–Comment Suggests He Thinks ECB Would Be Justifed In Restarting SMP

BRUSSELS (MNI) – The financial markets’ failure to reward countries
like Italy with lower borrowing costs despite their implementation of
reforms is a sign that the Eurozone’s monetary policy transmission
channel is not working properly, Italian Prime Minister Mario Monti said
on Thursday.

“The objective of ensuring the integrity and the functioning of the
transmission mechanism of monetary policy could be put into question if
the spreads between various countries become — as they have become
recently — so largely disconnected from the real development of the
policy-making in the different countries,” Monti said.

His comments suggest that he believes the ECB would be justified
were it to restart its interventions in sovereign bond markets.

In a speech delivered at a conference here via videolink from Rome,
Monti said that he saw “no need” for changing the ECB’s mandate to
include growth as well as price stability. He warned that a growth
mandate for the ECB could weaken the resolve of European governments
implement needed economic reforms.

Monti argued that the reason why Italy’s sovereign bonds spreads
are so high despite Italy’s ambitious reform agenda is that markets see
poor growth prospects. He called on his fellow European leaders to
ratchet up the fight against crisis contagion and efforts to boost
growth, in order maintain public support for tough fiscal and structural
reforms that are not yet yielding benefits in the short-term.

Europe should “accelerate” its battle against contagion not only
because the spread of the crisis is a “frightful event” but because it
risks “dismantling the support for sustainable fiscal discipline,” Monti
argued.

“Sooner or later there will be a backlash against the very fiscal
and structural discipline we are imposing” unless citizens start to see
the benefits soon, he warned.

“Germany should really reflect quickly on this” or risk seeing the
“stability culture that is its greatest export” be “undermined because
of a lack of promptness in setting up the necessary instruments to limit
contagion,” the Italian prime minister said.

If EU leaders can define a clear long-term vision for the future of
the Eurozone and agree on measures to boost growth at their summit in
June, it would “almost instantly” help lower borrowing costs for
governments adopting the right policies, because they would be giving
investors a growth story to believe in, he argued.

The EU’s fiscal rules should also differentiate between ordinary
operational spending by governments — on services such as health care,
for example — and growth-enhancing investments, Monti said. He arguing
that the “biased” treatment of public debt in EU fiscal rules, compared
to private debt, was “anti-growth.”

The EU’s history of treating all public sector debt as “suspect”
and all private debt as acceptable has in fact contributed to the causes
of the current crisis, Monti, a former economics professor said.

“What happened in Spain or Ireland is almost the mechanical
extrapolation of a control system that was really biased,” he said.

–Brussels newsroom: +324-9522-8374; pkoh@marketnews.com

[TOPICS: M$$CR$,MGX$$$,M$I$$$,M$X$$$,MT$$$$]