ECB officials warn of "currency war" risks to growth

By Marc Jones and James Mackenzie

FRANKFURT/ROME (BestGrowthStock) – Two top ECB policymakers warned about the risks of currency wars on Thursday as Board member Juergen Stark flagged up improvements in money markets a day after the ECB inched forward its exit strategy.

Forward-looking data this month have suggested Europe’s recovery is proving more resilient to a swathe of government budget cutbacks than previously thought.

ECB Governing Council member Mario Draghi, who also heads the Financial Stability Board warned, however, that worldwide imbalances and currency interventions were threatening the process at a global level.

“Current account imbalances are widening again, free floating currencies are suffering from (government currency interventions), divergent policies and consequent speculative tensions. The global recovery itself is at risk,” he said in a speech in Rome.

German ECB counterpart, Axel Weber, struck a similar tone in a small wine-growing town just outside of Frankfurt.

Germany has been criticized in Europe for running large current account surpluses, but Weber said the issue would fade naturally over time and instead took aim at China.

“In some cases, in particular China, it is a well-known fact that more flexible exchange rate regimes would help redirect growth from export to stronger domestic demand,” he said in a speech. “Market-oriented exchange rates that reflect underlying economic fundamentals contribute to global economic stability”.

Despite recent strong data ECB Board member Stark said it was still too early to say the financial crisis was over.

However, he was pointedly upbeat about the health of money markets, a day after the ECB took a small step in normalizing its lending to the euro zone’s commercial banks.

“In the money markets the situation has further normalized. It is not yet back to normal, but we have an acceptable situation where the volume of our refinancing operations has decreased from 800 billion euros to 400 billion euros,” he said.

“All special measures which have been taken in the past can be reduced step by step.”

The ECB is expected to decide in December which of its remaining support measures to keep in place beyond mid-January.

STIMULUS NOT APPROPRIATE

Euro zone economic sentiment data outstripped market expectations while the ECB’s own regular lending survey showed banks tightening credit conditions less than previously and corporate demand for loans rose.

German carmaker Daimler and airline Lufthansa also raised their full-year outlooks after improvements in demand in North America and Asia. Bayer reported quarterly earnings that were boosted by a rebound in demand for plastics and foam chemicals.

Weber said in his speech that growth in Germany, the euro zone’s industrial heart, was increasingly based on domestic demand. He said there was no need for extra support measures, contrasting the current mood in Japan and the U.S.

“Boosting demand by means of further macroeconomic stimulus measures would, however, be inappropriate and, at least in the case of Germany, highly procyclical,” he said.

Weber is the only ECB policymaker to publicly oppose the bank’s government bond buying program launched in May to help calm the euro zone debt crisis.

There was some talk by traders of the ECB buying Irish bonds on Thursday following a resurgence in bond spreads in recent days.

“We never comment on rumors,” an ECB spokesman said, also referring to comments by ECB President Jean-Claude Trichet that the bank does not detail its bond buying activity.

(Reporting by Marc Jones; editing by Patrick Graham)

ECB officials warn of "currency war" risks to growth