–Adds Detail, Quotes To Version Transmitted At 1000 GMT

FRANKFURT (MNI) – The European Central Bank has been successful in
delivering price stability to the Eurozone, and the economic recovery is
ongoing, but it is still too early to declare victory, ECB Governing
Council member Yves Mersch said on Thursday.

“It is widely accepted that the best a central bank can do in
supporting economic growth is delivering price stability,” Mersch said
during his speech in London. “The ECB has delivered price stability.”

He also said the incoming hard and soft data, which point to a
slowdown in the economic recovery for the second half of this year, “do
not warrant increased pessimism.”

Though noting that markets often reacted with a delay and in an
exaggerated fashion, Mersch said the tensions in the financial sector
were easing, “although it is still too early to claim victory.”

Still, the crisis revealed a number of weaknesses, some of which
had their source in the financial system. The crisis also revealed the
shortcomings in the macro-prudential area, within the Eurozone and
throughout the industrialized world, Mersch said.

Commenting on the current sovereign debt crisis, Mersch lauded the
“credible” deleveraging procedures that have been implemented by many
EMU countries, saying that these measures should allow them to return to
a sustainable growth path in the medium term.

He also referred to the European Financial Stability Facility
(EFSF), calling it “a symbol for the existence of a ‘community of
destiny’ that is a monetary union”.

“But solidarity presupposes responsibility,” Mersch said. “This
means that crisis prevention mechanisms are even more important than
crisis management facilities. And we have to recognize that before a
fiscal deterioration occurs and needs corrective actions, we ought to
detect early signals in the macro economic imbalances of economies that
share a single currency.”

To this end, Mersch called for “more automaticity” in
macro-economic Eurozone surveillance, which would focus on highly
indebted states, or in countries suffering from a strong deterioration
in competitiveness.

“[The framework] should foresee graduated sanctions at a
sufficiently early stage to reinforce compliance,” he said. “It should
take aim at national rigidities that are incompatible with a currency
union, like automatic indexation mechanisms of wages and pensions.”

While the ECB has been successful in its mandate of keeping prices
stable, monetary policy requires the support of sound public finances,
as well as sustained growth in across the monetary union to ensure the
continuation of the euro as a stable currency, Mersch said.

“A strengthening of the Stability and Growth Pact, preventing and
correcting macroeconomic imbalances at an early stage, and more
effective enforcement via gradual sanctions for non-compliant euro area
countries will help to achieve this goal.”

Still, despite the single currency and central bank, Mersch noted
that national economic policies “remain insufficiently aligned”.

“To overcome the macro-economic heterogeneity within the Euro area,
an explicit and clear framework for the surveillance of competitiveness
is needed with the aim of correcting large imbalances,” Mersch said.

— Frankfurt bureau: +49-69-720 142; email: frankfurt@marketnews.com —

[TOPICS: MT$$$$,MGX$$$,M$$CR$,M$X$$$,M$$EC$,M$$FX$]