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Asmussen Says Euro Area Needs Both Growth and Austerity Policies

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May 24 (Bloomberg) -- European Central Bank Executive Board member Joerg Asmussen said budget cuts and economic-growth plans are not mutually exclusive and policies to deal with both are needed in the euro area.

“The debate is not about austerity versus growth,” Asmussen said at an event today in Sopot, Poland. “Instead it is about austerity and growth. We need both.”

European leaders clashed yesterday in Brussels over joint debt sales as they urged Greece to make the budget cuts needed to stay in the single currency. Asmussen said that while “no one is against growth,” officials must find ways to increase “growth potential” rather than introduce “short-sighted initiatives.”

“Fiscal consolidation is not an end in itself. Rather, it is a pre-condition for achieving sustainable growth,” he said. “The only alternative would be to fight debt with more debt. This is no solution.”

Asmussen, who said the “bulk of responsibility” for resolving the debt crisis lies with politicians, advocated bonds targeted at specific growth-inducing projects and the full implementation of a European Union directive on freeing up service industries.

“Up to 1.8 percent in additional growth could be unleashed for the EU with the full implementation of the Services Directive,” he said. “Financial instruments of the European Investment Bank could be used, for example, for project bonds to support infrastructure projects.”

Inflation Risks

Responding to criticism that the ECB’s liquidity policies are stoking inflation, Asmussen said there is “no reason to question our commitment to price stability.” He said inflation will probably average 2.3 percent this year before easing and remaining “close to, or slightly below, 2 percent for the foreseeable future.”

“If inflationary risks were to emerge, we would take the necessary action to prevent these risks from materializing and withdraw any excess liquidity,” he said.

Asmussen also said that the ECB, which has injected more than 1 trillion euros ($1.26 trillion) into the financial system since December, has a greater role in crisis-fighting “than I would actually like.”

“Any member of a currency union has to treat its economic policies as a matter of common concern,” Asmussen said. “The euro area is already much closer to a political union than many of us realize.”

To contact the reporter on this story: Jeff Black in Sopot at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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