ECB's Stark warns global crisis far from over

Reuters News
Posted: Sep 24, 2011 1:09 PM
ECB's Stark warns global crisis far from over

By Marc Jones

WASHINGTON (Reuters) - The global financial crisis is far from over, European Central Bank Executive Board member Juergen Stark warned on Saturday, and hit out at the idea that low interest rates and other loose policy could solve the fundamental problems facing many.

ECB heavyweight Stark, who announced his shock resignation from the bank this month, said the world was still deep in crisis.

"The global financial crisis is far from over," Stark warned in a speech on the role of monetary policy.

Central banks therefore needed to stand firm against political influence and stick to keeping inflation in check.

"It is a fallacy to think that loose monetary policy can solve the large structural problems we are facing. Central banks must not become the victims of their own success and should not become overburdened."

Stark cited personal reasons for his decision to quit the ECB, although sources say it was principally over his opposition to the central bank's controversial bond purchase program.

He highlighted the heavy debts burdening key developed economies alongside structural problems and growth worries, but spent the core of the speech calling for central banks to stand firm against political interference.

"Credible, stability-oriented monetary policy frameworks are assets that have been difficult to acquire and must not be put at risk."

"For monetary policy to remain effective, its responsibilities must remain within clear limits."

His comments came hours after Treasury Secretary Timothy Geithner bluntly told European governments to eliminate the threat of a catastrophic financial crisis by teaming up with the European Central bank to boost the continent's bailout capacity.

The IMF also put pressure on the ECB, saying on Friday it would support it if decided to cut interest rates, a move markets are now pricing in for the ECB's October meeting.

"If a central bank comes under pressure in times of crisis, and succumbs to that pressure, it is very unlikely to exit from such extraordinary measures in a timely manner," Stark said.

"Opportunistic manipulations of the monetary policy framework of course damage the foundations on which that framework rests."

Price stability -- the ECB's main task- - could suffer unless governments got their books in order.

"The state of public finances clearly matters for central banks. At least from a theoretical point of view, one of the reasons is that monetary policy could in principle be used - or abused - to alleviate a government's budgetary woes."

"Any blurring of responsibilities can potentially lead to a loss of credibility for the central bank. Such a situation would ultimately undermine the effectiveness of monetary policy," he said.

To avoid a repeat of the current troubles a clear framework to deal with debt sinners was also needed in the euro zone.

"Regulation of the banking system and financial markets has not yet progressed sufficiently. Fiscal policy should be more grounded in a rules-based framework with clear medium term objectives, similar to monetary policy."

Stark also said that "exiting an extraordinary accommodative (monetary policy) mode too late can sow the seeds of future imbalances."

(Reporting by Marc Jones, Editing by Chizu Nomiyama)