–IMF’s Blanchard: Acute Eurozone Crisis Still Key Risk To World Economy
–Fiscal Compact Reduced Moral Hazard, Room To Think About Risk Sharing
–ECB Should Not Be Concerned With German Inflation Over Eurozone Infl

By Chris Cermak

WASHINGTON (MNI) – IMF Chief Economist Olivier Blanchard Tuesday
said the European Union’s fiscal compact had created the room for the
Eurozone to consider issuing Eurobonds as it continues searching for
ways to put the sovereign debt crisis firmly behind it.

Speaking in Washington after the release of the International
Monetary Fund’s latest World Economic Outlook, Blanchard said downside
risks to global growth remained “extremely present” and “the main risk
remains that of another acute crisis in Europe.”

The situation in Europe had “quietened down” over the last six
months, “but an uneasy calm remains,” Blanchard said. “One has the
feeling that any moment things could well get very bad again.”

Blanchard said markets had become “somewhat shizophrenic” by
seeking tough fiscal consolidation in European peripheral nations but
then punishing the same policies for slowing growth. He urged a focus on
structural reforms, medium-term consolidation and fiscal rules that
could restore credibility, while suggesting some countries should not
tighten further if the growth outlook worsens.

Joerg Decressin, the IMF’s deputy chief economist, described
Spain’s task as “more akin to a marathon than a sprint.” Despite recent
unease, the Spanish government had struck the “right balance” and there
were signs the policies were working, Decressin said, citing a lower
current account deficit, lower inflation and falling budget deficit.

Blanchard said the fiscal compact agreed by European countries in
December now meant “moral hazard is more limited” and that the Eurozone
should “explore the scope for issuing common sovereign bonds.”

“Now that the fiscal pact is in place, I think there is more room
for thinking about risk-sharing along these lines,” Blanchard said.

Blanchard said he expected countries to abide by the new fiscal
compact, but with trust still lacking, the Eurozone could begin by
issuing Eurobills with a maturity of less than one year, “implying very
little risk for the participating countries and a very useful step in
the construction of a Eurobonds market.”

Blanchard also directly targeted German concerns over increasing
inflation, encouraging them to use macroprudential tools to avoid asset
bubbles and warning against expecting a response from the European
Central Bank while other Eurozone members remained weak.

“Monetary policy is not aimed at making Germany right or wrong, it
is aimed at the euro area,” Blanchard said. “The ECB should not be
concerned about inflation in Germany as opposed to inflation in the
Eurozone.”

** MNI Washington Bureau: 202-371-2121 **

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