FRANKFURT (MNI) – The European Central Bank’s support for banks and
government bond markets can only work if governments also do their jobs,
ECB Governing Council member Ewald Nowotny said in an article published
Friday in The International Economy magazine.
“Through its ability to create liquidity at will, the central bank
can prevent possible difficulties in the refinancing of bank balance
sheets and enable banks to fulfill their role in financing the real
economy economy. It can also support the markets for government debt
until confidence has returned,” Nowotny said.
However, “liquidity support to banks and asset purchase programs
will only work if they are not thought of as propping up insolvent banks
and sovereigns,” the Austrian National Bank governor said. “For monetary
policy to do its job, governments have to do theirs.”
In this context, reducing fiscal deficits is essential for many
Eurozone counties even if it “certainly risks making the looming
recession worse,” Nowotny noted.
In the long run, more government spending and deficits could
“undermine confidence in the solvency of governments and banks, and the
future of European integration,” Nowotny said, adding that the lack of
confidence is the main reason for the current economic slowdown.
However, Nowotny said that “while currently there is no alternative
to reducing deficits for some countries in Europe, there may be a
certain room for flexibility in other countries.”
–Frankfurt bureau tel.: +49 69 720 142; Email: jtreeck@marketnews.com
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