President of the European Central Bank warned yesterday that short-term measures aimed at solving the economic and financial turmoil could sow the seeds of a future crisis.
Jean-Claude Trichet told the European Parliament that there would be no solution to the financial crisis until the structural problems in the world economy were corrected.
M. Trichet said the world remained out of balance in terms of the financial system, macroeconomic factors, and governance of the financial sector.
“The present crisis does not just offer us an opportunity to rebalance, it provides an obligation to rebalance these three intertwined domains of the global economy,” M. Trichet said. “And yet we also need to make sure that our decisions today do not lay the ground for similar disorder in the future.”
Governments around the world, including the US and the UK, are unleashing massive stimulus injections into their economies to bolster growth and unfreeze lending markets.
But the ECB head warned that though policy makers must take measures to ease the short-term crisis they also had to ensure that a recovery would be sustainable.
“First, credible exit strategies must be planned and promptly implemented once macroeconomic measures have had their desired effects and, second, policies must aim not only to stimulate domestic demand over the short run but also to foster longer-term structural adjustments,” M. Trichet said.
The ECB has been less aggressive than the Bank of England and the US Federal Reserve in cutting interest rates to deal with the crisis, even though the eurozone faces a deepening recession. Some critics have argued that rate cuts, along with other stimulus measures, risk stoking future inflation.
“As regards monetary policy, our guiding principle has been and continues to be to ensure price stability in the euro area in the medium term,” he said.
M. Trichet argued that international authorities needed to pay more attention to the links between macroeconomic and financial stability with closer collaboration between global institutions such as the International Monetary Fund (IMF) and informal groups including the Financial Stability Forum.