ECB's Trichet: austerity plans don't risk stagnation

European Central Bank Chairman Jean-Claude Trichet appears before the Committee on Economic and Monetary Affairs of the European Parliament in Brussels June 21, 2010.

FRANKFURT (Reuters) - Budget austerity plans will not drag the euro zone economy into stagnation, European Central Bank President Jean-Claude Trichet was quoted on Thursday as saying.

In an interview with Italy's La Repubblica newspaper, he urged governments to push ahead with necessary budget and structural reforms, repeating calls for more fiscal discipline in the 16-nation bloc.

"As regards the economy, the idea that austerity measures could trigger stagnation is incorrect," Trichet said, according to an English-language transcript published on the ECB's Internet site.

"I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today."

Trichet said Germany was showing the right commitment to tackle budget problems with its plans for 80 billion euros ($98 billion) in budget cuts over the next four years, and said Italy was on the right track.

The ECB has urged a system of sanctions and incentives, including a separate budget watchdog, as part of an overhaul of EU fiscal rules.

The Stability and Growth Pact "should be the equivalent of a federal budget in terms of ensuring sound policies. This is why we want the Stability and Growth Pact to be strong, solid and fully respected," Trichet told the paper.

DENIES DEFLATION RISKS

In a letter to G20 leaders last week, President Barack Obama warned against the premature withdrawal of stimulus policies and urged flexibility in implementing fiscal policy to safeguard and strengthen the recovery.

Billionaire investor George Soros said on Wednesday Germany's budget savings policy risked destroying the European project, pushing weaker euro zone members into a cycle of deflation.

Asked about the risk of deflation, Trichet said: "I don't think that such risks could materialise", adding that inflation expectations were well anchored.

Trichet said the euro, which has recently recovered from four-year lows , was a very credible currency because it had safeguarded price stability and was therefore a "major asset" to investors.

Asked if he expected concrete results from the upcoming Group of 20 meeting in Toronto, Trichet said he was confident important decisions would be taken by the end of the year.

A bank tax, banks' capital and rating agencies were all important elements, he said. "I am confident that we are on the right track, knowing that a number of important decisions are to be taken at the G20 meeting in November this year."

He declined to comment on Bundesbank President Axel Weber's criticism of the ECB's decision to buy government bonds, and on the profile of his successor. Weber and Italy's central bank governor Mario Draghi are seen as the frontrunners to replace Trichet in November 2011.

"I have a very heavy responsibility, with all my colleagues of the Executive Board and of the Governing Council. And my mandate expires in one year and four months. That is a long and demanding period of time. It is premature for me to comment on my possible successor," he said.

(Reporting by Krista Hughes; Editing by Jan Dahinten)

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