"A strong safety net over employment and the living standards of citizens will put a stop to the further depletion of state revenues and, by consequence, a widening of deficits," the newly-appointed governor of the Central Bank of Cyprus told a conference in Nicosia.

"An enrichment of the fiscal compact is required, or it should be combined with a strong framework of measures to stimulate growth," he said.

Demetriades, who took over from Athanasios Orphanides earlier this month, is a strong proponent of stimulus and has long argued that an austerity drive must not sap output - a view that has gathered weight in the euro zone with the election of Socialist Francois Hollande as French president.

In his first public address, Demetriades told a conference of Cyprus's bank workers union Etyk that a reduction in non-productive spending should be linked to an increase in the quality and effectiveness of spending geared towards growth.

"Maintaining the fiscal compact agreed by euro zone leaders is a significant step towards restoring fiscal balance, but further recession amplified by austerity feeds a vicious cycle between a reduction in output and a widening in fiscal shortfalls," the British-trained former economics professor said.

"It is now understood both in Cyprus and in the euro zone that austerity by itself is not enough to bring the finances of any country back to a healthy basis, particularly when all the other countries of the EU follow the same policy," he said.

Prior to his appointment, which gives him a seat on the ECB's Governing Council, Demetriades had also expressed the view that the ECB should reconsider what he regards as an over-emphasis on inflation for defining monetary policy.

The ECB's goals are modeled firmly on the commitment to restraining inflation espoused by Germany's Bundesbank and credited with helping to make Germany one of the world's most successful exporters.

(Reporting by Michele Kambas; Editing by Ruth Pitchford)

• A Permanent Economic Emergency