BERLIN, Nov 16: European Central Bank Governing Council Member Ernst Welteke said on Saturday that Europe was not facing deflation and that the banking system was stable.

He also said there was a risk that the US economy might enter a renewed weak phase and that the dollar’s external value could fall sharply.

I don’t think we are facing a deflation scenario as in Japan, Welteke said in response to a question at a banking conference.

Core inflation, which excludes volatile food and energy prices, was running at around 2.6 per cent and was far from indicating deflation, or falling prices, he added.

I think the banking system is stable. We don’t have a property bubble like they had in Japan, said Welteke, who is also president of the Bundesbank.

In separate comments to reporters, Welteke said there was a risk that the US economy could enter another weak period.

This is the mildest recession in US history, it’s also the mildest recovery. There is some risk the US could enter a stronger weak phase.

I don’t see the danger but there is a certain risk that the dollar could strongly lose value, he added.

Welteke said the current account deficit in the United States was a cause of uncertainty.

One can only hope that cutting the current account deficit happens gradually, not abruptly, he said.

The Bundesbank has long warned that the US current account deficit was unsustainable. The current account measures a country’s trade in goods and services and other unilateral transfers, making it a broad indicator of international financial transactions.

In his speech to the conference, Welteke urged governments to accept being punished if they break EU budget rules, which he said were flexible enough to take account of economic cycles.

He said the European Union’s Stability and Growth Pact, which sets a timetable for reducing government deficits and imposes penalties if states’ deficits exceed three percent of GDP, was no hindrance to growth.

Anyone who calls for a ‘flexible interpretation’ of the pact, which is ‘conducive to growth’ is, in reality, demanding to be given carte blanche. This is blatant contravention of both the letter and the spirit of the Pact, Welteke said.

Welteke backed the European Commission’s decision to issue budget warnings against several countries and urged governments not to block the reprimands in the EU council of ministers as Germany did earlier this year.

It would do the stability offenders good to accept this procedure and to subsequently pursue a course of serious budget consolidation, he said.—Reuters