ECB Chief Sees Eurozone Recovery, Says Deficit Easing "dangerous"

BRUSSELS (AFP) - European Central Bank president Jean-Claude Trichet said that the eurozone economy would continue to recover modestly next year but condemned proposals to ease eurozone budget rules as "dangerous".
Trichet also told the European parliament that any further rise of oil prices would would hit growth and that the bank would be "vigilant" regarding risks of inflation.
The ECB president said that concern that the Greek public deficit had apparently been under-estimated for several years amounted to "an enormous problem".
The ECB expected gradual recovery of the eurozone economy to continue in the coming quarters, but he warned that higher oil prices could dampen demand or increase inflationary pressures.
Trichet told the European parliament`s economic and monetary affairs committee that economic figures over the past few months showed that the momentum of recovery in the 12-state eurozone had been maintained.
"The conditions for a continuation of the economic recovery remain in place," he said.
Trichet said that global demand remained robust, despite temporary fluctuations, contributing to export growth.
On the domestic side, higher corporate profitability and favourable financing conditions should boost business investment, he said, adding that interest rates were very low by historical standards.
Private consumption should also be sustained by growth in real disposable income and, in time, by an upturn in the labour market.
"Against this background, we expect the present gradual recovery to continue in the coming quarters and to become more broadly based, leading to a somewhat stronger upswing in the course of 2005," he said.
He said that while this outlook was surrounded by some uncertainty, risks were broadly balanced.
Amongst the downside risks, he warned that "if oil prices were to reach higher levels than currently expected by markets, this could dampen both foreign and domestic demand".
He called for "strong vigilance" on inflation risks, saying that "concerns relate in particular to oil price developments".
He concluded that "overall, while the prospects for price developments remain in line with price stability over the medium term, upside risks to price stability have emerged".
Trichet condemned proposals by the European Commission to adapt the way the budget rules enshrined in the Stability and Growth Pact were applied, effectively easing the constraints they put on countries such as Germany and France which have been unable to respect the rule during a period of low growth.
He declared that the proposals would not contribute to monetary union being strong and healthy and that the plan for increased budget flexibility when growth was slow was "dangerous".
The ECB was against any loosening of the EU`s excessive deficit procedure.
And he singled out for criticism suggestions that governments in breach of the eurozone ceiling for public deficits, of 3.0 percent of output, should have extra time to put their finances in order and proposals offering some relaxation of the rules for countries experiencing economic stagnation.
The ECB is independent in setting monetary policy and is obliged to seek price stability. The European Commission, the EU`s executive body, is responsible for ensuring the application of treaties, making policy proposals and for administering most EU activities.