Hawkish Trichet calls for fiscal rectitude

The future chief of the European Central Bank (ECB, Mr Jean-Claude Trichet, signalled yesterday that euro-zone interest rates were low enough for now, and cast himself as a hawk on budget deficits with a call for fiscal rectitude.

In written responses to members of the European parliament, Mr Trichet issued a firm rebuke to his government of his native France for allowing its public sector deficit to grow, and signalled the ECB was not ready to cut rates now.

"The Governing Council of the European Central Bank demonstrated that it intended to give growth and job creation every chance, through ensuring credible price stability over the medium term," Mr Trichet said.

"The fact that we have, in the euro area, the lowest key interest rates for half a century - the lowest for 56 years in France, and the lowest since the creation of the Bundesbank in Germany, for example - is not enough underlined by observers."

Mr Trichet, who already sits on the governing council as Bank of France governor, also said the ECB was committed to guarding against deflation but saw no such risks at present.

ECB rates are at a record low of 2 per cent and the bank is expected to make no change when it meets today. It last cut interest rates by a hefty 50 basis points in June.

A day after France said it would be difficult to cut substantially its public deficit next year, Mr Trichet said the EU's Stability and Growth Pact - the rules to safeguard the euro currency - should be respected.

"It would be mistaken to believe that in difficult times, from the standpoint of growth, one is necessarily better off recording a deficit."

ECB watchers said the comments from Mr Trichet, who is due to take over from Dutch president Mr Wim Duisenberg at the ECB helm on November 1st, dispelled any notion that he could be soft on budget deficits.

"It puts Jean-Claude Trichet firmly in the camp of hawks with respect to the Stability and Growth Pact and sends a clear message to all governments in danger of breaking the pact," said Mr Julian von Landesberger, economist at HVB Group.

Mr Trichet's latest hawkish stance on the deficit issue struck a chord with similar comments on Monday from European Central Bank governing council member Mr Ernst Welteke, who urged EU states to stick to the bloc's budget rules.

Mr Trichet said work by the European Commission, the EU's executive body, showed the 3 per cent deficit level allowed by the stability pact gave members the necessary flexibility to take account of economic fluctuations.

The ECB would not change its policies to help new EU members join the euro zone, Mr Trichet added, urging such states not to rush to join the single currency bloc. - (Reuters)