FRANKFURT (MNI) – Sustainable and credible fiscal policy is
“essential” for all governments in the Eurozone in order to maintain
confidence, European Central Bank President Jean Claude Trichet said in
an interview published Saturday.

Europe must actively pursue structural reforms, because its economy
lacks sufficient flexibility, Trichet told Portuguese weekly Expresso.

Trichet reiterated that the bank’s unwinding of non-conventional
measures is in line with the improved functioning of markets, but he
conceded that banks are still not providing the economy with sufficient
credit and reminded them of their duty to help promote economic

Asked if he thought fiscal exit strategies in high-deficit
countries such as Ireland, Portugal or Greece were risks to recovery,
Trichet responded that the Governing Council has “always defended
fiercely the [European Union's] Stability and Growth Pact.”

The Council has always emphasized to governments that the Stability
Pact is “crucial” for economic and monetary union (EMU), he explained.

This is true not only because these governments are part of the
EMU, or out of a moral responsibility to protect future generations from
an “abnormal burden,” but also “because it is a crucial element of the
confidence of the households, entrepreneurs and market participants,” he

“That is the reason why we see no contradiction between the
objective to permit the economic recovery to expand and be active as
possible, and the sound management of fiscal policies,” Trichet said.

Governments must know that “if they do not do what is necessary to
be credible in having a sustainable fiscal position in the medium term,
they will not create confidence,” Trichet added.

“The recovery today depends crucially on the confidence of
households, of fellow citizens and of enterprises,” he asserted.

Asked if Portugal could face a situation similar to Greece’s
predicament were its government not to bring the public deficit to below
3% of GDP, Trichet would only say that “the countries are all in very
different situations.”

“That being said all governments of the euro area, without
exception, have the task to be credible in the sustainability of their
fiscal policies. It is our permanent message,” he underlined.

All Eurozone countries must “collectively exercise strong
surveillance of the individual governments of the euro area, impose
strong conditionality where needed and fully recognize that they are
sharing a destiny in common,” Trichet argued.

The peer surveillance organized under the Stability and Growth Pact
is “absolutely essential” for reinforcing fiscal discipline, Trichet
said. “If we have a reinforced surveillance on the members of the euro
area themselves, we will not have problems in the future.”

“I think Europe has a lot to do to improve macro-policies, in
particular fiscal policy, but also to be very active in the field of
structural reforms,” he said.

Trichet added that the Eurozone’s economy “is not sufficiently
flexible.” Structural reforms are “a very urgent” need and are “very
important” for all European countries, he said.

The ECB president said that euro area banks are still not providing
enough credit to the economy, and he noted that the ECB’s
non-conventional liquidity measures were implemented in a manner that
was “prompt and decisive in terms of quantity and quality of the
measures taken.”

Now the central bank is progressively unwinding these measures and
“this unwinding is fully in line with the fact that the markets are
progressively functioning better,” he said.

“We have a very simple message for all banks in the euro area: to
do their job financing the real economy; to do all they can to
restructure their balance sheets to be able to finance the economy.”
This includes market possibilities to issue new capital, using retained
earnings to buffer their own funds and paying moderate compensation, he

Trichet said that globally it is clear “we are in recovery mode,”
and that it is particularly visible in emerging countries, especially
emerging Asia, but also in Brazil and Latin America.

Trichet noted that he is “very happy” to continue working with
current Bank of Portugal head Vitor Constancio, who takes over as ECB
Vice President on June 1 and will therefore join the bank’s Executive
Board in Frankfurt.

–Frankfurt bureau; +49-69-720142;

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