TOKYO (MNI) – The European Central Bank must unwind its
non-standard policy measures as soon as market conditions permit and
will have the tools to do so, ECB Executive Board member Benoit Coeure
said Monday.

“We can withdraw the ample liquidity created as a side-effect of
the long-term operation whenever the Governing Council deems liquidity
conditions are excessive in view of the outlook for price stability,”
Coeure said in a text for delivery to a conference here.

“All the tools necessary for large-scale liquidity withdrawal are
already in place or will be readily available when needed,” he assured.

A “timely exit” from these measures “and a return to a less
accommodative policy stance – once the economic conditions are ripe –
are essential,” Coeure stressed.

Loose monetary policy over time could “fuel excessive risk-taking,
leverage and asset price bubbles” and make banks, companies and
governments addicted to low rates and dissuade them from cleaning up
their balance sheets, he cautioned.

“At present, we are seeing some encouraging, albeit early, signs of
normalization across financial market segments,” Coeure said. He noted
the pick-up in M3 money supply growth and lending in January, as well as
the decline of stock market volatility and money market credit spreads.

The role of the ECB is not to cure the “root cause” of the current
crisis: weak fiscal institutions, diverging competitiveness among
Eurozone countries and low potential growth due to delayed structural
reforms, he stressed.

Indeed, if there is a silver lining in the crisis, it might be the
obligation “to pursue sustainable state finances and to undertake the
necessary structural reforms,” he said. “Switching this mechanism off
would weaken incentives to conduct the right economic policies.”

“Some” governments “have taken important steps towards addressing
the root cause of market malfunctioning,” he noted. Mechanisms for
tighter collective fiscal surveillance are being created and “might
become the first step towards a fully-fledged fiscal union.”

Armed with graphs and equations, Coeure resumed the success story
of the ECB in assuring price stability over the medium term and keeping
financial markets functioning during the worst crisis since the second
world war.

The recent overshoot in inflation is due mainly to volatile energy
prices and “certainly remains within the strictest tolerance bands,” he
asserted.

Moreover, the Eurozone economy has enjoyed relative stability —
second only to that of Switzerland — and produced a rise of GDP per
capita comparable to that of the United States, he showed.

“Borrowing money in the euro area is cheaper today – in real and
nominal terms – than it was a decade and a half ago, and the lower cost
of borrowing is largely related to a less uncertain and a more
predictable macroeconomy,” he argued.

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