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Business

ECB's Top Economist Says Weak Banks Should be Allowed to Fail

The European Central Bank's (ECB) top economist said on Wednesday, Aug. 27 that weak banks that heading for collapse sue to the current global financial crisis should be allowed to fail rather than be bailed out.

The banking district in downtown Frankfurt/Main, Germany

Frankfurt's banking district may glitter but not all those who trade there are golden

Juergen Stark told the Sueddeutsche Zeitung that "weak banks should be allowed to disappear from the market" when asked by the German newspaper whether he believed the ECB should try to save banks in peril.

"Bad management must be sanctioned," he said. "A rescue is justified only when there is a threat to the entire financial system."

On the subject of weaker euro zone economic activity, Stark told the newspaper that the situation should be temporary.

Weak euro zone situation "temporary", says Stark

"For me, a phase of weakening and a progressive convalescence is the most likely scenario," Stark said, as German economic indicators showed Europe's biggest economy was headed for rough times. "After the German economy began the year with a bang, that was to be expected. I nonetheless foresee more than a simple correction."

German inflation hit 3.3 percent in July, the highest level in 15 years, but dipped slightly in August to 3.1 percent.

"Domestic demand in particular is developing less strongly than anticipated. But this weakness will be temporary," Stark added.

A Euro sculpture is seen in front of the European Central Bank ECB building

The ECB says consumer prices will continue to rise

The ECB economist reiterated central bank warnings about medium-term inflation and excessive pay raises, and said consumer prices were likely to rise further.

Analysts now expect the 15-nation euro zone economy to contract after Germany posted a 0.5 percent decrease in its second quarter gross domestic product, its first drop in four years.

Other euro zone countries will release their own data on Thursday, with an estimate for the entire economic zone due shortly thereafter.

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