–Adds Additional Comments To Story Sent Out At 16:05 GMT

BERLIN (MNI) – Inflation risks in the Eurozone remain low over the
short term but are pointed upward, ECB Governing Council member Axel
Weber said in the text of a speech for delivery Tuesday evening in the
southwestern German city of Mannheim.

Weber noted that in the current forecast for the Eurozone the
expectation is for only a moderate recovery of demand. Moreover,
capacity utilization is still low.

Therefore, prices increases “should remain subdued,” Weber
asserted. However, “while inflation risks are low in the short-term,
they are still pointed upwards,” he asserted. He said the most recent
Eurozone consumer inflation figure for March, at 1.4%, was “not far
away” from the ECB’s price stability definition of close to but below
2%.

But the medium term inflation is moderate, he said, and the current
low interest rate level continues to be appropriate.

Weber’s comments on inflation risks are at odds with the consensus
of the ECB Governing Council as expressed in the April 8 press
conference statement of the bank’s president Jean-Claude Trichet, who
described them as “broadly balanced.”

However, his comments are in line with remarks by his ECB colleague
Juergen Stark, who warned last week that rising commodity prices and
strong growth in the emerging economies could lead to a spike of
inflation in Europe, and that the situation needed to be watched
carefully.

Weber said the Eurosystem is aware of the necessity of an exit from
its extraordinary measures “and is on a good path to master these
challenges.”

The Bundesbank president again rejected any claims that the ECB
should raise the current inflation limit of close to but below 2%, which
is its definition of price stability. “The demands for an increase of
the inflation goal are to be countered decisively,” he stressed.

Diverging economic developments in the Eurozone could make a
uniform monetary policy more difficult, Weber warned. “Thus, it is of
the utmost importance to counter these divergences actively by…the
means of structural and fiscal policy,” he argued.

Rising public deficits and debt levels can also become a problem
for monetary policy, Weber reasoned. Fears that governments could
attempt to consolidate public budgets via higher inflation could lead to
a destabilisation of inflation expectations, he cautioned.

A continued expansive budget policy “could force monetary policy to
be more restrictive stance than would be necessary otherwise,” he
pointed out. Budget consolidation should, thus, have the highest
priority in the Eurozone, he demanded.

Weber warned that in Greece’s “excessive public deficit” there is a
“significant risk” of contagion to other Eurozone states. “An eventual
default of Greece would lead with high certainty to a serious economic
backlash for other countries of the monetary union,” he asserted.

Thus, should Greece temporarily not be able to refinance itself on
capital markets, “support could be considered as a last resort,” the
central banker said. The real goal of financial aid for Greece, however,
would be to assure financial stability in the Eurozone, he stressed.

However, “there must not be an automaticity for support” of Greece,
Weber urged. Any call by Greece for aid will be examined to determine if
it is really necessary for guaranteeing financial stability, he said.

As a key lesson from the Greek case, the EU Stability and Growth
Pact needs to be tightened, Weber demanded.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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