–Adds comments from Milan on inflation expectations, structural reforms

FRANKFURT (MNI) – The involvement of the International Monetary
Fund in an aid package for Greece would damage the image of the euro,
European Central Bank Executive Board member Lorenzo Bini Smaghi said in
an interview published Wednesday.

“Those who are interested in economic and monetary stability in
Europe should resist the path to the IMF,” Bini Smaghi told German
weekly Die Zeit. Were the IMF to get involved, “then the image of the
euro would be that of a currency that is only able to survive with the
support of an international organization,” he warned.

“The markets reaction in recent days has shown that it can be
damaging for the stability of the euro to activate” the IMF, he
observed. “We should not leave the destiny of our currency completely to
market forces.”

Bini Smaghi suggested that those who favor an IMF solution are
anxious to divert the blame for a harsh financial crackdown on Greece
away from the Eurozone and the EU.

However, “Whoever believes that the IMF would be a better
scapegoat, forgets that the conditions it demands in return for its
engagement are generally not stronger but rather weaker than those that
we in Europe have now agreed on,” he argued.

Should Greece go the IMF route, “these weaker conditions will
become the new standard and replace the EU’s Stability Pact,” he warned.

Bini Smaghi said the general pledge of support for Greece by EU
leaders at their February 11 summit should now be made more specific in
order to avert futher market speculation against Greece.

The EU heads of state and government are scheduled to meet Thursday
and Friday in Brussels, and reports have been swirling around European
capitals in recent days that they will discuss a compromise deal
including both IMF and Eurozone aid. The Eurozone aid would be
voluntary, however, and Germany would likely not participate in it, EU
sources told Market News International on Tuesday.

Bini Smaghi also said that the treaty forming the European Monetary
Union does not allow for fiscal transfers, but that temporary help would
not violate the EU’s treaty.

“The treaty is clear here. Fiscal transers between countries within
the Eurozone are not allowed, but temporary aid” is, he explained. This
“would not be a violation of the treaty.”

Bini-Smaghi asserted that failing to support Greece would be much
costlier for European taxpayers than offering temporary support.

He warned that “a Greek insolvency would hit banks all over Europe,
which would have to bear the cost. This would weaken the real economy
and the labor market.”

He added: “You saw what happened in 2008 after the Lehman Brothers

Bini Smaghi noted that the instinctive reaction at the time was
that the U.S. taxpayer should not be asked to pay. However, “a more
rational analysis would have shown that letting Lehman go under would be
even more expensive. That is what happened,” he noted. “We in Europe
should be a little smarter.”

Speaking separately today at an event in Milan, Bini Smaghi said
the “economic turnaround cannot be based on stimulus alone, which will
eventually end.”

He also noted that inflation expectations in the Eurozone remain
low, despite some predictions that the crisis would end with high
inflation. As a result, interest rates remain low, he noted. “People
thought interest rates would spike, but they haven’t.”

Bini Smaghi said the crisis was not only a cyclical one but a deep
structural one. “There need to be radical changes in the way the economy
works,” he said. But he complained that there does not appear to be
sufficient will to reform in the U.S. or Europe.

The automobile and construction industries have been profoundly
altered by the crisis, he said, and cannot be the same as they were
before it.

He defended bank capital reforms that are underway, saying they are
intended to “guarantee that the economic system is strong and there is
more access to credit to support the economic turnaround.”

He said the profits of banks, which have increased due to easy
monetary conditions, must be used to shore up their capital and not pay
big dividends to shareholders and bonuses to executives.

–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com

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