Head of European Central Bank says governments must start bringing deficits down
European Central Bank president Jean-Claude Trichet warned today that governments that have borrowed billions to fight the economic crisis had no room for more debt and would have to start bringing down budget deficits.
Trichet said the large injection of funds in an effort to stimulate European economies had been the right response, but said there was a need to get public finances back under control as soon as possible. "There is a moment where you can't spend any more and you can't accumulate any more debt. I think we are at that moment," Trichet told Europe 1 radio.
"We are in exceptional circumstances," he said, adding that financial markets and consumers had to be convinced that budgets would return to normal.
The ECB has slashed interest rates to shore up a battered economy, though a rate of 1% is higher than in the United States or Britain and was cut more slowly.
Although the eurozone was not at the core of the freezing up of financial markets in the autumn of 2007, its banks held vast amounts of toxic assets and countries such as Germany, which was heavily dependent on exports, have plunged into recession as world trade collapsed.
But Trichet said there was now wide agreement that the bloc's economy would be showing clear signs of recovery by 2010 if the appropriate action was taken.
"In that hypothesis, we will have growth coming back again and so we have to begin the operation that consists of moving progressively towards balance," he said, referring to budget deficits.
Trichet said the unprecedented actions taken by central banks had restored confidence to money markets that were almost crippled by the shock of the Lehman Brothers collapse last year.
"As far as risk, risk premiums on money markets, the functioning of the money markets is concerned, we have returned to a situation I would qualify as 'pre-Lehmans'," he said.
Trichet also repeated calls for an overhaul of the rules underpinning the global economy. He said the global crisis had revealed the fragility of the financial system, which had encouraged short-term decisions and reinforced cyclical swings and he said it should be strengthened "in an extremely significant manner". "We would not be forgiven for starting again with the same degree of fragility."
He welcomed the recent steps agreed by European Union leaders to tighten financial supervision. "Some might say we should go much faster but I think one has to be realistic and practical."
Trichet said that as head of the ECB he would be able to lead a new European Systemic Risk Board that would monitor risks to stability but he declined to comment on whether he would actually chair the body. Britain and national banking and insurance regulators in the EU oppose the ECB chairing the new board.
Copyright Speakers Corner 2017