–Adds quotes on government debt’s influence on monetary policy to story
transmitted at 10:30 EST

FRANKFURT (MNI) – Given significant consolidation needs in Europe,
a quick and permanent reduction of new borrowing is called for, European
Central Bank Governing Council member Axel Weber said Wednesday.

Germany should not cave in to demands for slower consolidation but
should instead use better-than-expected economic developments to speed
up consolidation, thus leading by example, Weber said in a speech text
for delivery at a conference organized by the leading government party

The head of the German Bundesbank also reiterated his call for a
stronger Stability and Growth Pact reinforced by tougher sanctions.

“High public indebtedness is presenting a very significant burden
for both the recovery and future growth not only, but also, in Germany,”
Weber said.

At the same time, “constantly growing public debt hampers a
monetary policy that is bound to price stability,” Weber cautioned.

“High debt levels tend to require higher interest rates to anchor
inflation expectations at a low level. This would be especially true if
fears emerged in the population of an ‘inflating away’ of public debt,
regardless of how unjustified this may be with a view to the
independence of monetary policy in the Eurosystem and the clear mandate
to preserve price stability,” Weber explained.

Given the “significant” consolidation need, “quick and determined
measures for the sustained reduction of new public borrowing are
decisive,” he said.

In Germany, he said, such measures “are not only in our own best
interests in order to restore the sustainability of public budgets and
the functioning of fiscal policy, but rather, they also have an
important function as an example for the whole currency union.”

“The consolidation of public finances is of exceptional importance,
even if international pressures for a slower consolidation may suggest
otherwise,” Weber asserted.

He welcomed the German government’s recently announced austerity
measures but said that further details are warranted and additional
efforts may be needed.

“Especially in regards to the national [law on debt reduction]
additional measures might be necessary, which as the case may be would
need to be considered in the budgetary framework for 2011 and
medium-term fiscal planning,” Weber said.

“The requirements of the EU deficit procedure are likely to be
reached, given current more favorable economic developments. In our view
it is appropriate if the aggregate public deficit percentage is below 3%
[of GDP] already in 2012,” he added.

Better-than-expected economic conditions should be used to speed up
consolidation in a bid to send a “strong signal” to Europe as well,
Weber argued.

Weber asserted that “the most recent fiscal decisions in Spain
Portugal and Greece are going in the right directions — although they
are merely first steps.”

The head of the Bundesbank said new rules are required so as to
increase the incentives for more prudent fiscal policies.

“In this context, the strengthening of the Stability and Growth
Pact and ensuring its compliance play a central role. In my view, this
will require more stricter sanctions in conjunction with greater
automatization of their execution,” Weber said.

At the same time, there need to be mechanisms in place should all
preventive measures fail, Weber said. He reiterated his support for
closer look at an insolvency rules for states and his rejection of
permanent support mechanisms.

–Frankfurt bureau tel.: +49-69-720142. Email: frankfurt@marketnews.com

[TOPICS: M$X$$$,M$G$$$,M$$EC$,,M$$CR$]