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No reason for 'irrational inflationary fears' - ECB's Weidmann

Jens Weidmann, president of the German Bundesbank and a member of the European Central Bank (ECB) Governing Council, speaks at the Center fo
Jens Weidmann, president of the German Bundesbank and a member of the European Central Bank (ECB) Governing Council, speaks at the Center fo

By Erik Kirschbaum

BERLIN (Reuters) - The president of Germany's Bundesbank said on Thursday there was no reason for "irrational inflationary fears" and dismissed suggestions of a danger of the euro zone falling into deflation, echoing the European Central Bank's outlook.

Jens Weidmann also urged France to live up to its function as a role model and show its peers how to restore economic competitiveness, saying it was decisive for the recovery of the whole the euro zone.

A member of the ECB's governing council who tends to take a more hawkish view than many of his peers, Weidmann backed the ECB's expansionary policy stance citing subdued price and economic developments in the euro zone.

His comments suggest that opinions on the council seem less divergent than for example last year, when Weidmann argued against aggressive interest rate cuts.

More harmonized views within the council could bode well for policy decisions as the ECB considers further non-standard measures, having almost depleted its conventional tool box.

"I fully agree with my colleague Mario Draghi that there is no reason to cultivate irrational inflationary fears," Weidmann said in a speech in Berlin, adding that the euro zone was also not about to fall into a deflationary scenario.

Many analysts and international organizations are, however, more concerned of the 18-country bloc falling into a spiral of decreasing prices.

The International Monetary Fund on Wednesday flagged deflation as a rising risk, with Christine Lagarde describing it as an "ogre that must be fought decisively".

The ECB cut its main refinancing rate to a record low of 0.25 percent in November after inflation fell to 0.7 percent in October. It has picked up slightly since.

FOCUS ON FRANCE

Weidmann, however, reiterated his concern about keeping interest rates at low levels for a long time, saying ultra-loose policy cannot become "permanent therapy" for the ailing economy.

Low rates carried risks, including easing pressure on companies to adjust their business models, squeezing margins, and potentially leading to exaggerated real estate prices.

Overall, economic prospects looked brighter than last year and some of the countries hit hardest by the crisis were making good progress, Weidmann said.

"The leading group already has the goal line in sight, while others still have some distance to cover," he said, adding that during the heated phase of the crisis the focus had been on the periphery countries, and now France had to do its part.

"France is decisive for the euro zone," Weidmann said in a question and answer session after the speech.

"France has lost some of its competitiveness. I'd hope that France, as one of the largest countries in the euro zone, would live up to its position as a role model," he added.

On Wednesday, German Foreign Minister Frank-Walter Steinmeier praised French President Francois Hollande's plans for spending cuts and tax relief for business as courageous, following in the mould of Germany revitalizing its economy a decade ago with welfare reforms.

Berlin has been discreetly encouraging Hollande, dogged by a lackluster economy and high unemployment, to take such steps since the Socialist became president in 2012.

Turning to bailout measures, Weidmann re-introduced the idea that euro zone government debt could include a clause of automatically extending maturities by three years when a country receives loans from the European bailout fund.

Asked if he could imagine switching to a commercial bank at some point with a big salary like his predecessor Axel Weber, who became UBS chairman, Weidmann seemed baffled by the question: "I'm very happy doing what I'm doing now. The Bundesbank is just a great institution."

"I'd like to stay there. If it's possible to have a second eight-year term then I'd be happy to stay."

(Writing by Eva Taylor; Editing by Alison Williams)

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