FRANKFURT (MNI) – The firm anchoring of inflation expectations all
during the crisis has made the task of the European Central Bank much
easier, ECB President Jean-Claude Trichet said Friday.

Speaking at the ECB Watchers’ Conference, Trichet — according to a
text of his remarks provided by the ECB — avoided touching on monetary
policy in favor of a comparison of economic heterogeneity in the euro
area as compared to in the U.S.

However, he noted that in Europe, “inflation expectations have
remained solidly anchored in line with our definition of price stability
throughout the crisis. There was no materialisation of a deflation risk.
This has enormously facilitated our task, especially during the period
of economic freefall in the winter of 2008/09.”

Although the financial crisis has not left public deficits and
debts untouched in the Eurozone, public finances in the area as a whole
are “sound,” he said, pointing to an expected deficit this year of about
half of the corresponding figures for the U.S. and Japan.

Moreover, he added, “recent forecasts indicate that the euro area
as a whole is on track to bring the deficit to GDP ratio below the 3%
reference value by 2013 and to stop the adverse debt dynamics caused by
the financial crisis.”

However, he continued immediately, “there is absolutely no reason
for complacency in the euro area” and more needs to be done with respect
to job creation and raising potential growth.

Trichet called “misguided” those who would suggest that economic
heterogeneity could prove the undoing of the Eurozone, arguing that in
fact, heterogeneity here and in the U.S. has been “broadly similar” over
the last dozen years.

Nevertheless, he stressed, if a member country consistently shows
competitiveness losses, imbalances can result that pose a “very large”
cost when they unwind, with spillover effects elsewhere in the currency
union.

Trichet reiterated his call for “more speed and automaticity in the
sanctioning mechanism, particularly in the Stability and Growth Pact,
but also in the broader macroeconomic policy surveillance framework.”

He continued: “Beyond faster and more automatic sanctions, the
enforcement tools also need to be more effective. The macroeconomic
surveillance framework, in particular, needs to provide clear incentives
by imposing financial sanctions already at an early stage. This also
means that there should be no room for discretion in the implementation
of the surveillance framework.”

The demands made on fiscal and other macroeconomic policies should
be “more ambitious” and member countries of the Eurozone should pursue
policies that are consistent with membership in the union, he said.

So as to ensure sound fiscal and macroeconomic policies at the
level of member countries, strong national budgetary frameworks are
appropriate, he said.

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

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