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ECB Says Ditching Austerity Would Not Help Euro Zone

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ECB policymakersrebuffed suggestions that Europe should ease up on austerity andsaid that while the central bank has room to cut interest rates,such a move would not necessarily help the economy much.

European Central Bank Vice-President Vitor Constancio saidthat seeking to stimulate economies by stopping measures aimedat cutting government debt could merely increase countries'borrowing costs rather than triggering growth.

Finance leaders of the G20 economies last Friday edged awayfrom a long-running drive toward cutting spending and raisingtaxes in rich nations, rejecting the idea of setting hardtargets for reducing national debt in a sign of concern about asluggish global recovery.

With budget cuts blamed for a second straight year ofrecession in the euro zone, the EU's top economics official OlliRehn indicated over the weekend that more flexibility on tougheconomic targets was needed.

His boss, European Commission President Jose Manuel Barroso,said on Monday that austerity had reached its natural limits ofpopular support.

Recent surveys and data have pointed to economic weaknessspreading to the euro zone core, and on Wednesday Germany's Ifosentiment indicator came in weaker than the most pessimistic offorecasts as poor exports undermined Europe's largest economy.

"We certainly still have some margin of manoeuvre to takedecisions, and as (ECB) President Draghi said in the latestpress conference, we stand ready to act if economic conditionscontinue to provide bad news, as has unfortunately been thecase," Constancio told the European Parliament in response to aquestion.

But ECB policymakers did not accept that weaker growth was areason to change course on reform, insisting that more balancedbudgets were essential to revive sustainable growth.

"Economic adjustment, both internal and external, has beensignificant, has implied high costs in terms of unemployment andshould not (be) put into risk of unravelling now," Constanciotold the European Parliament.

Joerg Asmussen, who sits on the ECB's Executive Board, alsospoke of a risk of slipping back and warned against taking thecurrent market calm for granted.

"(A) sound fiscal condition is really a precondition forgrowth," he told the Financial Times. "If one postpones fiscalconsolidation to a later day, that comes not without risks."

ECB Governing Council member Ardo Hansson said EU statesmust push economic reforms further, strengthen public financesand avoid complacency.

German Bundesbank President Jens Weidmann had a sternmessage for France, the euro zone's second major economy, whichis slipping already this year from commitments to cut its budgetdeficit.

Lessons should be drawn from earlier breaches of debtlimits, Weidmann said. "France especially has an important roleto serve as an example for credibility of the rules and trust inthe sustainability of public budgets."