–Adds Comments On Price Stability, Bank Recapitalization, L-Term Growth

VIENNA (MNI) – It is clear that the European Central Bank must not
finance the debts of governments, ECB Governing Council member Ewald
Nowotny said here Tuesday.

Comparing the ECB with the U.S. Federal Reserve and the Bank of
England, Nowotny said, “it is remarkable that we have two different
monetary regimes.” While the governments of the U.S. and the U.K. “more
or less” have access to their central banks, the ECB by contrast “has
the clear task not to provide government financing, as a legacy of the
Bundesbank,” he said.

“The difference in monetary regimes explains, why countries like
the UK have no trouble in the markets, since markets do not see a
problem of insolvency,” Nowotny argued.

He added that in EMU, “much stricter fiscal discipline” is required
than in countries whose governments have access to their central banks.

Nowotny’s comments, in a lecture on the sovereign debt crisis held
at Vienna’s University for Business Administration and Economics, come
at a time when the ECB’s role in a new anti-crisis package is being
hotly debated. Until last weekend, France had pushed for Europe’s
bailout fund, the EFSF, to get a bank license so it could finance itself
at the ECB and use the proceeds to buy sovereign bonds of peripheral
Eurozone countries. But France dropped its proposal in the face of
fierce opposition from Germany and the ECB itself, which cited arguments
similar to Nowotny’s.

A new conflict erupted Tuesday when a draft of the communique for
Wednesday’s EU Summit showed European leaders calling on the ECB to
continue its nonstandard measures, including sovereign bond purchases.
Germany’s chancellor Angela Merkel hit back, saying Germany rejected
such wording in the communique and was waiting to hear from the ECB on
the role it envisioned for itself.

Nowotny said the main task of Europe’s political class, in meetings
that have taken place in recent days and which will continue at the EU
summit in Brussels tomorrow, is to avoid another financial meltdown like
the one that ensued after the Lehman Brothers bankruptcy in 2008.

“We have a crisis of public finances. We have to make sure that
there is no feedback loop to another credit crisis,” said Nowotny, who
heads the Austrian National Bank. “This is the fight that will be fought
in Brussels over the next days.”

Nowotny noted that since the crisis started, markets have made
clear the limits of their willingness to finance external and fiscal
deficits of countries. The low Greek bond spreads that prevailed prior
to 2008 were “a clear market failure,” he said.

EMU is comparable to a “gold monetary system,” because it imposes
“very strict” discipline on individual countries, he said. Some had to
learn that “the hard way,” he added. Nowotny later argued that “the gold
standard is irrelevant today. It is an inflexible system and it would
throw economies into deep depressions.”

Nowotny asserted that the ECB “has fully accomplished” its goal of
price stability.

While acknowledging that “deregulation in the past went too far,”
Nowotny warned of the risk “that we move to the other extreme of too
much re-regulation.”

Echoing comments out of the EU summit and finance ministers’
meetings over the weekend, Nowotny said that in order to recapitalize
themselves, banks should first attempt to access the private equity
markets before turning to their governments. But he lamented that “many
banks did not seize the window of opportunity” to recapitalize via the
markets.

Nowotny rebuffed growing pessimism about Europe’s long-term growth
prospects. “I am not pessimistic for Europe. Europe has enormous
intellectual potential,” he said.

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