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ECB's Nowotny worried by economy, relaxed on inflation

FRANKFURT (Reuters) - The euro zone economy risks a protracted period of weakness while inflation is not a worry, European Central Bank policymaker Ewald Nowotny said, expecting price pressures in the bloc to fall below the ECB's target level next year.

The ECB opted to keep interest rates on hold at 1.5 percent last week despite some of the bank's policymakers calling for a cut amid signs the euro zone economy is deteriorating further and as Greek default fears weigh on the markets.

Nowotny's comments suggest the state of the economy remains the larger concern.

"One need not have any fear of inflation... We expect a clear decline of inflation, under the 2 percent mark in the second half of 2012," news agency Market News International quoted Nowotny as saying late on Tuesday.

Euro zone inflation jumped to 3.0 percent last month but Nowotny, Austria's central bank chief, said it should drop clearly below the ECB's preferred level of 2 percent in the second half of next year.

A greater concern was the economic outlook.

"What one must fear is the real economy," he said.

"There is the risk that we will enter a relatively long phase of weaker growth. Because the dynamic of exports is dwindling and at the same time we see weak domestic demand because of the consolidation of public finances."

Governments are tightening their budgets in response to the euro zone sovereign debt crisis, a factor a leading Austrian corporate executive said was impacting business prospects.

"Consumers' uncertainty about the debt crisis is beginning to hit the real economy," Voestalpine Chief Executive Wolfgang Eder told the Financial Times Deutschland paper.

Speaking in Riga, outgoing ECB policymaker Juergen Stark said the euro zone was not a transfer union in which member states are liable for each others' debts. He pressed governments in the bloc to tackle their own debt problems.

The troubles facing some euro zone countries highlight the need for sustainable fiscal policies, said Stark, who is resigning early from the ECB this year in protest at its policy of buying bonds to help troubled euro zone debtor states.

The ECB has faced sharp criticism in Stark's native Germany for buying bonds -- a move many in the euro zone's leading economy see as taking the bank into the fiscal arena and threatening its core role of fighting inflation.

"Stability begins at home," Stark, a member of the ECBs Executive Board, said in a speech at a Bank of Latvia.

"The euro area is not a transfer union," he added. "And I have been and remain to be a strict opponent to this issue of transfer union."

ECB President Jean-Claude Trichet said Greece, the country at the origin of the euro zone debt crisis, could avoid bankruptcy if it and European governments stick to their agreements to cut its debt levels.

"The commitments made by Greece and those made by all the European countries on 21 July should enable the scenario you mention to be avoided, and we have always warned the governments against it," he told French weekly L'Express.

(Reporting by Marc Jones, Sakari Suoninen and Eva Kuehnen; Writing by Paul Carrel)

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