LUCERNE, Switzerland (MNI) – The rate cut decided last Thursday by
the European Central Bank was justified by the analysis of economic
developments and their implications for inflation, ECB Executive Board
member Juergen Stark said Monday.

Speaking at a conference, Stark noted his duty as chief economist
to present an analysis of economic and inflationary prospects and said
the proposal to cut rates had to be “well justified; economically
justified with a view to the mandate for the task that the ECB has as
priority, namely to ensure price stability over the medium term.”

His analysis last Thursday, Stark said, indeed suggested a rate cut
was warranted “with a view to economic developments, with a view to the
consequences of economic developments with regard to price stability —
price developments, costs developments, wage developments.”

Although new ECB President Mario Draghi announced the decision, he
stressed, “it is not the decision of a single person or of a single
member of the ECB Governing Council,” but was “collective” and
“unanimous.”

There is the “danger of a vicious cycle” between strains on the
banking system and weak public finances, Stark warned, and the only
solution requires bank recapitalization and fiscal consolidation by
governments.

Observing that “government bonds today are no longer the safe
investment” that they once were, Stark recalled the paradigm shift of
the 1970s with respect to inflation.

“It would be desirable if we would also have a paradigm shift in
budget policy in the direction of solid finances,” he said, noting that
this should be a global shift since weak public finances are not an
exclusively European problem.

“There is no alternative to budgetary consolidation,” he said,
dismissing the argument that tighter fiscal policy would throttle
growth. Rather, he argued, one shouldn’t underestimate the boost to
confidence from sounder public finances — precisely what is needed in
the current crisis of confidence.

Stark repeated his opposition to the philosophy of ever greater
bailout funds and financial assistance to vulnerable Eurozone states,
“because at the end they leave those countries that are now somewhat
sound with potentially additional burdens.”

Greece’s travails are a “specifically Greek problem” stemming from,
among other factors, a culture of tax avoidance and evasion and an
inability of the government to deal with this, Stark asserted.

In contrast, he said, “Ireland is on a good path.”

Asked about governments’ willingness to seek more global
competitiveness via forex policy, Stark said he found it “worrisome”
that “several advanced economies” as well as many developing countries
have relied on exchange rate policy. This is “exactly the phenomenon”
that has already proven in the past to worsen the state of the global
economy, he warned.

In general, the G-20 is not paying close enough attention to the
threat of protectionism, he asserted, citing capital controls as
evidence of growing protectionist tendencies. There is a “serious
danger” that such policies “could aggravate the current weakening of the
global economy,” he cautioned.

In other comments, Stark called again on policymakers to draw the
proper lessons from the crisis, but fretted that they are “proceeding
too hesitantly when it’s a matter of transferring sovereignty to the
supranational level.”

“I assume that in one to two years at the latest the crisis will be
under control,” though not necessarily overcome, he said.

In a last remark, Stark said that “we tend to extrapolate the
expenditure structures of the present into the future. That cannot and
must not be so.”

–Frankfurt bureau tel.: +49-69-720143. Email: dbarwick@marketnews.com

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