–Adds Comments From Q&A On Inflation, IMF To Story Sent At 17:16 GMT

FRANKFURT (MNI) – European Central Bank Governing Council member
and renowned inflation hawk Axel Weber warned again Tuesday about
potential upside risks to price stability in the Eurozone.

The unexpectedly strong inflation increase in December was a result
of “special factors”, especially more expensive energy, Weber said in
remarks prepared for a conference here sponsored by the Friedrich Ebert
Foundation.

December’s inflation level “does not yet point to a sustained
endangering of price stability,” the president of the Bundesbank said.

“Over the medium term, inflation rates (HICP) under 2% are still to
be expected in the Eurozone, just as in Germany,” he said.

“At the same time, inflationary risks are still balanced to the
greatest extent possible,” he said. “However, upward risks could
increase.”

“The ECB Governing Council still sees the current main interest
rates as appropriate,” he underlined.

“At the same time, future price developments must and will be
monitored very precisely,” he stressed. Nevertheless, “it is of
particular importance that financial market data and surveys still prove
the solid anchoring of inflation expectations.”

Weber told his audience that he expected Eurozone inflation to peak
at 2.4% in March.

Favorable economic developments along with the end of economic
stimulus programs, as well as measures to consolidate finances, all
point to a decline in Germany’s public deficit to below 3% of GDP this
year, Weber said. “We expect a value of 2.5% after 3.5% last year.”

But Germany remains “a good way off” from the goal of a balanced
budget, he reminded. To reach that goal requires still more savings,
abstaining from “spending fantasies” and avoiding shortfalls in revenue.

In terms of fiscal probity, Germany has an important job as a role
model for other countries in the Eurozone which are in worse fiscal
shape, Weber argued.

Since tougher fiscal rules and macroeconomic surveillance cannot
prevent all crises, “an expanded long-term crisis-resolution mechanism
is sensible and necessary,” the Bundesbank head said.

Weber rejected criticism of the IMF’s conditionality in its rescue
programs in Europe, mentioning that sometimes “the conditionality among
the governments themselves is in reality strengthened” through a third
party like the IMF.

For Germany, which in some ways found it painful to give up its
D-mark a decade ago, Weber warned against “nostalgic” feelings for the
national currency. Indeed, viewed objectively, the euro is a success
that Germany has very much profited from and continues to gain from, he
pointed out. “The euro is at least as stable as the D-Mark and will
remain so.”

Germany’s economy “should continue” to grow, even if it a “somewhat
more moderate pace,” Weber reiterated. While exports will not expand as
fast as last year, private consumption should “clearly increase” and
unemployment will continue to decline, eventually reaching an average
level of under 7% in 2012.

There are some price pressures in Germany from asset prices,
including real estate, Weber noted to the audience.

He reminded his audience that in determining Eurozone monetary
policy, the central bank looks also at monetary and credit developments.
Here, even though credit growth and money supply have increased since
the nadir of the crisis, they are not levels seen in 2006 and 2007, he
said, adding that he did not expect a “noteworthy acceleration” in these
areas.

Confronted with concern that the projected drop in German
unemployment masked increases in temporary work, he said he sees the
possibility of temporary work as “absolutely positive” but urged
employers not to “abuse” this option.

Viewed by many as the favorite to take over for Jean-Claude Trichet
as head of the ECB, Weber declined to discuss personnel matters,
explaining that it would detract from important decisions that European
leaders need to make.

–Frankfurt bureau, +49-69-720142, tbuell@marketnews.com

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