FRANKFURT (MNI) – Inflation expectations in the Eurozone remain
anchored, and the common currency is seen as solid, European Central
Bank Executive Board member Lorenzo Bini Smaghi assured Monday.

In reforming the institutional framework underpinning the euro, one
should be cautious about reasoning with analogies, the central banker
warned, according to a text prepared for delivery in Halle, Germany.

He noted that even in politically integrated federations, such as
the United States, major difficulties arise and “the fact of having only
one decision-maker does not necessarily mean that the right decision is
made.”

Even though Europe’s diversity “might render the decision-making
more cumbersome, in the end its wiser,” he reasoned.

“No country was allowed to fail like Lehman Brothers — but no
country was bailed out for free and without strong conditionality,” he
reminded.

“The decision to start the consolidation of public finances earlier
rather than later, which characterised the transatlantic divide at the
London 2009 G20 Summit, proved to be appropriate,” he argued.

“Inflation expectations remain anchored. And the euro is viewed as
a solid currency,” he underscored.

“The euro is a stable and safe currency,” he said, noting that the
sentiment longing for the return of the deutschmark in Germany “is
purely emotional and not based on statistical or empirical facts.”

Bini Smaghi argued that merely striving for more integration on
both fiscal and budgetary matters within the single currency area is not
enough.

Pointing out that some countries with federal and centralized
governmental systems, namely the United States and the U.K., have
encountered serious budgetary problems that have been worse in numeric
terms than the EMU average.

“It can actually be argued that, with the market pressure which
arises in a monetary union, its members have to think more about the
long-run stability of their public finances than they do if monetary
policy eliminates the pressure by ensuring the financing of the
deficit,” he said.

“Under pressure from the markets the euro area countries have
adopted corrective measures which are expected to stabilise the public
debt-to-GDP ratio in the coming years,” he said.

He observed that since last May European leaders have implemented a
number of measures, starting with the E110 billion support program for
Greece, the EFSF, “and extending to a strengthening of the Stability and
Growth Pact and finally a change in the Treaty to allow for a permanent
European Stability Mechanism.”

“Some of the discussions are still ongoing, and I will not comment
further on this issue.”

“The ECBs position has been made quite clear. We are in favour of
a ‘quantum leap’ in the governance of the euro area; it would ensure
greater consistency between economic policies and the single currency,”
he reiterated.

Bini Smaghi called for rules and procedures to bind the financial
system, just as the Stability and Growth Pact binds national fiscal
policies.

“Some progress has been made towards implementing a single rule
book within the EU, but margins for national discretion remain,” he
stated.

“Furthermore, the mechanisms for cooperation among supervisors
mainly apply to large and complex banking groups and operate at EU level
rather than the euro area level,” he noted.

“Its the smaller and local banks that have proved to be much more
risky and burdensome for taxpayers,” he elaborated.

–Frankfurt bureau, +49-69-720142, frankfurt@marketnews.com

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