By David Barwick

PARIS (MNI) – The European Central Bank “must not overreact” to a
destabilization of inflation expectations “so as not to destroy the
still weak upturn,” Governing Council member Ewald Nowotny said in a
newspaper interview published Saturday.

The head of the Austrian National Bank told Salzburger Nachrichten
nonetheless that price stability always comes first.

Of the “many causes” of the current inflation, “the most important
one is a problematic side-effect of a trend that is in and of itself
gratifying,” he said with reference to emerging market growth and the
resulting higher demand from these populations.

This is “no short-term phenomenon” and “has nothing to do with
monetary developments,” he said. U.S. Federal Reserve policy “can lead
to additional speculative effects,” though these should not be
overestimated.

Pressed on that issue, Nowotny countered that money supply by
itself is without an economic effect, the latter driven instead by
lending. However, lending is “unfortunately not yet” expanding, he said.

“That is the analysis for Europe,” he said. “We are closely
monitoring developments and have all instruments to intervene, if we
have the feeling that inflation expectations are no longer stable.
However, we must not overreact so as not to destroy the still weak
upturn. Price stability always has priority.”

Asked if his last remark meant the ECB would throttle the recovery
in case of doubt, he responded merely, “We have a clear mandate and that
is to ensure price stability.”

Nowotny said he understood people’s concerns about inflation, since
“there are challenges,” among which “the largest is the rising energy
and food prices.”

“The ECB is monitoring this very closely,” he continued. “We cannot
influence the oil price, but are paying close attention that there are
not any second-round effects or spirals that result from this. We have
no evidence for this at the moment, but we are particularly vigilant.”

Nowotny said he would not worry about whether the euro will
maintain its value, observing that inflation in the Eurozone has
averaged 1.9% since the common currency was introduced. “The euro has
absolutely proven itself,” he said.

The Eurozone would overcome the crisis without a “breaking test,”
albeit with a challenge to economic policy in the area, he said. It was
“too optimistic” to expect a quick convergence of economic strength, he
said.

An exit from the common currency by its weakest member states would
be “neither desirable nor realistic,” he affirmed. “We have a problem,
but one can’t solve it by amputation, but rather only by patient work.”

Nowotny denied that fellow Council member Axel Weber had ever
called into question the ECB’s attachment to price stability, despite
his opposition to the central bank’s purchase of sovereign debt on the
secondary market.

“There were discussions about individual instruments, but not about
the fundamental orientation of the ECB,” he said. This does not depend
on who succeeds current ECB head Jean-Claude Trichet, he said, noting
the “number of very qualified candidates.”

Asked if nationality should play a role, Nowotny replied, “The
decisive point is the qualification of the candidates. And I would not
overplay comments from political leaders.”

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

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