IMF wants central banks to oversee markets with gov't supervision


BERLIN, Oct 11 (Reuters) - Central banks should beindependent in setting monetary policy but they should also betasked with monitoring financial market stability underpolitical supervision, the International Monetary Fund's (IMF)chief economist said.

Olivier Blanchard also told Handelsblatt newspaper's Fridayedition that Germany should take on a stronger role in Europeand needed to invest more rather than focus on saving.

"If there is one lesson to be learned from the crisis, itmust be: it's not enough to keep an eye on monetary stability.We must also look at the stability of the financial system,"Blanchard was quoted as saying.

"(Central bank) independence should be tiered. Classicalmonetary policy must remain independent. The control of thefinancial markets by the central bank, however, should be putunder some kind of political supervision."

Blanchard reiterated his call to raise inflation targets to4 percent from the current roughly 2 percent, saying that wouldcreate space to cut interest rates during crises. The EuropeanCentral Bank (ECB) should consider ways to lower credit costsfor small and medium enterprises.

Blanchard said he was concerned that European countrieswould drag their feet on structural reforms as confidence grewthat the worst was over in the euro zone sovereign debt crisis.

"You hear it more and more: 'we have reformed enough, now weare seeing results. Spare us new demands'. That worries me," hesaid. "We need further structural reforms if we want to reach anacceptable level of employment. Even Germany, which is not goingthrough a jobs crisis, is not exactly growing impressively."

He said Germany, the euro zone's largest economy, should seeEurope more as an insurance scheme than a transfer system andmany wished Germany would take a stronger role in Europe.

"Sometimes the fire is at your neighbour's house, sometimesit's in your own house. I wish the focus was more on thequestion: how can we strengthen the euro?" Blanchard said,adding that meant banking union should be completed.

Blanchard did not rule out further debt relief for Greece, the country where the euro zone crisis first broke out.

"The IMF has agreed with the Europeans that the debt levelwill be below 110 percent (of GDP) in 2022," he said. "We willhave to see how we will get there."

IMF chief Christine Lagarde, speaking at the IMF and WorldBank's autumn meeting on Thursday, said she had "no doubt"European authorities would stick by their commitments to giveGreece additional debt relief if it meets fiscal targets setunder its bailout programme.

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