FRANKFURT (MNI) – Eurozone governments need to set out fiscal exit
and consolidation strategies and press ahead with key reforms of the
financial system as well as labor and product markets, European Central
Bank President Jean-Claude Trichet said on Monday.

Against the background of worsening budgetary positions, “it is of
paramount importance that the updated stability programme of each euro
area country is underpinned by well-defined corrective measures in line
with the respective excessive deficit procedure and clearly sets out the
fiscal exit and consolidation strategies for the period ahead, with a
strong focus on expenditure reforms,” Trichet said in the introduction
to the ECB’s Annual Report.

So as to ensure sustainable growth and job creation ahead, key
reforms are also needed, the president said.

“In particular, reforms are urgently needed in the financial
sector, where an appropriate restructuring of the banking sector should
play an important role,” Trichet said.

“Sound balance sheets, effective risk management and transparent,
robust business models are key to strengthening banks’ resilience to
shocks, thereby laying the foundations for sustainable growth and
financial stability,” he added.

Looking at product markets, “policies that enhance innovation
should be developed to speed up restructuring and investment and to
create new business opportunities,” Trichet assessed.

So as to avoid significantly higher structural unemployment over
the coming years in labor markets, “moderate wage-setting, effective
incentives to work and sufficient labour market flexibility are
required.”

In a more detailed assessment in the annual report, the ECB said
that “with unemployment likely to increase further for some time to
come, labour market policymakers will need to ensure that recent
deteriorations do not translate into higher structural unemployment.”

Long-term labor market perspectives in the Eurozone will depended
on its ability to restructure, the report said.

“This process of creative restructuring is likely to require
further reforms in both labor and product markets to help enhance
long-term employment prospects and facilitate labor mobility during the
transition process,” the ECB said.

“These will include efforts to enhance wage flexibility — allowing
for sufficient differentiation according to labor market conditions, the
competitive situation of firms and the productivity of workers — in
order to stimulate labor demand,” it added.

At the same time, the crisis measures — including the widely used
short-time working schemes — must be ended in a timely manner so as
allow for “the necessary reallocation of labor from less to more
productive sectors.”

–Frankfurt bureau; +49-69-720142; jtreeck@marketnews.com

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