December 7, 2010 / 7:05 PM / 9 years ago

UPDATE 1-ECB's Constancio sees no medium-term dlr alternative

* No medium-term alternative to dollar

* SDRs not a promising option for monetary reform

* Controlling inflation not enough to contain bubbles

* Repairing bank balance sheets crucial for growth

(Adds quotes, detail, background)

By Daniel Flynn

PARIS, Dec 7 (Reuters) - There is no medium-term alternative to the dollar for the international monetary system and a reform based on IMF Special Drawing Rights is not a promising option, ECB Vice President Vitor Constancio said on Tuesday.

Speaking in Paris, Constancio said the rebalancing of power within the International Monetary Fund was a welcome move that better reflected the global economy, but the idea of using the fund’s theoretical currency the Special Drawing Right (SDR) in place of the dollar was a non-runner.

French President Nicolas Sarkozy has made driving a reform of the international monetary system a key theme of his year-long presidency of the Group of 20 industrialised and developing nations, which began last month.

However, Constancio suggested a broad reform could be an unrealistic goal for the time being.

“I do not see a major reform of the international monetary system on the horizon, as there is no real substitute for the U.S. dollar in the medium term,” he said in a speech at an event organised by a cultural centre in Paris.

“The special drawing right is not a promising option, and the insufficiently deep and liquid financial markets of emerging market economies will limit the role that their currencies can play in the foreseeable future,” said Constancio, who took over as European Central Bank vice president earlier this year.

“A more cooperative system of exchange rate regimes is essential but does not depend on unachievable radical reforms.”


Constancio urged authorites to focus on repairing battered bank balance sheets. “Repairing the balance sheets of banks and making banks more resilient are crucial prerequisites for the resumption of growth,” he said.

Keeping prices stable — something the ECB is mandated to do at just under 2 percent inflation — meanwhile, was not enough to prevent financial market bubbles forming.

“The crisis taught us some important lessons that economic policy cannot now ignore: 1) the financial sector is not self-regulating and self-equilibrating and can generate very large economic crises.”

“Excessive credit growth and leverage almost always ends in a crisis,” he said, adding that “maintaining price stability, i.e. controlling inflation, is not enough to avoid overshooting and bubbles in the price of assets, from housing to the financial markets.”

Constancio also warned that cooperation between major economic powers could deteriorate as the memory of the global financial crisis fades and said creating the right governance to ensure sustainable worldwide growth remained the most difficult challenge facing global policymakers.

Earlier on Tuesday, IMF Managing Director Dominique Strauss-Kahn criticised Europe’s disjointed response to the euro zone debt crisis, describing it as “piecemeal”, after Germany and other states resisted his calls for bolder action. [nLDE6B60CJ]

Constancio said plans to toughen euro zone debt rules did not go far enough and urged countries to repair their finances.

“Convincing fiscal consolidation to redress the fiscal imbalances is essential. In the present situation, the scale of the fiscal challenges faced by many European countries puts them in uncharted waters,” he said.

Europe also needed to take urgent action to solve the problem of an ageing population dragging back economic growth, Constancio said, noting output growth could fall to 1-1/2 percent per year in the 2011-20 period, significantly below rates observed in the last 20 years, according to a recent projection by the European Commission. (Writing by Marc Jones; editing by Stephen Nisbet)

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