Jean-Claude Trichet has called on eurozone leaders to step up their efforts to combat the region’s debt crisis, including slashing government deficits even more.
The European Central Bank president’s comments highlighted widespread fears that the crisis that last year rocked Europe’s 12-year-old monetary union could re-escalate in coming weeks as eurozone governments and banks raise funds in tense financial markets.
“In 2011, we must strengthen our efforts even more. We need to see further significant progress on the reduction of excessive fiscal deficits,” Mr Trichet told a gathering of Germany’s Christian Social Union, the Bavarian sister party of chancellor Angela Merkel’s Christian Democrats.
His remarks may have referred particularly to Portugal, where the ECB may see the need for greater efforts to secure the government’s fiscal goals. Portugal’s borrowing costs have this week risen close to euro-era highs.
But Mr Trichet also repeated his call for eurozone leaders to beef-up their plans to reform the governance of the currency bloc to prevent a repeat of last year’s crisis. “Europe cannot afford to rest halfway — we need to be more ambitious,” he said.
Speaking in Wildbad Kreuth in Bavaria, Mr Trichet, said Germany’s economy had “fared much better than many had anticipated” and noted that the country was now seeing a revival in domestic demand.
As he spoke, official data showed German imports hit a record level in November and were more than 4 per higher than the previous month. However economists were disappointed by other figures showing retail sales fell by 2.4 percent over the same period — which suggested much of the surge in imports was of goods required for the production of exports.
Mr Trichet paid tribute to Germany’s increased competitiveness but warned that “the competitive gap between countries in the euro area has widened” as shown by unit labor costs, inflation differentials and mounting current account balances. “The long term damage could take the form of persistent differentials in output growth, income and welfare.”
Germany’s fiscal rules — the “stability and growth pact” — were originally written largely by the CSU’s Theo Waigel, when he was finance minister in the late 1990s. Mr Trichet argued that the pact’s dilution in the middle of the last decade had been a “grave” mistake. “Today, governments have no choice but to change their policies. And they must substantially reinforce the stability and growth pact,” he said. Fiscal policies needed “to be brought back onto the path of virtue”.
The ECB has criticized as too weak the proposals agreed so far for amending the stability and growth pact — but remains hopeful that they will be reinforced before coming into effect.
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