ECB's Coene says austerity measures cannot be avoided

BRUSSELS Sat Oct 20, 2012 3:59pm BST

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BRUSSELS (Reuters) - Austerity measures in the euro zone are unavoidable, but countries can and should counteract with reforms to boost growth, European Central Bank Governing Council member Luc Coene said on Saturday.

In a panel debate on the euro zone in Brussels, Coene was challenged by economist Paul De Grauwe, now with the London School of Economics, who said policymakers should be foremost in promoting growth not reining it in.

"To think that austerity could be avoided is naive ... the interest rates would have risen even more than they did," said Coene, who is also governor of Belgium's central bank.

He said governments in the euro zone region, which has been mired in a debt crisis for almost three years, should have enacted structural reforms at the same time as pushing through austerity measures.

"We should have done that earlier. It could have countered the negative effect of saving," Coene said.

While a number of euro zone nations were keen to pass responsibility for solving the crisis to the ECB, the central bank was not involved in budget setting and had to rely on commitments of member states in return for help.

Asked how he saw the situation developing in Spain, which is in deep recession and plagued by high borrowing costs, Coene said it would have to decide whether to request aid from the EU bailout fund, the European Stability Mechanism.

However, this would not necessarily trigger bond buying.

"We would do an evaluation. There is no automatic link between the one and the other," he said.

Spain is seen requesting a bailout in the next few weeks.

The European Central Bank agreed last month that it was prepared for a potentially unlimited purchase of bonds with a maturity of up to three years of struggling euro zone countries.

If the bond buying programme, dubbed "Outright Monetary Transactions" (OMT) was triggered, it would ease pressure on the country's borrowing costs and should limit risks of contagion to other euro zone countries.

The prospect of it happening has already calmed financial markets.

Coene is the head of the Belgian central bank, a position which brings with it a seat on the ECB's 23-member Governing Council. He said he believed the "foundation stones" were in place for a resolution of the euro zone debt crisis.

"There is a question of going slower or faster ... but the political will to go on is there."

(Editing by Ethan Bilby and Sophie Hares)

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