Trichet rejects concerns about budget cuts hitting economic growth

European Central Bank chief Jean-Claude Trichet rejected Friday concerns that the tough round of fiscal cutbacks planned by European governments could undercut the fragile recovery from recession.

'Fiscal consolidation and growth are not mutually exclusive,' Trichet told an ECB watchers conference in Frankfurt.

'We disagree with the view that reducing public expenditures will hinder economic growth,' he told the conference. 'On the contrary, prudent fiscal management provides the basis for balanced and sustainable growth.'

While US President Barack Obama has expressed worries that moves to wind back public spending could jeopardise the current economic upswing, leading European states such as Germany have unveiled plans for cutting back deficit and debt levels run up during the recession.

In his comments Friday, the ECB chief also sought to underline the key role to be played by the so-called stress tests for European banks in underpinning investor confidence in the region's financial sector.

'Fiscal consolidation is being put in place at the same time as we strengthen the resilience of the European banking sector,' Trichet said.

'Publication of the detailed results of a harmonised pan-European stress test is an important step in the right direction,'he said.

'These tests will increase transparency and enhance investors' confidence in Europe's banking sector,' he argued.

The stress tests, which are aimed at measuring the banks' chances of surviving another financial crisis, are been coordinated by the London-based Committee of European Banking Supervisors.

The committee said Wednesday that its findings would cover 91 institutions.

Trichet's speech on Friday came just one day after the ECB's governing council announced that it was leaving interest rates on hold at an historic low of 1 per cent.

The ECB has left borrowing costs unchanged for 14 consecutive months as it attempts to shore up economic confidence in the 16-member eurozone.

The Frankfurt-based bank is expecting the eurozone economy
to post moderate economic growth in the coming months as it recovers from recession.

A temperate economic expansion rate combined with subdued inflationary pressures means that most analysts are expecting the ECB to wait until late next year before hiking interest rates.

'But,' warned Trichet Friday, 'events over the past few months have made clear that it is still too early to declare the crisis over.'

Indeed, overhanging the European economy is the threat of the re-emergence of the debt crisis, which earlier this year sent financial markets into a tailspin and threatened to derail the global recovery.