First Published Sunday, 5 September 2010 05:37 pm - © 2010 Need to Know News
--But Too Early To Declare "Victory"
PARIS (MNI) - The Eurozone's strong second quarter growth performance confirms that there won't be a double-dip recession, but there are plenty of challenges in the coming years, ECB President Jean-Claude Trichet said in a newspaper interview published Saturday.
"I've already said on many occasions that I didn't foresee a double dip in Europe, and the latest results confirm it," Trichet told the French daily Le Figaro.
He warned against reading too much into quarterly figures, however, saying that the economy must be judged in a longer-term perspective. "That said, I am delighted with the growth in the second quarter and with the upward revision to the European Central Bank staff forecasts that I announced last Thursday," he added.
However, "with regard to growth in the coming years, we remain cautious and are not declaring victory," Trichet said.
Trichet and his ECB colleagues have said many times recently that they do not expect growth in the second half of this year to match the second quarter's torrid pace. They expect momentum to slow in the third quarter and even more so in the fourth, though they believe a modest recovery will continue.
The Eurozone economy surpassed expectations in the second quarter with a robust 1.0% q/q growth rate, driven largely by Germany's dizzying 2.2% quarterly pace. Largely on the basis of the strong second quarter, the ECB staff revised upward its midpoint growth forecast for 2010 to 1.6% from the previous projection of 1%.
Trichet suggested that the strong 2Q performance cannot be attributed to the euro's weaker tone in foreign exchange markets, which many say has been a big boon for exports - especially Germany's.
"I note with great interest that the Eurozone's second quarter growth rests above all on its domestic demand [consumption and investments]: a total contribution of 0.7% to growth of 1%, with a contribution of 0.1% from foreign trade and 0.2% from inventories," the ECB president said.
He downplayed the idea that Germany's disproportionate share of 2Q EMU growth meant that a "two-speed" Europe was emerging.
"Germany is the biggest economy in the [currency] union and the top market for the exports of the near-totality of the other countries. When it improves, it is clearly good for the Eurozone as a whole," Trichet said.
He lauded Germany, saying its success was the fruit of the measures it has undertaken in recent years to reduce production costs and increase productivity, as well as the adaptability of German companies to the realities of globalization.
In a comment that could be aimed at France, which is facing a week of strikes, protests and general tension over the government's pension reform plan, Trichet noted that Germany's success was built on "a high degree of confidence among social partners [unions and employers], which we be desirable to regain in all countries of the Eurozone."
Given its attention to production costs and the reforms it has undertaken to make the economy "more flexible," Germany "can serve as an example to all its neighbors," Trichet said.
Asked to explain why the U.S. Federal Reserve was worried about deflation while the ECB was not, Trichet said there were "important structural differences on the two sides of the Atlantic, and that the fear of deflation "manifested itself from time to time in the United States, even if, very fortunately, the risk has not materialized."
In Europe, he added, "we are lucky to have a remarkable anchoring of inflation expectations in line with our definition of price stability of less than but close to 2%." He repeated, as he has for many months, that "the ECB considers the current interest rates appropriate to give us medium-term price stability, without inflation or deflation."
Trichet also repeated his criticism of the big three ratings agencies, saying "it is not necessarily healthy" that the important task of evaluating securities be share among only three institutions at the global level. "I don't think the solution is necessarily the creation of a public institution. We must continue to reflect," he said, adding that, "the right answers in this domain as in others can only be worldwide ones."
Trichet also renewed his call for China to exercise "greater flexibility" with regard to the exchange rate of its currency, the yuan. "From this point of view, I appreciated, along with all the [finance] ministers and [central bank] governors of countries with floating currencies, the move in the direction of more flexibility that was made public by China last June 19," he said.