Far-reaching reforms of public finances and economic structures are needed in many European countries, according to Mr Jean-Claude Trichet, governor of the European Central Bank.

Cutting back spending and taxes can significantly increase economic confidence, as the Irish experience has shown, he said in Dublin yesterday.

The experience of the Republic shows that improved confidence can dominate the contractionary impact of a consolidation of public finances, he said. He was delivering the Whitaker lecture, to honour Dr TK Whitaker, organised by the Central Bank.

If fiscal consolidation is perceived by the private sector to signal lower public spending in future, then the economy will respond positively to the prospect of future lower taxes, he said. The resulting lower interest rates could also boost investment.

The experience of Ireland after 1987 and Denmark in the mid- 1980s showed how, "in spite of the tightening policies undertaken, the rate of growth showed a significant increase in relation to previous years". Mr Trichet said many EU countries faced rising debt and deficit levels.

"Moreover, we would probably all agree that tax and spending ratios in some countries are too high and unfavourable for investment and economic dynamism."

While Mr Trichet did not refer to any countries by name, the big euro-zone members of France and Germany have deficits exceeding the 3 per cent limit set down in the Maastricht Treaty and have been criticised for slow implementation of economic reform.

Mr Trichet made a strong call for the implementation of a reform agenda. Implementing such reform is a real challenge, he said "and this challenge requires that we win the heart and trust of the people".

In regard to public finances, "countries are faced with the option of either profoundly reforming their public expenditure and social security systems or putting their long-run sustainability at risk".

Referring to the Lisbon reform agenda, agreed in 2000 by EU governments to boost competitiveness, Mr Trichet said economic activity, employment and innovation could only be lifted to a new level "by far-reaching and progressive structural reforms".

This refers to introducing freer markets and competition in financial markets, employment and markets for goods and services.

Europe has agreed the direction of many of these reforms, he said, but had to get better at deciding what to do and implementing these decisions.

The long-term advantage of these strategies would far outweigh the short-term cost, he said. Ireland's "astonishing" experience was driven by such structural reforms, he said, along with improvements in public finances.