FRANKFURT (MNI) – Stress tests will drive the necessary adjustment
of banks’ balances sheets and will help foster much-needed transparency,
European Central Bank President Jean-Claude Trichet said in a newspaper
interview published Tuesday.

In the interview, with French daily Liberation, Trichet also called
for extensive reform to create greater fiscal integration, but he
stopped short of calling for a change to the Maastricht Treaty.

It is “essential that the overall balance sheets of certain
institutions continue to be adjusted. This is now happening through the
stress tests which Europeans have fortunately decided to conduct, the
results of which will be published bank by bank,” Trichet told the
newspaper.

“The purpose of the stress tests is to measure the resilience of
banks in especially difficult circumstances. Transparency is very
important. This is what we have also seen in the United States, where in
the past there was a general absence of confidence, which was rectified
by the publication of such stress tests,” he added.

So as to avoid a repeat of the current sovereign debt crisis, the
European Monetary Union must improve fiscal surveillance and
integration, Trichet said.

In particular, it must “be able to go as far as possible, without
necessarily changing immediately the Treaty, notably with regard to very
early surveillance, almost automatic sanctions, and the strengthening
and extension of sanctions so that the euro area has the equivalent of
what we would have if we were in a fiscal federation,” Trichet said.

ECB Executive Board member Lorenzo Bini Smaghi last week called for
a revision of the treaty as regards the current deficit limit.

“The public deficit limit established by the Maastricht Treaty, 3%
of GDP, was calibrated on average economic growth of 3% a year. In the
outlook for coming years the euro area can reach growth of about half
that. So that figure needs to be changed,” he said. “The 3% limit gets
lowered. The accounts should tend to be balanced.”

Trichet said that creation of a common federal budget does not
appear to be a realistic option at the current juncture and he rejected
the sharing debt burdens ahead.

“A federal solution would require a huge leap forward at the
institutional level. It seems to me that a fully fledged political
federation is not, at present, wanted by the countries themselves.
Speaking as a citizen, it is a matter of regret to me that the chance to
take further steps was not seized in the 1990s,” he said.

“In the meantime, responsibility for the economic union itself —
as part of the economic and monetary union, the EMU, — rests with the
member states themselves,” Trichet said. Other governments and European
institutions should ensure that no member state “adopts policies that
could undermine the stability of the euro area as a whole.”

Asked what he thought about the idea of jointly managing some
Eurozone debt, Trichet replied that the ECB is and remains “opposed to
merging treasury operations, because this would strip states of their
responsibilities and they would lose the financial incentive for sound
governance.”

The president also noted that breaking the dominance of Anglo-Saxon
rating agencies is “probably advisable,” but that changing the role and
pro-cyclical impact of the ratings might be more essential.

“The fundamental problem is to reduce or eliminate this
[pro-cyclical] amplifying effect that the rating agencies contribute
to,” he said.

–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com

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