FRANKFURT (MNI) – Persistently high public deficits risk damaging
well anchored inflation expectations and would force central banks to
embark on more restrictive monetary policy, European Central Bank
Governing Council member Axel Weber said Monday.
The “central challenge” for fiscal policy is “to restore the
confidence in public finances damaged in the course of the crisis and,
thus, remain able to act for the future,” the president of the
Bundesbank said in a speech for delivery in Munich.
“This room for maneuver needs to be maintained not only with a view
to foreseeable demographic change and future [economic] downturns, but
also to prevent persistent high public deficits from allowing inflation
expectations to rise, which up to now are still well anchored,” Weber
said.
Such a scenario “would force central banks into a more restrictive
monetary policy path,” he warned.
At the European level, Weber argued that the EU’s Stability and
Growth Pact must be “toughened” since it was inadequately enforced
before the crisis.
Even with a strong Pact and the establishment of a mechanism for
economic supervision, future crises cannot be “fully ruled out,” Weber
argued. Thus, “the additional establishment of a mechanism to deal with
the crisis is necessary and sensible.”
Under such a program, funds could be made available to member
states under strict conditions. “In order not to distort the incentives
for capital investors, private creditors should also not be relieved of
their responsibility,” he said.
However, “so as not to intervene in current contracts, I consider
the establishment of such a mechanism sensible at the earliest only for
the time after the crisis,” he underscored.
While Germany had practically balanced budgets in 2007 and 2008,
last year the public deficit hit 3% of GDP and “in the current year it
should continue to rise, but still will remain clearly under the 4%
mark,” Weber reiterated.
–Frankfurt bureau; +49-69-720142, frankfurt@marketnews.com
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