High and rising public debt could force the European Central Bank into higher interest rates to anchor inflation expectations, European Central Bank Governing Council member Axel Weber said on Wednesday.
Weber, who heads the German Bundesbank, also said Germany needed significant fiscal consolidation and might need to come up with additional measures to get public finances on a healthy path.
"A continuously rising state debt impedes price stability oriented monetary policy," Weber said in the text of a speech to be given at an event organized by the German conservative party CDU in Berlin.
"At high debt levels, higher interest rate levels tend to be required to keep inflation expectations anchored at a low level."
Higher rates could be needed especially if people fear that the public sector planned to inflate away the debt it has amassed, he said, although such fears would not be justified as the ECB is independent and has a clear price stability mandate.
The euro zone must win back lost confidence after its latest bout of fiscal support measures last month, Weber said, adding recent fiscal decisions in southern Europe were good, but not enough by themselves.
"The most recent fiscal policy decisions in Spain, Portugal and Greece go in the right direction — also when they are just first steps."
Turning to his native Germany, Weber said the country's deficits were to a large extent structural and would not be wiped away merely by the improving economy, especially since the crisis has lowered its growth potential.
"The need for consolidation is also substantial," Weber said.
"Especially given the national debt brake, additional measures could still be required, which should, if applicable, be in the 2011 budget framework and also taken into account in medium-term fiscal plans."
It was especially important for Germany to cut deficits, as it acts as an example for the rest of the monetary union, Weber said, adding it should strive to push the deficit below the EU Stability and Growth Pact limit of 3 percent by 2012.
The government aims to lower the deficit, set to exceed 5 percent of gross domestic product (GDP) this year, to meet the Stability Pact by 2013.
Weber also repeated his call for stronger sanctions on countries that breach the agreement and said the possibility of state insolvency should be studied.
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