EUROPEAN BANK´S ECONOMIST IS OPTIMISTIC ON SOVEREIGN DEBT, BUT CRITICS ARE WARY / THE NEW YORK TIMES ( HIGHLY RECOMMENDED READING )

July 9, 2010

European Bank’s Economist Is Optimistic on Sovereign Debt, but Critics Are Wary

By JACK EWING

FRANKFURT — The European Central Bank’s de facto chief economist said Friday that “the worst is over” for Europe’s sovereign debt crisis and expressed optimism about the Continent’s growth, underscoring similar comments by the head of the bank in what seemed to be a concerted effort to restore confidence in the euro area’s economy.

But the economist, Jürgen Stark, and other top bank officials found optimism a tough sell at a conference of central bank members and economists. At times the meeting resembled a monetary policy confrontation, as leading economists and analysts attacked the bank president, Jean-Claude Trichet, and other members of the governing board about their crisis management and even the viability of the euro.

Mr. Stark, a member of the central bank’s executive board, said he was “a bit more optimistic” about growth after data released on Thursday showed a better-than-expected increase in manufacturing in Germany, the bloc’s biggest economy.

Speaking to reporters at the conference, Mr. Stark said he was also encouraged by signs that European banks were becoming less dependent on E.C.B. cash, and that governments were showing they were able to get their budgets under control and push through changes in labor laws and other measures to promote growth.

“The European politicians have understood that the crisis is a wake-up call, that they have to change their behavior — and this is what we are seeing,” Mr. Stark said, noting progress made by countries like Portugal and Spain.

“It’s not only fiscal consolidation. It’s also a commitment by governments to embark on structural reforms. This is key,” he added.

Mr. Stark’s comments came a day after Mr. Trichet said at a news conference that European growth in the second quarter was probably better than in the first quarter, and that outside observers were being overly pessimistic about the economy.

Speaking on Friday at the same conference as Mr. Stark, Mr. Trichet said that outsiders had underestimated “the capacity of the Europeans to make decisions.”

But Mr. Stark was less guarded than Mr. Trichet, saying that an economic forecast issued on Thursday by the International Monetary Fund was too pessimistic. The I.M.F. “has not caught up to the reality in Europe,” Mr. Stark said. “The I.M.F. is underestimating the strength of the economy in Europe.”

He suggested that the E.C.B. could be winding down its unprecedented and controversial purchases of government bonds, which the bank began on May 10 to unfreeze debt and money markets. “We always said this is a temporary measure,” he said.

Mr. Stark answered critics who charged that stress tests of 91 European banks, intended to clear up questions about their ability to stand up to economic and market shocks, would not be rigorous enough to restore confidence.

“As far as I know these are serious tests,” Mr. Stark said. “You should not listen to those who always ask for more.”

The conference for professional E.C.B. observers, sponsored by the Center for Financial Studies in Frankfurt, is an annual affair, but several participants said the debate was more heated than in past years.

Economists offered pointed criticism of the way that the bank had managed the crisis, and a much more pessimistic view of the state of the euro area.

Daniel Gros, director of the Center for European Policy Studies in Brussels, referred to polls showing declining public confidence in the E.C.B. He told Mr. Trichet that the bank needed to be frank about how its role had expanded from guardian of price stability to the last line of defense against a market collapse.
“It’s difficult to tell people you have to buy Greek and Irish bonds to maintain price stability,” Mr. Gros said. “Wouldn’t it be better to be honest about this?”

Manfred J. M. Neumann, a professor at the University of Bonn, pointed to a growing split in the economic performance of Northern and Southern Europe. “This cannot last. If you do this for another 10 years the euro will fall apart,” Mr. Neumann said.

He said there should be a procedure to allow countries to exit the common currency.

That proposal prompted a sharp response from another E.C.B. executive board member, Lorenzo Bini Smaghi. “Have you sat down 10 minutes and thought about what that would mean?” Mr. Bini Smaghi asked, arguing that any country that dropped out of the euro would go broke.

“The euro is here and it’s going to stay,” Mr. Bini Smaghi said.

Mr. Bini Smaghi rejected suggestions by other speakers that it would be better to let Greece default on its debt, instead of asking taxpayers of other countries to bail out Greece.

“I don’t think you can say easily we know how to do it in a clean way,” Mr. Bini Smaghi said, referring to a debt restructuring. “In Argentina it was really bad for the people. It was really bad.”