BERLIN (MNI) – ECB Governing Council member Axel Weber on Wednesday
said the crisis has reappeared on the back of high public deficits in
some Eurozone countries.

“The crisis has again raised its head, this time exposing the weak
position of government budgets in some euro area countries,” Weber said
in prepared remarks for a dinner speech at a conference organised by the
German Finance Ministry here.

While at first sight, the current problems seem to be rather
different from the recent financial crisis, “a second glance reveals
that the underlying causes are quite similar, and so are the remedies,”
the Bundesbank president remarked.

The government budget crisis also resulted from a credit boom, in
this case due to sinking interest rates after the countries in question
had joined the Eurozone, Weber noted.

Furthermore, there was insufficient or totally absent risk
management in economic policy, “which should have been much more
counter-cyclical,” the central banker reckoned.

Finally, the EU Stability and Growth Pact was not applied as
strictly as it should have been or it was weakened by questionable
accounting practices and faulty statistics, Weber asserted.

“Given these similarities with the root causes of the financial
crisis, the responses of economic policy are similar, too,” he remarked.

The first challenge had been to stabilise the situation, Weber
pointed out, noting that important steps towards that goal were taken by
the ECB and EU finance ministers ten days ago.

“In particular, the commitment of fiscal policy to stepping up
frontloaded consolidation efforts shows the will of the [EMU] member
states to tackle the current crisis at its root.”

The Governing Council member stressed that it was now essential to
strengthen the existing EU fiscal rules to prevent individual countries
from running into budgetary difficulties again.

He noted that proposals to improve the EU Stability and Growth Pact
had already been put forward. “They could be complemented by national
fiscal rules similar to the national debt brake in Germany,” he advised.

Moreover, over the medium term, mechanisms are needed to limit the
systemic impact of sovereign debt crises that might still occur, Weber
said.

However, particular caution is warranted in this regard, given that
adverse incentive effects in the field of public finances would most
likely be even more severe than in the financial sector, he insisted.

“For example, a permanently available support scheme [for Eurozone
countries] would only exacerbate these problems and therefore should not
be a policy option,” he warned.

The fiscal crisis that reached its climax ten days ago underscored
the need for ambitious consolidation efforts and reforms in the fiscal
policy framework in order to deliver sustainable public debt levels,
Weber said.

“In both cases, policy-makers now have to muster the political will
to take the necessary steps, however contested and painful they might
be,” he stressed.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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