Fiscal transfers no way out of crisis – ECB

The current eurozone debt crisis cannot be resolved simply by stronger countries shoring up the weaker indefinitely, the European Central Bank’s outgoing chief economist Juergen Stark said yesterday.

“Fiscal transfers, flowing from the stronger countries or regions to the weaker parts of monetary union (do not solve, but) only hide the problem,” Stark said in a speech prepared for delivery at a conference organised by the Bank of Latvia in Riga.

A copy of the speech was made available by the ECB in Frankfurt.

Stark conceded that fiscal transfers could be used as a tool to help stabilise a country’s finances in the short term but said they did not tackle the root of a problem.

“Temporary transfers can play a stabilising role and may be needed –subject to strict conditionality – if a country is affected by a very serious shock. Open-ended transfers, however, are not a mode of adjustment,” Stark insisted.

“In fact, they are the opposite. They finance non-adjustment.”

In a monetary union, member states no longer had the exchange rate as a tool to adjust to economic shocks, Stark argued.

Instead, countries could redress imbalances via price and wage flexibility, flexibility of the labour force and fiscal transfers.