ECB says ditching austerity would not help euro zone

By Martin Santa and Sakari Suoninen

BRUSSELS/FRANKFURT (Reuters) - ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said 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 said that seeking to stimulate economies by stopping measures aimed at cutting government debt could merely increase countries' borrowing costs rather than triggering growth.

Finance leaders of the G20 economies last Friday edged away from a long-running drive toward cutting spending and raising taxes in rich nations, rejecting the idea of setting hard targets for reducing national debt in a sign of concern about a sluggish global recovery.

With budget cuts blamed for a second straight year of recession in the euro zone, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed.

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

Recent surveys and data have pointed to economic weakness spreading to the euro zone core, and on Wednesday Germany's Ifo sentiment indicator came in weaker than the most pessimistic of forecasts as poor exports undermined Europe's largest economy.

"We certainly still have some margin of manoeuvre to take decisions, and as (ECB) President Draghi said in the latest press conference, we stand ready to act if economic conditions continue to provide bad news, as has unfortunately been the case," Constancio told the European Parliament in response to a question.

But ECB policymakers did not accept that weaker growth was a reason to change course on reform, insisting that more balanced budgets were essential to revive sustainable growth.

"Economic adjustment, both internal and external, has been significant, has implied high costs in terms of unemployment and should not (be) put into risk of unravelling now," Constancio told the European Parliament.

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

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

ECB Governing Council member Ardo Hansson said EU states must push economic reforms further, strengthen public finances and avoid complacency.

German Bundesbank President Jens Weidmann had a stern message for France, the euro zone's second major economy, which is slipping already this year from commitments to cut its budget deficit.

Lessons should be drawn from earlier breaches of debt limits, Weidmann said. "France especially has an important role to serve as an example for credibility of the rules and trust in the sustainability of public budgets." (Additional reporting by Eva Kuehnen in Frankfurt, Alexandra Hudson in Dresden and David Mardiste in Tallinn, writing by Sakari Suoninen; Editing by Ruth Pitchford)