PARIS (MNI) – The risk that Greece’s debt crisis will spread to
other Eurozone countries such as Portugal and Spain is “very remote,”
ECB Governing Council member and Bank of France Governor Christian Noyer
said in a radio interview broadcast over the weekend.

The E30 billion contingency loan plan announced earlier this week
by Eurozone finance ministers is “extremely strong,” Noyer told France
Culture radio. “It’s a plan that says to the market, ‘if you can’t
finance Greece we will finance it in your place.’ That gives complete
credibility to financing for Greece.”

He added: “In the weeks to come, in my view, markets will take that
increasingly into account.”

Moreover, “none of these other countries have the same level of
debt or the same level of [market] interest rates” as Greece. “So I
think this risk [of contagion], if it ever existed, has been banished,”
he said.

“Now we know how crises can be dealt with,” Noyer added.

With the proffered aid, Europe has “shown solidarity,” Noyer
asserted. “But having solidarity doesn’t mean you can let people do
whatever they want,” he said, adding that Europeans countries have to
monitor each other to make sure sustainable fiscal policies are being
followed.

Before the crisis, markets had a tendency to neglect the
differences among the different Eurozone economies, Noyer noted. In a
clear reference to Greece, he said: “You can’t live in a monetary union
with a strong commitment by the central bank to maintain price stability
at a rate close to 2% and have countries where the cost of production is
growing at 5%, 6%, 7% every year. This is not possible.”

Those countries quickly become uncompetitive, he said.

Noyer warned of the macroeconomic dangers of maintaining government
deficits and debt too high for too long. “Households and businesses will
change their behavior” because they will assume that with the budget
continually in the red, eventually their taxes will have to rise.

“So households will raise their savings rate and lower their
consumption. The less households consume, the less businesses invest,
the more growth will retreat,” Noyer argued. “The less rapidly we cut
deficits the more debt will weigh.”

He singled out Ireland for praise, saying that with its deficit
hitting unsustainable levels last year and markets getting shaky, it
“dealt with its problem right away, without letting market concerns
grow.” By cutting public sector salaries 10% to 15% and raising some
taxes, “it quickly won credibility,” Noyer said.

Greece, too, has taken measures that are “rigorous” and “very
credible,” Noyer said. He noted that the Greek government has announced
a cut in public sector salaries of 10% as well as hikes in VAT taxes.
“It gives you an idea of what you can do when you really have a knife to
your throat,” he said.

He urged all Eurozone countries to take measures to reduce their
deficits and debt as quickly as possible. Spending cuts in the public
sector should be given priority, he said. “On public spending, in France
we have maneuvering room because we have one of the highest public
sector spending ratios in Europe,” he noted.

Given the contraction of potential growth as a result of the
crisis, due to prolonged weakness in business investment and the
destruction of jobs, the time is right for deep, fundamental reforms in
the economy, Noyer said.

In France, reforming the retirement system is of utmost importance,
he said, adding that people will have to work longer. There must also be
efforts at retraining workers who have lost their careers, in addition
to investment in research and in innovation that will allow France to
enhance its competitiveness and its potential growth, he said.

On the current macroeconomic outlook, Noyer reiterated that while
the recession is over, growth is still “fragile” and there’s “still a
lot of uncertainty.” The recovery in Europe is still “not at full
thrust,” he said, because rising unemployment weighs on household morale
and businesses, faced with surplus productive capacity, will try to
raise utilization rates before investing in new plants and equipment.

On the international front, the U.S., because of its flexible
economy is able to return to job creation more quickly than Europe —
just as it was quicker to lay people off when the recession started,
Noyer noted. However, “we know that the U.S. is a country that consumes
too much in relation to what it produces,” so the rise in its savings
rate will continue, he added. That being the case, “I’m not sure the
U.S. will be the principal growth motor in the years ahead.”

China, on the other hand, needs to move in the other direction,
Noyer urged. He noted that Chinese save half of their revenue. “We need
for them to save less if they are going to become a motor of growth.”

Noyer added his voice to the chorus of ECB colleagues who have
roundly rejected a proposal in a research paper by the IMF that said
central banks should consider targeting inflation at closer to 4% rather
than 2% in order to protect against shocks to economic activity.

The idea, Noyer said, “makes no sense.” He warned that flirting
with higher inflation would cause long-term market interest rates to
rise, raising the cost of capital, discouraging investment and
ultimately making “the rate of growth collapse.”

Asked if he thought joblessness would stop rising in France this
year and the economy would start creating jobs again, Noyer was very
cautious. “I hope so,” he said, adding that he thought there would be a
“gradual but slow consolidation of economic activity this year.” The
recovery in the labor market would “lag by a few months,” he predicted.
Though he added that, “we see the first signs of hope in the temporary
labor market, which is recovering.”

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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