Bonds News

UPDATE 1-ECB's Stark rebuffs European rescue fund idea

* Says European Monetary Fund would break euro zone rules

* Fund could become very expensive

* Would burden responsible countries

* Greek actions should stabilise markets

(Adds quotes, details, background)

FRANKFURT, March 8 (Reuters) - A European rescue fund would break European rules, penalise countries with solid finances and encourage wayward spending, European Central Bank Executive Board member Juergen Stark was quoted as saying on Monday.

The European Commission said on Monday it was working with Germany, France and other European countries on plans for a EU rescue fund that could, in future, be tapped to help troubled countries.

Stark attacked on the plans.

“Such a mechanism would not be compatible with the principles of the monetary union,” Stark wrote in a guest column in German daily Handelsblatt’s Tuesday edition. The text was made available to news agencies on Monday.

“It would be the start of a financial levelling off in Europe, which would become very expensive, set the wrong incentives and burden countries with more solid public finances.”

He also said “public acceptance of the euro and the European Union would be undermined.”

The idea has been positively received by many politicians. German Chancellor Angela Merkel said she backs the idea of a European Monetary Fund in principle, although a number of details would have to be cleared up before anything was agreed. [ID:nBAT005214]

Stark also said the answer should not be promises of aid, but a stricter enforcement of the EU’s Stability and Growth Pact, which states public deficits should not exceed 3 percent of the gross domestic product (GDP).

“Instead of a European “Monetary Fund”, budget rules should be strengthened and applied with by using a strict supervision mechanism,” he wrote in the column. “Both the preventive and corrective part of the Stability Pact has to be strengthened.”

The procedure should be more automatic and less politically influenced, Stark said, adding free-riding should be penalised.

“Countries which have not abided by the rules, which profit unilaterally from the euro, without taking their duties seriously, should not be rewarded,” Stark said.

Stark said governments should not wait for help from third parties, but work to consolidate their household finances.

“Without steering against the deficits as quick as possible, that is already this year or at the latest in 2011, a lengthening and intensification of the crisis threatens us.”

Turning to Greece, he said the actions taken to reduce its deficit should be recognised and should lead to market stabilisation.

Stark also repeated his attack on an IMF paper suggesting higher inflation targets. Proposals to cut public debt by inflating it away would likely increase in number, as would political pressure on central banks which are not as independent as the ECB, Stark said.