–Adds comments on euro, fiscal crisis, economic outlook
PRAGUE (MNI) – The euro’s recent softness in foreign exchange
markets should be a boon to the European economy, though the single
currency is still near the upper end of its historical trading range
against the dollar, European Central Bank Governing Council member Ewald
Nowotny said here Monday.
“What we have seen is that the problematic appreciation of the euro
has been averted. The euro is at a level that is somewhat at the upper
end of the historic euro-U.S. dollar relationship. So it is not weak,”
Nowotny told reporters on the sidelines of a speaking engagement here.
“I think this is a positive development for the European economy,
he added. “An over-intense appreciation would have been a challenge for
the Eurozone economy.”
Speaking later during a panel discussion here, Nowotny said the
euro has “firmly established itself as the second world currency” and is
also well received by Eurozone citizens.
“The euro has weathered the crisis well,” Nowotny said. “Without
being a member of the Eurozone it would have been much more difficult to
weather the storm especially for small countries like Austria,” he
noted.
“To make a long story short, there were two main assets,” Nowotny
said, citing the ECB’s size and cross-boarder activity in liquidity
management, and stable exchange rates.
“Without the ECB no single national bank ever would have been able
to fight successfully against this liquidity problem,” he said. The
absence of exchange rate fluctuations, too, “was an important element of
stability,” he added.
In the Eurozone you do not have the easy way out — depreciation —
but that is never the right solution in the first place, Nowotny argued.
Nowotny, who heads the Austrian National Bank, also said that he
expected no significant alterations to the ECB’s economic scenario after
the next Governing Council meeting on April 8. “I do not see any major
changes,” he said. “Both for the growth rate of the Eurozone and for
inflation.”
Maintaining price stability “should not be a real problem because
we do see … price stability over the medium term,” Nowotny said.
“The more difficult problem is really to get back with higher
growth. … There I have to say that we still see that the real economy
is very weak,” the governor warned.
He said last week’s agreement by Eurozone leaders on a joint
EMU-IMF contingency plan for Greece was “an adequate solution” that
offered “a chance for an efficient solution to the Greek problem.” He
added: “I hope that chance materializes.”
However, Nowotny added, “it is important to see that this solution
has no impact at all on the independence of the European Central Bank.
In fact, the ECB and IMF have cooperated successfully already in other
circumstances.”
He also said the ECB’s decision to maintain more lenient collateral
eligibility rules into 2011 was a “very realistic step” that would help
reduce dependence both of the ECB and of national economic policies on
the decisions of ratings agencies.
Though he insisted the ECB did not make the decision solely to
benefit Greece, he said it was intended to help ease Greek spreads and
bring more stability to the current situation.
With regard to the impact of Greece’s debt crisis on the rest of
the Eurozone, Nowotny said: “I do not see a systemic risk, but it is
quite obvious that Greek assets do play a role in [the operations of]
European banks and therefore there is a common interest to stabilize the
situation.”
He argued that, given Greece’s tiny weight, it “does not have a
direct impact on the economy of the Eurozone as such.” But he cited,
once again, the “positive” indirect impact of the softer euro vis-a-vis
the dollar.
Asked about the timing of an ECB interest rate hike, Nowotny
implied it was not even on the radar screen. “We never pre-commit at the
ECB, but as President Trichet has underlined on several occasions, we
are for the time being discussing exit strategies with regard to
liquidity provision, and we do not have any further discussions,” he
said.
Nowotny said that whether he supported the idea of a European
Monetary Fund would depend on what was actually intended. He said he
wouldn’t favor one that would be in competition with the IMF. He urged
all Eurozone nations to speak with one voice within the IMF, noting that
“then [the Eurozone] would be the largest shareholder.”
Nowotny stressed the importance of following the rules stipulated
in the EMU’s Stability & Growth Pact, but at the same time he cautioned
that fiscal consolidation must not choke off the nascent recovery.
“We have to have some kind of equivalent to a common fiscal policy
and this is the Stability and Growth Pact. The maintenance of the
Stability Pact and observing the Stability Pact is very important,” he
said.
“We do have the problems of the fiscal financial crisis and there
we have to move in very differentiated way,” Nowotny assessed.
“It is quite obvious that it is not possible to maintain high
deficits…but on the other hand we also have to be very careful to move
in a way so as not to destroy the weak start of the economic recovery in
Europe,” he said.
–Frankfurt bureau; +49-69-720142; jtreeck@marketnews.com
[TOPICS: M$$EC$,M$$CR$,MT$$$$,MGX$$$,M$X$$$]