E.C.B. Chief Sees Eurozone Recovery, Says Deficit Easing "dangerous"

BRUSSELS (AFP) - European Central Bank president Jean-Claude Trichet said the eurozone economy was on track for modest further growth next year but condemned proposals to ease budget rules as "dangerous".
Trichet warned that any further rise in oil prices would hit growth, said that there were "upside risks" for prices and signalled that the bank would show "strong vigilance" regarding inflationary pressures.
The ECB president, speaking shortly before Greece doubled its deficit figure for 2000, said that concern that the Greek public deficit had apparently been under-estimated for several years amounted to "an enormous problem".
Trichet told the European parliament's economic and monetary affairs committee that the central bank expected growth of the eurozone economy to continue moderately in coming quarters.
But he warned that a further rise of oil prices, which have climbed more than 60 percent in 12 months, could dampen demand or increase inflationary pressures.
He said that recent data showed that the momentum of recovery in the 12-state eurozone had been maintained and that "the conditions for a continuation of the economic recovery remain in place".
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.
The gap between the ECB's main interest rate of 2.00 percent, the US Federal Reserve's rate of 1.75 percent, following Tuesday's quarter-point tightening move, and the Bank of England's rate of 4.75 percent were "important differences".
But they were "justified by the fact that we all have our own mandate and responsibilities in very different environments".
Private consumption in the eurozone should also be sustained by growth in real disposable income and, in time, by an upturn in the labour market, he said.
"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."
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".
The ECB opposed any loosening of the Stability and Growth Pact's disciplinary procedure for EU countries with excessive deficits. The 3.0-percent of output limit was the anchor of the fiscal framework and should not be undermined.
And he criticised as "dangerous" the European Commission's proposal to give governments more flexibility at times of slow growth.
"The slow-growth concept seems to me dangerous," he said, adding that "we dont think we can go along such a line".
The commission's proposal to take national circumstances into account when surveilling deficits was dangerous because all countries should be treated equally.
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.