–Adds Comments On Basel III, Fiscal Sustainability

FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet Tuesday warned against “beggar-they-neighbor policies” and “wars
of any kind,” in remarks that appeared to be aimed at countries that
resort to competitive currency devaluations.

“What we need today is not ‘wars’ of any kind, but a strong and
renewed commitment to confident and resolute cooperation,” Trichet said
in a speech given at the Economic Club of New York.

“Together we must say ‘no’ to protectionism and ‘no’ to
beggar-thy-neighbour policies,” he continued. “The international
community can and must continue to make a difference by being united and
showing a strong sense of medium and long-term direction.”

Trichet’s comments were a clear reference to recent warnings by
some political officials against what they’ve described as a “currency
war.”

Trichet last week urged China to allow the yuan to appreciate
against the dollar and other major floating currencies. But China is not
alone in seeking competitive advantage by weakening its currency. The
Bank of Japan recently intervened to stem the yen’s rise. The Swiss
National Bank has done the same this year, as has the Brazilian central
bank.

Some analysts would even argue that the Federal Reserve’s massive
balance sheet amounts to a competitive devaluation by the backdoor.

Meanwhile, the euro is taking the brunt of the adjustment in
foreign exchange markets, soaring above $1.40 in recent days.

Turning to the Eurozone economy, Trichet reiterated that recent
data confirms that the economic recovery is slowing in the second half
of this year, though he said the “positive” underlying momentum of the
recovery “remains in place.”

The ECB chief also said that consumer price inflation would stay
moderate next year, and he stressed that medium- to long-term inflation
expectations “continue to be firmly anchored in line with our definition
of price stability.”

Nevertheless, “we do not declare victory and we have to remain
cautious and prudent,” Trichet cautioned.

Trichet lauded the new focus of many Eurozone governments on
cutting their public deficits and he said he was confident the trend
would continue.

“Euro area countries are demonstrating their commitment to a
sustainable path by taking action towards consolidation that is
necessary and in their own interests,” he said.

He also cited a number of counter-arguments to the notion that
consolidation risks would hinder economic recovery, noting that
excessive levels of fiscal imbalances have put some countries “in
unchartered waters,” leaving them vulnerable to a loss of confidence
from firms, households and the market.

He reiterated his view that a “quantum leap” was needed in economic
governance in the EU in order to ensure that governments comply in the
future with the fiscal rules limiting deficits and debt. Among the
measures he favors, Trichet said, are semi-automaticity in imposing
penalties on states that break the rules, and shorter lead times on
excessive deficit procedures by the European Commission.

The ECB chief stressed that “this was a time for action on our
financial system” and called the new Basel III capital rules “a
cornerstone of the new regulatory system”.

“But we are far from done on financial reforms,” Trichet said,
noting that many issues on the agendas of both the G20 and Financial
Stability Board still need to be addressed and harmonized policies put
into action.

These include: “the too big to fail” issue, the influence of
ratings agencies, accounting standards, compensation for financial
executives, short selling, and greater standardization and transparency
for OTC derivatives.

“My message on these is straightforward: these agendas should be
implemented fully and equally on both sides of the Atlantic. Rigour and
a level playing field are the two key terms in this context,” Trichet
said.

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

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