Brussels, 21/01/2009 (Agence Europe) -Speaking before the MEPs of the committee on economic and monetary affairs of the European Parliament, Jean-Claude Trichet amongst other things ruled out any risk of deflation and rejected fears of a breakdown of the euro zone. Despite the high level of uncertainty around the economic perspectives, "it could be a mistake to underestimate the ability of the economies to bounce back", said the President of the European Central Bank (ECB), who did, however, warn of the risk of uncontrolled sideslipping of public finances.
No risk of deflation. Returning to the reasons which prompted the board of governors to decide to reduce rates once again last week (see EUROPE 9819), Mr Trichet confirmed the drop in inflationary pressure and a return to a level which is in line with the price stability objective laid down by the ECB (below but close to 2%). He ruled out any risk of deflation (a drop in prices over a relatively long period of time), drawing a distinction between this phenomenon and the disinflation currently being experienced (a reduction in the increase in prices). This process is present in the euro zone due to the sharp drop in the prices of oil and raw materials, "but there are currently no risks of deflation", Mr Trichet stressed, even though the inflection of inflationary tendencies may sometimes lead to negative inflation rates.
The much-needed reinforcement of the global financial system. "The financial architecture calls for a reinforcement of the informal groupings, particularly the Financial Stability Forum and the G20", Mr Trichet stressed. Concerning the ratings agencies, "it is clear that this is one of the points to which we must make very substantial improvements", but "on which we need a transatlantic agreement", he added. He voiced his agreement with Pervenche Berès (PES, France), president of the parliamentary committee, on the need to consolidate macro-economic monitoring at global level, in order to avoid a perpetuity of global imbalances ("I cannot see any other body but the IMF doing this"). In view of the fragility of the global system, "we need much greater transparency" and "enormous amounts of political energy. The G20 will be of decisive importance in this", but "we also need sustainable macro-economic policies".
Keeping in place the principle of budgetary consolidation. Amongst other things, Mr Trichet welcomed the reaffirmation, the day before, by the finance ministers of the EU that there would be a return to the consolidation of the public finances as soon as possible. "The various countries have made use of all available room to manoeuvre. It is only this room to manoeuvre which will be tolerated", he stressed, confirming to Sahra Wagenknecht (GUE-NGL, Germany): "all that we do must be done bearing in mind the fact that it is temporary, that it is targeted, but that we need an exit strategy". "The governments are responsible for their budgetary policies and must respect the Stability and Growth Pact (SGP)", which is "not an abstract framework", and it is up to the Member States to put into practice "policies which are sustainable in the long term and convincing". The difference between the rates for State loans in the countries of the euro zone is not something which calls into question either the euro zone or the single currency itself, added the president of the ECB. "I am not worried, but some governments must adopt more sustainable policies", he told John Purvis (EPP-ED, United Kingdom), who had voiced concern at the worsening the ratings of certain Member States and possible risks of payment default.
The role of the ECB in supervising the banking system. In order to remedy the problem of banking regulation in the euro zone, Mr Trichet clearly stated the readiness of the European Central Bank to take on an increased supervisory role. This possibility is laid down in the treaties, with article 105 § 6 of the EC Treaty authorising the Council to entrust the ECB with specific missions relating to policies on the prudential controls on credit establishments and others, with the exception of insurance companies. On Wednesday, he said that he was "prepared" for this eventuality, even though the Board of Governors has not yet discussed the issue.
Calls for availability of credit. Mr Trichet, who is "highly attentive" to the way in which the decisions of the ECB on rates are translated into the monetary markets, reported a number of improvements, even though "things are not going as they should". In recent weeks, the inter-bank reference rate (the Euribor 3 months) has dropped, which has had at least a partial impact on household credit rates. "We call on the banks permanently to translate the reductions in rate which we decide upon effectively and absolutely sincerely", he told Robert Goebbels (PES, Luxembourg), whilst remaining "not convinced that everything has been done in this field", despite the fall in interest rates by unprecedented levels (2.25% since 8 October) and support plans for this sector.
Will the euro explode with the crisis? To this question, put by Jean-Paul Gauzès (EPP-ED, France), the president of the ECB surprised no one by replying in the negative. "All of the currencies of the world are under pressure from the current financial turbulence", but "the Euro and the euro zone had shown that they have a capacity for resistance". Any idea that the euro zone may fall apart "strikes me as totally unfounded". (A.B./trans.fl)