ECB’s Trichet says eurozone needs budgetary federation to watch over government finances

Trichet sees need for ‘budgetary federation’

PARIS — European Central Bank President Jean-Claude Trichet says Europe needs “the equivalent of a budgetary federation” as a watchdog over eurozone governments’ public finances as a response to the continent’s government debt crisis.

In an interview published Monday in the French daily Le Monde, Trichet said that existing European treaties would permit the kind of “control and surveillance” of government’s public finances.

“Surveillance of budgetary policies, of eurozone economies’ competitiveness, and of structural reforms must be radically improved,” Trichet was quoted as saying. “We are a monetary federation. Now we need the equivalent of a budgetary federation in terms of the control and surveillance of the application of public finance policy.”

He suggested new institutional arrangements would not be needed “at first,” meaning the basic EU treaties would not have to be changed — a long and politically difficult process.

Existing EU rules have not been enough to get countries to coordinate their fiscal management and keep them from running up too much debt.

In the interview, Trichet said he supports European Union plans for EU oversight to go further and monitor how EU economies are performing.

Earlier this month European Union officials urged a crackdown on widespread government overspending, calling for much closer economic coordination between EU nations to curb the acute debt crisis that started in Greece and has threatened to sink the shared euro currency.

The plan presented by the EU’s executive commission advocated unprecedented scrutiny of countries’ spending plans even before they go to their national parliaments — and new financial penalties for rulebreakers.

That would deepen the ties that bind 16 nations in Europe’s currency union and would curtail some nations’ power over their own economies in an attempt to keep more reckless spenders like recently bailed-out Greece from dumping their debts on all eurozone members.

Trichet said he “doesn’t understand” criticism of the plan, notably in France, according to Le Monde.

In a speech in Vienna on Monday, Trichet also refuted criticism of the ECB’s controversial program to buy government bonds and support the bond market. Depending on how they are done, bond purchases by a central bank can increase the supply of money in the economy. That can both stimulate growth and cause inflation as well.

Trichet said that would not happen because the bank “sterilizes” its intervention, offsetting the impact on money supply. “The Securities Markets Program should not be confused with quantitative easing. In simple words: We are not printing money,” Trichet said, according to a copy of his speech on the ECB’s website.

In a separate speech Monday in Rome, Italian Central Bank governor Mario Draghi said the market intervention “will have to be discontinued as quickly as possible,” when markets resume trading of the securities of the countries involved.

German central bank governor Axel Weber said in a speech in Mainz, Germany that it is “essential” that possible supportive measures be “strictly targeted and tightly controlled.”

Weber, one of the ECB council members who has openly criticized the plan to buy government bonds, said he is critical of “new monetary policies in overcoming the financial crisis and the stability-political risks that are connected with it. The risks need to be minimized.”