FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet, in an interview published over the weekend, once again defended
the ECB’s decision to buy government bonds, saying it had been an urgent
response to a rapidly deteriorating global situation.

It would be a “grave error” to think the bank will allow the bond
purchases to lead to inflation, he told German weekly Der Spiegel.

Trichet explained, as he has several times over the past week, that
the additional liquidity injected by buying the bonds of troubled
Eurozone states would all be reabsorbed. He said last week that the ECB
would do so by collecting the extra cash in term deposits held at the
central bank.

On the defensive, as he has been ever since the ECB announced its
controversial bond buying program a week ago, Trichet was faced with a
barrage of questions suggesting the central bank had lost it
independence by doing the bidding of politicians. He was asked point
blank how he could be sure the ECB would not now become a permanent
“money printing machine” for political leaders.

He insisted that what the bank is doing is “totally different” from
the quantitative easing conducted by the Bank of England and U.S.
Federal Reserve. Their goal has been “to supply as much liquidity as
possible to the market,” he noted. “We will withdraw all the additional
liquidity that we supply.” He added: “Our monetary policy stance is
unchanged.”

The bank has “done a good job” keeping prices stable throughout its
young history, Trichet continued. And those “who believe — or, even
worse, are suggesting — that we will tolerate inflation in the future
are making a grave error,” he said, noting the ECB’s unpopular decision
to begin raising interest rates in December 2005 over the objections of
politicians.

Trichet also took on the national governments, insisting that a
“quantum leap” in governance is needed in the Eurozone, and that “major
improvements” are required to prevent “bad behavior. There must be “real
and effective sanctions” against violations of the EU’s Stability and
Growth Pact, he argued.

Under the Pact, a country’s deficit may not exceed 3% of GDP and
its total public debt cannot exceed 60% of GDP.

The extreme market turbulence that led to the new ECB measures —
which include reactivation of several unconventional liquidity
operations in addition to the bond purchase program — was reminiscent
of what happened after the Lehman Brothers’ bankruptcy, Trichet said.

Yet it was not an attack on the euro, he insisted, but rather a
matter of the credibility of individual states and, “as a consequence of
the financial stability of the euro area.”

“It is clear that it is the primary responsibility of the Europeans
to take the appropriate measures in order to counter the present severe
tensions which have erupted in Europe,” Trichet asserted.

Trichet noted that politicians are always tempted to spend more
money than they have, and that inflation reduces their debt. However,
“we must now demand extensive adjustment programs from the governments,
which the heads of state and government committed to the Friday before
last,” he reminded. “They are committed to accelerating the
consolidation of their budgets. They know what is at stake now.”

Trichet again rejected the idea that it would be a good thing for
countries to be able to leave the single-currency area: “No. This is
excluded. If a country joins the euro area, it shares a common destiny
with the other members,” he said.

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

[TOPICS: M$$EC$,M$X$$$,M$G$$$,MGX$$$,M$$CR$]