REPEAT: MNI: Stark Sees ECB Behind Curve, Risk No Ammunition

Repeats Story Initially Transmitted at 08:50 GMT Mar 2/03:50 EST Mar 2

--Stark: Slow Removal Of Stimulus Will Impact On Future Policy

--Next German Government Doesn't Appear To Be 'Strong Or Stable'

By Christian Vits

     FRANKFURT (MNI) - The European Central Bank risks having no ammunition to

fight any cyclical downturn as it misses chances to exit from its extraordinary

measures, Jurgen Stark, the bank's former chief economist, warned in an

exclusive interview with MNI.

     "We generally face the problem that central banks have been falling behind

the curve, the ECB exits too late," Stark, who also acted as Bundesbank Vice

President during his career, said. 

     This is due to an "asymmetric approach, which means that the reaction to a

downturn always came promptly and heftily while the one to an economic recovery

came as gradual small steps, leading to a lack of room for manoeuvre," he said.

     Stark noted that many countries in the Eurozone are pretty advanced in the

economic cycle. "At one point in time, possibly in 2020, first indications will

arise that the economy won't be running at full steam anymore and then the

central bank will be asked what it can do -- without having normalized monetary

policy."

     The US is in a similar situation, he stressed. "This is not a normalization

of policy, the Fed Funds Rate stands at 1.5 percent, the economy is running at

full steam, you have full employment and additionally you will get the tax

relief, which will fuel the boom. The Fed Funds Rate should already be at 3

percent, but it will reach this level only in late 2019."

     --SUCCESSOR HINDERED

     The effect of the ECB's policy will be that no matter who takes the helm

from ECB President Mario Draghi next year won't be able "to exit overnight" and

will need time to normalise policy, Stark said.

     "The exit from the asset purchases, then the normalisation of interest

rates and the balance sheet contraction, this all will take ages. This will take

four or five years," he said, adding that this scenario can only be executed if

no adverse incidents happen.

     Stark also noted that Bundesbank President Jens Weidmann seems to be the

most suitable candidate to succeed Draghi, but wasn't certain he would be well

advised to take the job. "But I don't know whether the job would then be for him

as he knows that his hands will be tied at least for the first half of his

tenure," he said.

     "The alternative would be a Frenchman who feels half German: [Francois]

Villeroy [de Galhau]," Stark noted. "He is pursuing a fairly clear campaign. He

accepts every invitation from Germany, speaks German fluently and explains his

policy goals."

     Still, Stark makes no secret of his scepticism about Villeroy. That choice

"so to say would be the continuation of Draghi's policy. I see Villeroy in line

with a neutral to dovish stance -- similar to Noyer during his time as ECB Vice

President but with much more presence."

     --BERLIN WEAKER

     He also warned the German government not to repeat past mistakes such as

promoting a candidate from Southern Europe for the ECB's Vice Presidency to

boost the chances of a Northern bloc candidate replacing Draghi. Berlin did just

that in 2010/2011, expecting to get the top job for former Bundesbank President

Axel Weber more than a year later.

     "It was a mistake of the German government to play this North-South card,"

Stark noted. "And it is not true that the North-South idea was always adhered

to. Think of [Wim] Duisenberg and [Christian] Noyer at the start of the currency

union."

     With a view to German politics, Stark, who also served as a state secretary

in the German Finance Ministry and Sherpa for G7 meetings, said the

pre-coalition talks "do not indicate to a very strong and stable government."

     He sees Chancellor Angela Merkel's position weakened due to the loss of

support but thinks that the withdrawal of Martin Schulz as a candidate for the

foreign ministry and from the Social Democrats' party chairmanship might

heighten the responsibility of the chancellery regarding European policy.

     "The predominant player is out of game," Stark said. Schulz, a former

President of the Union's parliament, is a proven expert on European politics.

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com