POLICYMAKERS IN Europe must not tear up the rule books when launching emergency economic rescue packages, the European Central Bank president has urged.
Fiscal indiscipline could threaten already fragile economic confidence and increase capital market nervousness about governments' funding needs, Jean-Claude Trichet warns in interviews today.
He argues, however, that the EU's stability and growth pact, which sets rules on public deficits and debt, offers flexibility to some countries with stronger finances.
Worries about the fiscal outlook for euro-zone countries such as Greece and Italy have led to a dramatic widening in spreads between German and other government bonds. "The market is aware of the room for manoeuvre of the various countries," Mr Trichet warns.
He argues that the global financial market crisis has posed a serious threat to industrialised economies. "We cannot afford in future to put the concept of the market economy at risk as we did . . . The fragility, not only of global finance but of the global economy itself, is something we should reflect on."
Policymakers have a duty "to eliminate as completely as possible all the inbuilt elements in global finance that are amplifying the booms and the busts".
Mr Trichet's comments could offer some comfort to the German government, which has come under international pressure to step up its fiscal expansion problems.
However, they could add to some analysts' fears that the ECB is still underestimating the pace and extent of the economic downturn. - ( Financial Timesservice)
