ECB’s Liikanen says budget cuts may slow growth in euro area
European Central Bank council member Erkki Liikanen said budget cuts may slow economic growth in the euro area.
“The sovereign debt crisis has increased the downside risks to the growth forecast,” Liikanen, 59, who also heads the Finnish central bank, said in a press briefing in Helsinki today.
“Faster-than-expected consolidation of public finances could contribute to slower short-term growth.”
The ECB, led by President Jean-Claude Trichet, has started buying securities to boost liquidity on the market for European bonds.
The region’s economy expanded 0.2pc in the first three months of this year, extending the recovery to a third straight quarter.
The 16-nation euro area may see growth of 0.9pc this year and 1.5pc in 2011, the European Commission, the EU’s executive body, forecast on May 5.
The long-term impact of fiscal consolidation is “positive,” as sustainable growth “isn’t possible without healthy public finances,” Liikanen said.
The average budget deficit in the euro region may widen to 6.6pc of gross domestic product this year before easing to 6.1pc next year, the commission projects. That’s more than double the EU’s 3pc limit.
European leaders meet in Brussels today to discuss the unprecedented financial backstop to support high-deficit nations such as Spain and defend the euro.
The single currency has fallen 14pc this year as Greece’s near-default fueled concern about rising debt in the region.
On the central bank’s bond-purchase program, Liikanen said “the Securities Markets Program doesn’t represent a relaxation of monetary policy” and all liquidity added to the market will be removed “in full.”
The central bank, which has kept its benchmark interest rate at a record low of 1pc for more than a year, is “inflexibly attached” to its price-stability objective “under all circumstances,” he said.
Europe’s aid plan “created an opportunity to take further action and it’s important that Europe use the time well,” World Bank President Robert Zoellick said in an interview late yesterday in New York. “We’re not through that period by any means yet.”