powerful fiscal and monetary policy stimuli,” he said. “In
essence, the U.S. is trying to counter the symptoms of a debt crisis by
means of yet more debt.”

America’s “expansive strategy carries risks and might raise
difficult questions, for example with regard to the durability of the
dollar as the leading currency,” he said.

Returning to the Eurozone, Dombret reiterated that medium-term
inflation is expected to remain in line with price stability — close to
but below 2%.

“However, the risks — which currently remain largely balanced —
could well move to the upside,” he cautioned. “The Eurosystem is
monitoring these developments very attentively.”

Similar comments by ECB President Jean-Claude Trichet last week
spooked the markets. Since then, however, Governing Council members have
stressed that inflation concerns are still contained and that markets
may have overreacted to the new inflation rhetoric.

–Frankfurt bureau tel.: +49-69 720142. Email: jtreeck@marketnews.com

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