Papademos notes EU fiscal gaps, but sees little inflation

European Central Bank Vice President Lucas Papademos yesterday criticized fiscal developments in some key eurozone countries, and said the prospect of a return to balanced budgets is «rather bleak.» However, in a speech in Athens, Papademos was relaxed about price pressures in the 12-nation bloc, saying he expected inflation to remain around its current rate of 2.1 percent in coming months. «Unfortunately, fiscal developments in the euro area continue to be on average far from satisfactory, and in several member states disappointing,» Papademos told a gathering of Greek and Turkish bankers. «Some countries have succeeded in achieving and maintaining sound budgetary positions, a significant number of others have not, including the larger ones,» he added. German and French budget deficits have both exceeded the European Union’s 3 percent of gross domestic product limit in each of the past three years, and the two countries are struggling to get back within it during 2005. Greece itself is also a serial offender against the Stability and Growth Pact, which is designed to underpin the stability of the euro, and on which EU finance ministers recently agreed on amendments to make it more flexible. Some critics have said the result has watered down the previously rigid rules. Papademos said it was now essential that these revised rules be implemented in a «firm, rigorous manner.» However, he said inflationary pressures show no significant sign of building up in the eurozone, and that harmonized yearly inflation is likely to remain around 2.1 percent in coming months, just above the ECB’s 2.0 percent ceiling. «Overall there is no significant evidence of underlying domestic inflationary pressures building up in the euro area,» Papademos said. «Economic analysis suggests that domestically generated inflationary pressures are likely to remain limited. In an environment of moderate economic growth and slack labor markets, wages should continue to increase at a modest pace and the pricing power of firms should be constrained.» However, he added, high oil prices were posing upside risks to price stability despite downside risks to economic growth, and that credit growth and excess liquidity were risks to price stability which the ECB would monitor vigilantly. He also said structural reforms and the integration of financial markets were crucial for Europe’s economic welfare.