–Retransmitting 18:51 ET Story, Fixing Typo
— No inflationary pressures in the euro area

By David Barwick

WASHINGTON (MNI) – A reduction of liquidity in the Eurozone by no
means implies the European Central Bank is set to tighten policy and can
even be interpreted positively, ECB Executive Board member Lorenzo Bini
Smaghi said Sunday.

Speaking at an event on the margins of the Annual Meeting of the
IMF and World Bank, Bini Smaghi said that “the system by which we
provide liquidity has proved to be very effective.”

When market participants “want less liquidity, it’s not a drama,”
he said. Many observers interpret a liquidity reduction “like, ‘ECB’s
going to tighten’. That’s not the way it works.”

On the contrary, he affirmed, “it means banks are able to manage
their business with less liquidity.”

This “is a good sign” and “we don’t see any reason why we should
force banks to hold more liquidity than they want,” Bini Smaghi said.

Bini Smaghi painted a benign picture of price developments in the
Eurozone: “There are no major inflation pressures, we don’t see any
inflation pressures in the euro area. So i don’t think our policy should
be based on a risk that we don’t consider material at this stage.”

In general, he said, after a few days here “I am not so sure Europe
is the area which is in more trouble.” The European recovery is
proceeding on the expected path and one should be neither too optimistic
nor too pessimistic, he said.

“So basically, on the real economy I would say things are not that
different from what we thought three months ago,” he said. At the same
time, credit developments are progressively “starting to move again.”

This includes in particular credit to households, but lending to
the non-financial sector is also showing “signs of stabilization,” he
said.

The recently conducted bank stress tests indicate that “fortunately
many of the problems lie in banks which are owned by govts or the
national authorities,” he said.

The process of financial sector restructuring is an ongoing process
that needs further effort, he said.

Turning to the sovereign debt crisis, Bini Smaghi said that in
theory, one way of overcoming fiscal problems would be “to inflate the
problem away,.”

However, he continued, “We know the ECB will not allow it,” so that
“in the euro area this is not a solution.”

Indeed, “the only way to get out of this crisis is the traditional
one: to have people pay taxes, to fight against tax evasion.”

On the whole, “Europe has reacted well” to the crisis, he said. To
be sure, “there are many problems ahead of us,” but in this Europe is
“like all other major economic areas in the world.”

“The euro is one of the major creations of Europe and … the
failure of the euro would be the failure of Europe,” he asserted.

In other comments, Bini Smaghi called in the context of current
forex developments for the enlargement of the international cooperative
framework by other important actors.

“But these major players need to accept the rules of the game. ..
so they have to work in a cooperative environment, which is a long
process because they come from different histories … and it will take
time, but I think that’s the way we have to work.”

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

** Market News International Washington Bureau: 202-371-2121 **

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