ECB's Trichet has 'grave concerns' on eurozone governance

(FRANKFURT) - The head of the European Central Bank Thursday expressed his "grave concerns" about economic governance in the euro area in what he called an "exceptionally demanding and uncertain" environment.

Speaking at a central banking conference here, Jean-Claude Trichet recalled that the ECB had expressed worries about the weakening of the Stability and Growth Pact, which seeks to limit the budget deficits of EU member states.

"I am sending this message, as solemnly today as in 2005 when I expressed, on behalf of the (ECB) Governing Council, those grave concerns that I just quoted," Trichet said.

"In the past days, taking into account the lessons of the global crisis, in particular as regards its impact on the European single market and in the single currency area, we have called, and are still calling, for a quantum leap of governance," he added.

Describing the current situation on the financial markets and the economy as "exceptionally demanding and uncertain," he stressed it was all the more important "to preserve and reinforce the authority of public authorities."

Trichet was speaking as officials from the European Union, the ECB and the International Monetary Fund were in Ireland assessing the financial situation of the debt-wracked country.

Ireland could receive "tens of billions" of euros as part of a bailout, the country's central bank governor said earlier Thursday.

However, despite huge international pressure, Ireland's leaders have still not committed to accepting an aid package amid concerns about how conditions attached to such a loan might affect domestic issues such as tax policy.

But the EU is extremely concerned that Ireland's weakness could lead to a contagion that could drag down other heavily indebted economies in the 16-nation eurozone such as Spain and Portugal.

Turning to current ECB policy, Trichet said the bank was keeping all options open on potential exit strategies from exceptional stimulus measures designed to shore up the struggling eurozone economy during the global crisis.

"We consider that we are not bound to unwind non-standard measures before considering interest rate increases; we could do one or the other or both," said Trichet.

The ECB has provided eurozone commercial banks with unlimited cash loans to ensure liquidity in the money markets and ease a credit crunch that spread to the broader economy.

It has also kept its short-term interest rates at a historic low level of one percent in a bid to stimulate demand.

The ECB's policy, and target of keeping inflation close to but below two percent, has produced exceptional results in controlling prices, even in turbulent times, Trichet said.

"The average inflation rate in the euro area since January 1999 has been 1.97 percent. This represents an achievement that is worth taking note of," said Trichet.

"It is, moreover, the best result in the major euro area countries in over 50 years."