–Adds comments on IMF, Government Debt, Growth and Stability Pact

FRANKFURT (MNI) – The European Central Bank must and will act in a
timely manner to raise interest rates when the time is right, European
Central Bank Executive Board member Juergen Stark said in an interview
released Friday.

It is dangerous to keep interest rates too low for too long, the
ECB’s chief economist told the German business magazine Capital.

Strong growth in developing countries could put upward pressure on
commodity prices, leading to higher inflation rates here at home before
the economy has reached a stable path of growth, Stark said. “This could
mean stagflation,” he warned.

“It is dangerous to hold on to low interest rates for too long,” he
cautioned. “We must and will act at the right time.”

Stark rejected the idea that the ECB would keep interest rates low
to help governments reduce their debt.

“No state can expect that interest rates will remain as low as
today for the long haul,” he said. “To say it clearly: I fear that many
governments will have problems financing their debt when rates rise
across all maturities. Each additional percentage point should raise the
debt servicing burden in the Eurozone by E25 to E30 billion,” Stark
warned.

This is an additional reason for governments to start budget
consolidation early, Stark said.

He also made clear he was still not sold on the idea of the
International Monetary Fund’s participation in the contingency aid
package for Greece.

It “is sensible to rely on IMF expertise. But as previously, I am
still sceptical concerning its possible financial contribution,” Stark
said. Expressing clear concern about the autonomy of the Eurozone, he
added: “The IMF has to accept the rules of the monetary union.”

That Stark would express such concerns publicly, as Greek
authorities prepare to meet with European and IMF officials on Monday,
shows there are still significant differences of opinion between the
Eurozone and the IMF over the details of aid to Greece.

A senior Eurozone official said Thursday that the IMF has been
insisting on imposing its own conditions in exchange for its
contribution to the Greek assistance package. The Europeans are anxious
to maintain the integrity of the EU’s Growth and Stability Pact, and the
ECB is concerned about any arrangement that could be perceived as an
affront to its independence.

Under the terms of a contingency plan announced last Sunday, the
EMU countries would collectively contribute up to E30 billion in loans
during the first year of the program, which would be supplemented by an
undisclosed IMF contribution that well-placed Eurozone sources have
estimated at between E10 billion and E15 billion.

In more general terms, Stark said attempts to create financial
safety nets at the national and international levels are a cause for
concern.

“The result of such nets is that the behaviour of market
participants will not change. After all, they know that they will be
caught [in the net] in case of emergency even if they have to bear part
of the cost,” Stark said.

For the Eurozone at least, strengthening the Stability and Growth
pact would be more beneficial, Stark argued.

“We must intensify supervision, both for states in the Eurozone and
for those who want to become members,” he urged. Promises are not
enough, but rather “we need to enforce discipline.”

He dismissed the notion that the European Union’s Stability and
Growth Pact is dead, saying that indeed “the rules are helping right
now” with regard to exiting crisis-related aid and consolidating
budgets. Still, the crisis must have consequences, he urged.

Stark noted that the Stability and Growth Pact suffers from a
structural problem in that potential fiscal sinners judge other
potential sinners.

“It would be good if an independent group of experts could check on
fiscal policies of the individual states and give a binding assessment
to the European Commission and Finance Ministers,” he urged.

Furthermore, he advocated for a process in which countries could
expect sanctions immediately if they overshot the EU’s 3%-of-GDP deficit
limit.

However, Stark rejected the suggestion of Germany’s Finance
Minister Wolfgang Schaeuble that a Eurozone member state might be
ejected from the union as a last resort.

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

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