Interview: ECB cannot solve root causes of euro crisis, financial market reforms a priority: ECB chief economist

2012-10-26 13:32:32 GMT2012-10-26 21:32:32(Beijing Time)  Xinhua English

MILAN, Italy, Oct. 26 (Xinhua) -- The European Central Bank can ease some pressure on banks struggling amid capital shortfalls and funding strains, but broader measures are necessary to tackle structural problems, ECB chief economist Peter Praet said here on Friday.

In a keynote speech delivered at Bocconi University in Milan, Praet said the ECB has adopted a series of non-standard measures which have prevented "destructive self-sustained dynamics" in the eurozone, since 2007 when rumors of some European banks' exposure to the U.S. Sub-prime market begun to affect financial markets.

After providing liquidity aimed at stabilizing interest rates and ensuring that temporary liquidity problems would not affect bank solvency, the central bank in 2009 introduced open market operations.

Then, with the deepening of the sovereign debt crisis, the ECB took additional measures enhancing further credit support in 2011. It also announced recently the details of a rescue mechanism (OMT) especially aimed at addressing severe distortions in the eurozone government bond markets.

However, tough monetary policies can only alleviate some pressure on the banking sector's deleveraging in crisis times. "It cannot address their root causes," Praet stressed.

He added that the creation of abundant liquidity could originate side effects that needed to be carefully monitored.

"In fact, to tackle the underlying problems, a wide-ranging policy response is necessary, inter alia, pertaining to public finances, economic competitiveness and the financial sector," the 63-year-old Belgian official said.

"The ongoing and envisaged reforms towards a financial market union follow a clear and economically sound strategy," he said stressing it is "crucial" to follow through with these efforts.

In his view, a more integrated financial market union must be "one of the top priorities in Europe."

"And the single supervisory mechanism, just a few months ago considered as out of reach in the foreseeable future, is now under construction," he said.

Yet, Praet noted, it is of "outmost importance" that European governments and policy makers undertake all needed structural measures to address the fundamental sources of the current crisis.

Speaking of Italy, he said it is taking encouraging steps. The banking sector is now under severe adjustments, as the necessity to put public finances on the right track not only has been recognized in the Mediterranean country, but is being "very forcefully addressed by the present government."

All the necessary reforms need to be "understood and shared by the broad base of the population," because it is key for the stability of the financial industry that the sovereign debt is being tackled, he said.

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