–But Too Early To Declare “Victory”

PARIS (MNI) – The Eurozone’s strong second quarter growth
performance confirms that there won’t be a double-dip recession, but
there are plenty of challenges in the coming years, ECB President
Jean-Claude Trichet said in a newspaper interview published Saturday.

“I’ve already said on many occasions that I didn’t foresee a double
dip in Europe, and the latest results confirm it,” Trichet told the
French daily Le Figaro.

He warned against reading too much into quarterly figures, however,
saying that the economy must be judged in a longer-term perspective.
“That said, I am delighted with the growth in the second quarter and
with the upward revision to the European Central Bank staff forecasts
that I announced last Thursday,” he added.

However, “with regard to growth in the coming years, we remain
cautious and are not declaring victory,” Trichet said.

Trichet and his ECB colleagues have said many times recently that
they do not expect growth in the second half of this year to match the
second quarter’s torrid pace. They expect momentum to slow in the third
quarter and even more so in the fourth, though they believe a modest
recovery will continue.

The Eurozone economy surpassed expectations in the second quarter
with a robust 1.0% q/q growth rate, driven largely by Germany’s dizzying
2.2% quarterly pace. Largely on the basis of the strong second quarter,
the ECB staff revised upward its midpoint growth forecast for 2010 to
1.6% from the previous projection of 1%.

Trichet suggested that the strong 2Q performance cannot be
attributed to the euro’s weaker tone in foreign exchange markets, which
many say has been a big boon for exports – especially Germany’s.

“I note with great interest that the Eurozone’s second quarter
growth rests above all on its domestic demand [consumption and
investments]: a total contribution of 0.7% to growth of 1%, with a
contribution of 0.1% from foreign trade and 0.2% from inventories,” the
ECB president said.

He downplayed the idea that Germany’s disproportionate share of 2Q
EMU growth meant that a “two-speed” Europe was emerging.

“Germany is the biggest economy in the [currency] union and the top
market for the exports of the near-totality of the other countries. When
it improves, it is clearly good for the Eurozone as a whole,” Trichet
said.

He lauded Germany, saying its success was the fruit of the measures
it has undertaken in recent years to reduce production costs and
increase productivity, as well as the adaptability of German companies
to the realities of globalization.

In a comment that could be aimed at France, which is facing a week
of strikes, protests and general tension over the government’s pension
reform plan, Trichet noted that Germany’s success was built on “a high
degree of confidence among social partners [unions and employers], which
we be desirable to regain in all countries of the Eurozone.”

Given its attention to production costs and the reforms it has
undertaken to make the economy “more flexible,” Germany “can serve as an
example to all its neighbors,” Trichet said.

Asked to explain why the U.S. Federal Reserve was worried about
deflation while the ECB was not, Trichet said there were “important
structural differences on the two sides of the Atlantic, and that the
fear of deflation “manifested itself from time to time in the United
States, even if, very fortunately, the risk has not materialized.”

In Europe, he added, “we are lucky to have a remarkable anchoring
of inflation expectations in line with our definition of price stability
of less than but close to 2%.” He repeated, as he has for many months,
that “the ECB considers the current interest rates appropriate to give
us medium-term price stability, without inflation or deflation.”

Trichet also repeated his criticism of the big three ratings
agencies, saying “it is not necessarily healthy” that the important task
of evaluating securities be share among only three institutions at the
global level. “I don’t think the solution is necessarily the creation of
a public institution. We must continue to reflect,” he said, adding
that, “the right answers in this domain as in others can only be
worldwide ones.”

Trichet also renewed his call for China to exercise “greater
flexibility” with regard to the exchange rate of its currency, the yuan.
“From this point of view, I appreciated, along with all the [finance]
ministers and [central bank] governors of countries with floating
currencies, the move in the direction of more flexibility that was made
public by China last June 19,” he said.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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