Trichet Says Divergences Don’t Put Euro Monetary Union at Risk

By Meera Louis

Jan. 21 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said credit-rating downgrades and worsening public finances in some euro-region countries are not threatening to break up the decade-old monetary union.

“In a very vast continental economy, it is not abnormal to have diversity,” Trichet told the European Parliament in Brussels today. “I would not say at all that it is something that puts into question the euro area.”

Standard & Poor’s this month downgraded the sovereign credit ratings of Spain and Greece and said the ratings of Ireland and Portugal are under threat. Bond yield spreads between the strongest and weakest euro-region economies have ballooned as the global financial crisis pressures budgets, making the ECB’s one- size-fits-all monetary policy less effective.

“Negative ratings actions on Greece, Ireland, Portugal, and Spain reflect their economies’ higher susceptibility to a tightening external credit channel,” S&P said on Jan. 15. These countries “have, in our view, lost competitiveness relative to their European peers, leading to a rise in their imbalances.”

Trichet said all 16 countries using the euro are experiencing difficulties and renewed his call for governments to pursue “sustainable” fiscal policies.

“I’m confident that the pressures of the circumstances and the reality will do their job,” Trichet said. In any case, “there is no bailing out” of the euro area.

To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net.