EUROPEAN CENTRAL Bank president Jean-Claude Trichet has said suggestions that some EU states may have to leave the euro zone due to the economic crisis were “unfounded”.
At a meeting in the European Parliament yesterday he also played down the threat posed by deflation, which some economists believe could prompt a further cut in interest rates. “There is presently no threat of deflation . . . What we are currently witnessing is a process of disinflation, driven in particular by a sharp decline in commodity prices,” said Mr Trichet, who added that the rapid fall in inflation was a “welcome development”.
“The spike in oil and commodity prices that began in 2007 and lasted until mid-2008 was both inflationary and contractionary. The recent decline in these prices is both disinflationary and expansionary,” said Mr Trichet, who signalled last week that the ECB would not move again on interest rates until its governing council meeting in March.
The ECB is expected to scrutinise the inflation outlook in the run-up to the March meeting and ECB council member John Hurley insisted the bank is “ready to act” if its inflation outlook changes.
“Clearly, if events cause our expectations regarding inflation to be revised, then the governing council remains ready to act,” he said in Dublin.
Back in Brussels Mr Trichet sought to allay fears that the depth of the current economic crisis could cause a rupture in the euro zone. Asked by MEPs about rumours that some states would have to leave the common currency because they may not be able to pay down their debts, he replied: “I think these rumours are unfounded about the euro.”
Financial markets have begun factoring in the once unthinkable – that the euro zone might break up. Prices of insurance against debt default by Ireland, Greece, Italy, Spain or Belgium have jumped and the yield spreads against Bunds have ballooned.
“Of course in the financial markets banks have to determine their own level of risks,” said Mr Trichet, adding that governments needed to keep a limit on extra spending. “Governments are responsible for their policies. We ourselves are saying we are in a single euro area. Governments remain responsible, they have to do all [that is] necessary to cope with the situation,” he said.
“The current economic situation calls for prudence with regard to the adoption of extensive fiscal stimulus measures, taking into account the particular fiscal situation in each country.”
