ECB head gives stark warning to EU states

EUROPEAN Central Bank President, Wim Duisenberg yesterday urged European Union finance ministers to stick to budget deficit rules, or risk a dangerous loss of confidence in monetary union.

Duisenberg’s farewell speech to finance ministers, delivered at a dinner in his honour in Venice on Wednesday, was one of his starkest warnings yet that the grand experiment of launching a new currency for Europe, is still a young project that could be undermined by fiscal laxity.

Governments must stick to the budget deficit pact to prevent this, Duisenberg said. “This is a contract not just among governments, but a contract with every single citizen of the euro area. It is on the basis of this contract that they have accepted loss of their monetary sovereignty,” Duisenberg said.

He said the Stability and Growth Pact, which requires governments to keep their public deficits below 3% and move toward balanced budgets or face penalties, foresaw difficult economic times, and are no excuse for backsliding.

The EU, however, has decided to deal leniently with France, which is set to breach the deficit limits for the third straight year, citing slow growth Germany is heading in the same direction.

Duisenberg had harsh words for finance ministers. “If you break this contract, this confidence will be lost. You were warned. The rules were not designed just for the good times but also for the bad.

“The difficulties that some of you now face do not provide grounds for tinkering with the rules. They call for implementation. “These rules are there to help, not to hinder, efforts to put the house in order. They should be allowed to do what they were designed for. Otherwise I fear the Pact will unravel, the contract with the people will be broken. Without the right foundations, you cannot build a stable house,” he said.

The retiring ECB president, who hands over to Bank of France Governor Jean-Claude Trichet at midnight on Friday, also indirectly rebuffed criticism that the ECB should do more to boost growth, and has been too ideologically committed to beating inflation at the expense of growth.

He said that structural reforms to labour and product markets, as laid out by EU officials in Lisbon several years ago, is the route to faster growth in Europe. “Most importantly, we have done our duty. We have maintained price stability. And we have done it in a pragmatic fashion with a steady hand,” he said.