December 3, 2010 / 9:43 AM / 10 years ago

UPDATE 3-Trichet says EU fund must be big enough for task

* All industrialised countries need better budget management

* ECB’s Trichet and France’s Sarkozy say euro is credible

* Says EZ austerity measures do not risk provoking recession

* Trichet declines comment on his ECB successor

(Adds context, link to wrapup)

By Daniel Flynn and Leigh Thomas

PARIS, Dec 3 (Reuters) - Euro zone governments’ response to the bloc’s debt crisis, including a stabilisation fund to deal with it, must be big enough to deal with the scale of the problems, ECB President Jean-Claude Trichet said on Friday.

Speaking in Paris, where he met President Nicolas Sarkozy, Trichet urged European leaders to press ahead with a “quantum leap” in fiscal governance. He said he did not think budget cuts to curb swollen deficits would drive a recovering European economy back into recession.

His comments came as the European Central Bank continued to buy euro zone government bonds to counter a destabilizing rise in peripheral countries’ borrowing costs, and as Germany rebuffed calls from Spain for a closer fiscal union to underpin monetary union. [ID:nLDE6B20AX]

European Union leaders appeared this week to pass the baton to the ECB, stepping up pressure on it to unveil new steps to stabilize the euro zone as it battles a crippling debt crisis that has stoked contagion fears in the United States and Asia.

Yet Trichet said the need for an appropriate response in quantitative and qualitative terms applied to governments’ fiscal policies, structural reform and the “collegial collective action that we might have, including through the stabilisation fund.”

Trichet said the euro currency was “credible” and had preserved its value, which was crucial for the stability of the 16-nation bloc and the well-being of its citizens.

“We have a problem at the moment which is not a problem of the euro currency but a problem of the budgetary policies which were not correct, despite the rules, and that is what must be corrected and it is that which will be corrected,” he said.

France’s Sarkozy also reiterated his confidence in the euro, which he too described as a “credible” currency that had over the 10 years since its creation become the world’s second most important reserve currency.

Economic recovery in France and Germany was also proving “more dynamic than expected”, he said, according to a statement from the Elysee presidential palace after the president’s meeting with Trichet.

Trichet repeated, following Thursday’s rate decision, that the ECB was pressing ahead with acquiring European sovereign bonds. Bond traders said the ECB bought chunks of Irish and Portuguese bonds on Thursday and Friday, lowering the risk premium.

“It is extremely important that everything is commensurate to the dimension of the challenges,” Trichet told journalists, in response to a question about reports European governments might need to boost a 750-billion-euro bailout fund.

Analysts say the stabilisation fund might begin to look stretched if Portugal and Spain were forced to follow Ireland and Greece in seeking rescues.


As Spain renewed calls for closer integration of economic policy, Trichet said the main lesson of the crisis was the need to strengthen governance in the euro zone and Europe in general.

“We need ... in the current period to engage in a quantum leap in the governance of the euro zone,” he told journalists.

With the debt crisis hurting the euro’s image, Spanish Economy Minister Elena Salgado said that to have a single currency, Europe must also integrate economic policymaking.

“We have to improve economic governance in Europe. You cannot have in the long term a common currency without a common economic policy,” Salgado told BBC radio.

Trichet noted that the euro zone’s fiscal gap would be lower next year than in the United States or Japan and said the European economy had been “relatively dynamic” since the beginning of the recovery, prompting many observers including the ECB to raise their growth forecasts.

“But this is no time for complacency, neither as regards financial stability nor as regards the real economy.”

Asked if austerity measures would push euro zone states into recession, he had earlier told RTL radio: “I don’t think so”.

Trichet declined to comment on the likelihood of Bundesbank President Axel Weber replacing him at the helm of the ECB next year when his term expires. (Additional reporting by Nick Vinocur and Emmanuel Jarry; Editing by Susan Fenton)

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