Trichet warns of 'lost decade' over debt

EUROPEAN CENTRAL Bank President Jean-Claude Trichet last night renewed his call for austerity hours after Federal Reserve Chairman Ben Bernanke said he was ready to step in to support the US economy if necessary.

Trichet said governments risk causing a “lost decade” of weak economic growth if they delay reversing the surge in public debt triggered by the financial crisis.

“The lesson from past history is that dealing with the legacy of accumulated imbalances is not simply a duty to be fulfilled after the economic recovery, but rather an important precondition for sustaining a durable recovery.”

He was speaking at the Kansas City Federal Reserve Banks annual monetary symposium in Jackson Hole, Wyoming.

“The primary macroeconomic challenge for the next 10 years is to ensure that they do not turn into another ‘lost decade.’” His view clashes with President Barack Obamas preference to focus on spurring growth.

Focusing on the longer term, Trichet said debt among consumers, businesses and governments “bears the ultimate responsibility for slowing down the economic recovery” and that delivering stability and growth in the coming years would require a “progressive reduction” of it.

Reducing Europe’s debt to 60 per cent of gross domestic product will require a 30 percentage point drop, he said. Without naming specific policy makers, Trichet said some have suggested the short-term economic outlook requires more spending and that debt can be ignored for now.

“Adopting this view would be very dangerous for our economies,” he said, drawing a parallel with Japan in the 1990s when banks contributed to economic weakness by rolling over the bad debts of inefficient firms.

High public debts and the lack of a plan to pare it threaten to spur uncertainty among households and companies knowing they would ultimately face the higher taxes and spending cuts needed to reduce it, Trichet said.

“So the option of ‘living with the debt’ indefinitely is not a solution to the challenges currently facing policy makers, nor is it a means to ensure sustainable economic recovery,” he said. “Given the size of the accumulated public debt, fiscal consolidation will have to be ambitious.”

Trichet said he was sceptical of the argument that cutting back deficits now would risk derailing the recovery.

The role of central banks during a period of fiscal retrenchment is to maintain their focus on delivering price stability, he added. Referring to how central banks have used a mixture of interest rate cuts and non-standard policies to fight the financial crisis and recession, he said their withdrawal could occur independently of each other. “Interest rate increases could perfectly well take place independently of the phasing out of the non-standard measures if those non-standard measures continue to be fully justified by the situation,” he said. –(Bloomberg)