---- by Steve Whitehouse ----
PARIS (AFX) - Bank of France governor Jean-Claude Trichet said the jump in euro zone inflation in May means that the European Central Bank has to be particularly vigilant about the risk of inflationary wage developments.
Eurostat reported on Monday that euro zone inflation rose to 3.4 pct in May from 2.9 pct in April, reaching its highest level since the start of monetary union. The ECB aims to keep inflation below 2 pct over the medium term.
"The most dangerous thing for European growth and job creation would be if there were second round effects, that is if a wage-price spiral started," said Trichet in an interview with AFX News. Trichet said the May figures mean that ECB council members will be extremely prudent and vigilant.
"This naturally leads every national central bank governor to strengthen the message of moderation in costs, particularly moderation in wage developments," he said.
"It is important for growth, job creation and the fight against inflation in all European countries that wage moderation continues," he added.
"We indicated in advance, through the words of (ECB president) Wim Duisenberg, that there would be an upturn in inflation so the figure that was published was not unforeseen, also because of what had been seen in different European countries," he said.
However, he said council members are confident that after this upturn, inflation will fall back below 2 pct in the course of 2002, probably in the first half of next year.
He declined to comment on whether the May inflation figures were likely to mark a peak.
Trichet said any increase in the French hourly minimum wage by more than the 3.6 pct rate required by the strict application of the law would be detrimental. This is already a very significant rise, he said.
"To go beyond that would run counter to what is needed to avoid the second round effects I talked about and it would have adverse effects on job creation," he said.
Asked about the economic slowdown in Germany, Trichet said that observers should not be too pessimistic.
"What counts is economic growth in all of Europe, because we are all interdependent. My feeling is that we must remain cautious, and what counts is the final figure once all the calculations have come in. It seems to me that any exaggerated pessimism concerning Germany is not justified. On this point I naturally defer to my colleague (Bundesbank president Ernst) Welteke," Trichet said.
Trichet said estimates based on corporate leaders' feedback show that French GDP growth is currently running at an annual rate of around 2.5 pct.
Trichet said the Bank of France's survey of 12,000 business leaders points to quarter-on-quarter GDP growth of 0.5 pct in the second quarter and 0.6 pct in the third quarter.
Trichet stressed that he was not making any forecast of his own, but that the survey's growth scenario is "not unlikely".
Even if GDP remained flat in the fourth quarter, this would mean that France would record full year growth of 2.3 pct, he said. "The French economy is relatively strong, supported by the automobile market and by housebuilding. There is a slowdown in the whole of Europe and in France but it seems that in France we still have relatively strong growth," he said.
Trichet said the impact of the U.S. economic slowdown on the euro zone has turned out largely as expected. "The impact of the U.S. slowdown is in line with what we expected. The sort of impact that we had in mind was 0.2 percentage points of slowdown in growth in France and in Europe for every 1.0 percentage point of slowdown in the U.S., all things being equal" he said. He said the French economy has proved to be a good proxy for the euro zone economy as a whole. Asked about Duisenberg's comment after the last ECB council meeting on June 7 that the central bank's monetary policy remained appropriate to guarantee medium-term price stability, Trichet said: "Mr Duisenberg gives the view of the whole governing council and so I subscribe totally to what he said." But he declined to comment further on monetary policy. The ECB council meets in Dublin tomorrow. He also declined to comment on the euro's exchange rate, except to reiterate the council's view that a strong euro is in the interest of Europe.