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Nov. 30 (Bloomberg) -- European Central Bank Executive Board member Juergen Stark said the only way for the region to exit its debt crisis is for governments to reduce budget deficits and embrace wage cuts and other structural changes.
“There is only one instrument left, which is adjustment in relative prices in wages, in salaries, in costs,” Stark said in remarks after a speech hosted by the Federal Reserve Bank of Dallas yesterday. “The ECB does not have the powers to support governments.”
The ECB has resisted calls to become a lender of last resort, saying its mandate prevents the bank from propping up irresponsible government spending. Even so, Germany is pushing for governance changes at a summit next week that would tighten enforcement of budget rules, a move that might make it easier for the ECB to play a bigger part in supporting euro-area nations.
Euro-area finance ministers approved enhancements to their bailout fund yesterday while backing off from setting a target for its firepower and seeking a greater role for the International Monetary Fund in fighting the debt crisis.
The finance chiefs of the 17 nations using the euro agreed to work on boosting the resources of the IMF so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg’s Jean-Claude Juncker told reporters late yesterday in Brussels after leading the meeting.
Greater roles for both the ECB and the IMF are “on the table,” Belgian Finance Minister Didier Reynders said as he left the meeting.
The ministers have started talks on channeling ECB loans to cash-strapped euro nations through the IMF, aiming to bring the central bank on to the front lines without violating its ban on direct lending to governments, according to two officials familiar with the discussions.
Stark, asked yesterday if the ECB could lend to the IMF, said, “we are not a member of the IMF.”
Stark said that while “many countries in the euro area have not adjusted to the conditions in the monetary Union,” he is “very optimistic” that the euro will survive the crisis.
In prepared remarks, Stark said central banks must guard their independence and keep their focus on price stability or risk being dominated by free-spending governments.
“Crucial challenges in this regard include the risk that monetary policy is overburdened by fiscally dominant regimes caused by government’s irresponsible fiscal behavior and unsustainable public finances,” Stark said.
Bank of France Governor Christian Noyer said separately that any lasting euro-area backstop must come from governments, while the ECB sticks to its mandate of ensuring price stability. Reiterating a speech delivered in Tokyo earlier this week, Noyer said in Singapore that it’s essential to stabilize European bond markets and the ECB’s current bond-buying program is “totally justified.”
The ECB needs to ensure the euro-area banking system has access to liquidity, Noyer also said.
Stark used the bulk of his speech to discuss the impact of globalization on monetary policy during the financial crisis. Global forces require “much greater economic policy co- ordination among monetary union members,” he said.
He differed with the U.S. policy approach, which has given equal weight to maximum employment and price stability.
“The ECB has never subscribed to the view that monetary policy has a primary role to play in the management of aggregate demand and we think that this element of the pre-crisis monetary policy paradigm should be revised,” he said.
--With Assistance from Steve Matthews in Atlanta. Editors: Christopher Wellisz, Chris Anstey
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