LUXEMBOURG (MNI) – Reforms being agreed by European leaders have
not yet resolved the current crisis, but they head in the desired
direction, European Central Bank Governing Council member Yves Mersch
said Wednesday.

The sovereign debt crisis “illustrates more each day the importance
of a complete command over public finances,” Mersch, who heads the
Luxembourg Central Bank, said in the editorial to the bank’s latest
bulletin. “Very fortunately, fundamental reforms are underway at the
European level. If these reforms don’t constitute success yet, they go
in the right direction.”

Elsewhere in the bulletin, the bank noted that survey data point to
a slowdown of economic activity in 4Q, and it repeated the view of the
Governing Council that inflation rates should exceed 2% in the coming
months but then slip below that level.

Among the elements limiting Eurozone growth, the bank said, are “a
moderation of the pace of growth of global demand and the unfavorable
effects, for global financing conditions and confidence, that result
from the tensions currently observed in sovereign debt markets of the
Eurozone, as well as the process of balance sheet adjustment of the
financial and non-financial sectors.”

Still, the bulletin continued, a pickup of activity, “although very
gradual,” is likely next year on the back of improved global demand,
“very low” short-term interest rates, and all the measures taken to
support the banking system.

However, uncertainty is high and risks to growth in the area are
largely tilted downward, the bank said, pointing to a worsening of
financial market tensions and their potential to impact economic
activity.

Moreover, the bulletin observed, the global economy could be weaker
than expected, while protectionist pressures and the possibility of a
disorderly correction of global imbalances are additional threats.

More subdued inflation next year “reflects expectations, according
to which, in a context of a slowdown of growth in the Eurozone and on a
global scale, the underlying tensions on costs, wages and prices in the
Eurozone should also remain moderate,” the central bank asserted.

Risks to the medium-term inflation outlook are “overall balanced,”
the bulletin said, citing indirect taxes and administered prices as the
main upside risks, with weaker-than-expected growth in the euro area and
globally the main downside threats.

Echoing the introductory statement of last Thursday’s ECB press
conference, the bank said that intensified market tensions had not yet
had a major impact on credit supply, but that since such effects could
appear with a lag, credit developments should be monitored very closely.

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

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