European Central Bank president Mr Wim Duisenberg has eroded prospects for cheaper credit in the world's second largest economy, saying that low interest rates alone cannot boost growth.
Rather the outgoing ECB chief urged European governments to bring their budget deficits into line to make their economies more efficient and tackle labour and product market reforms.
"Although the outlook for price stability is favourable, having allowed interest rates to fall to historically low levels, monetary policy cannot by itself generate lasting and sustainable growth and employment in the euro area," he said in a speech at a central banker round table in Calgary, Canada.
"Part of the weakness in economic growth in the euro area may be linked to a lack of ambition in recent years in both fiscal and structural reforms to improve the conditions for investment and employment in the euro area." Only far-reaching reforms can create a dynamic economy, he said.
Mr Duisenberg was driving home a point made in an ECB statement on Thursday that budget deficits were a "great concern." Financial markets were little moved by his remarks.
Other ECB policymakers have expressed dismay that Germany and France, the euro-zone's largest economies, are violating budget rules that underpin the single currency.
Lowering rates is not the only way to achieve growth, Mr Duisenberg said. "Trying to use monetary policy to fine-tune economic activity or to gear it above a sustainable level will, in the long run, simply lead to rising inflation, not to faster economic growth," he said.
The World Bank and the Organisation for Economic Cooperation and Development this week both said the ECB had room to cut rates that already are at more than 40-year lows.
Many economists also are forecasting one more cut, probably by year end, to shore up an economy that stagnated in the second quarter, though markets take a different view and have priced for rate increases next year.
The ECB president affirmed the central bank's forecast for a gradual improvement later this year in the 12-state bloc. The ECB is forecasting growth a little below 0.7 per cent in 2003 and has said this would be helped by a global rebound.
"Now with the end of the major hostilities in Iraq, the reduction in geopolitical uncertainties and lower oil prices, a gradual upturn in world economic activity is expected, and it is important that policymakers do all they can to support it," Mr Duisenberg said.
Meanwhile his designated successor, Bank of France governor Mr Jean-Claude Trichet, this week has started to move to the fore, telling a closed-door conference yesterday that interest rates are low enough in the euro zone to support a recovery. - (Reuters)
