ECB’s Trichet: budget cuts won’t lead to new slump

ECB President Jean-Claude Trichet dismissed warnings that drastic and simultaneous spending cuts planned by eurozone governments could send the 16-country bloc back into recession.

US policymakers have called for continued stimulus to keep momentum in the global recovery, while many economists and academics have raised fears that austerity measures on the cards in Athens and a clutch of other European capitals could snuff out the eurozone’s nascent recovery.

“We are totally against the view that reducing public expenditures will hinder economic growth,” Trichet said at an ECB watchers conference organised by the Goethe University Frankfurt’s Centre for Financial Studies.

“Consolidation measures will help turn the current upturn into sustained growth.”

The ECB took a cautiously confident view of the eurozone’s recovery after it held the bloc’s interest rates at a record low one percent.

Trichet said it was too soon to sound the all-clear over the crisis, but backed eagerly awaited bank stress tests – currently being carried out on a sizeable chunk of Europe’s financial sector – to help the recovery process.

“These tests will increase transparency and enhance investors’ confidence in Europe’s banking sector,” he said.

It remains vital for governments to get their finances back in order, he said.

“Just like consumers and countries, governments cannot live beyond their means forever. Fiscal authorities need to look beyond the current cyclical upturn. There is no alternative to that.”

In a copy of Trichet’s speech released by the ECB, he also backed harsh punishments for governments that flout Europe’s deficit limits.

“In the most severe cases of persistent non-compliance (countries not complying with stability pact rules), a limitation or suspension of voting rights should be considered.

“We are now at a stage in which we have to finalise new rules and regulations that will help to make our economies more resilient… It is a very important phase and it requires our full attention,” he added.