Presentation of the ECB’s Annual Report 2004 to the European Parliament
by Mr Jean-Claude Trichet
President of the European Central Bank
Strasbourg, 4 July 2005
Monsieur le Président, Mesdames et Messieurs les Membres du Parlement européen, j’ai l’honneur de vous présenter aujourd’hui le Rapport annuel de la BCE pour l’année 2004. Le Rapport annuel constitue un des outils principaux de la BCE pour rendre compte aux citoyens de l’Europe et à ses représentants élus de sa politique monétaire et de ses activités dans les autres domaines de sa compétence.
La BCE est consciente de l’importance fondamentale de sa responsabilité démocratique et a toujours souligné que son indépendance doit s’accompagner d’une stricte obligation de rendre des comptes. Dès lors, la BCE attache une importance primordiale au dialogue régulier avec les représentants élus des citoyens européens.
In meinen einleitenden Bemerkungen werde ich zuerst einen Überblick über die wirtschaftliche und monetäre Entwicklung im Jahr 2004 geben und unsere Einschätzung der Wirtschaftsaussichten und der geldpolitischen Strategie darlegen. Im Anschluss werde ich auf einige Anmerkungen und Vorschläge im Berichtsentwurf zum EZB-Jahresbericht 2004 zu sprechen kommen.
Economic and monetary issues
In 2004 the ECB’s monetary policy operated in an environment of gradual economic recovery in the euro area. Real GDP growth for the year as a whole stood at 1.8%, compared with 0.5% in the previous year. During the first half of 2004 economic activity showed relatively dynamic growth, supported by a strong expansion in the world economy. In the second half of 2004, however, economic growth was only modest, partly on account of rising oil prices, which also had a negative impact on global expansion.
As regards price developments, underlying domestic inflationary pressures in the euro area remained contained, reflecting subdued increases in labour compensation and well-anchored inflation expectations. While the appreciation of the euro exchange rate in 2004 contributed to lower inflationary pressures, increases in administered prices, indirect taxes and rises in the oil price visibly affected headline inflation rates. Overall, the annual HICP inflation was 2.1%, unchanged from the previous year.
Against the background of subdued domestic price pressure and a favourable outlook for price stability over the medium term, key ECB interest rates remained unchanged throughout the year at historically low levels. Interest rates remained low over the entire maturity spectrum, thereby lending considerable support to economic activity.
At the same time, while price developments as a whole remained well contained in 2004, the outlook for inflation was subject to a number of upside risks. These were related to developments in oil prices, potential second-round effects in wage and price-setting behaviour and uncertainty about further increases in indirect taxes and administered prices. Furthermore, strong monetary and credit growth, as well as the stock of liquidity, which continues to be very ample, increasingly became of concern, not only as regards price stability over the medium term but also as a possible source of unsustainable asset price increases, particularly in property markets in some parts of the euro area.
Turning to recent developments, the moderation in economic activity that had been observed since mid-2004 continued into 2005. Real GDP grew by 0.5% quarter on quarter in the first quarter of 2005 compared with 0.2% in the previous quarter. However, these figures for real GDP growth partly reflect statistical effects related to working-day adjustments to the data. Most recent indicators for economic activity remain, on balance, on the downside, signalling that the underlying growth dynamic has remained weak in the first half of 2005.
Looking ahead, there is scope for positive fundamental factors to contribute to a recovery and broadening of economic activity. Notably, euro area exports should continue to benefit from strong global economic activity. Robust earnings, improvements in business efficiency and the very favourable financing conditions should support investment. At the same time, we expect consumption growth to develop in line with real disposable income growth.
The picture of a gradual improvement in real economic growth in the period ahead is reflected in the June 2005 Eurosystem staff projections. Euro area real GDP is projected to grow at rates in the range of between 1.1% and 1.7% in 2005 and between 1.5% and 2.5% in 2006. However, uncertainties surrounding the short-term evolution of domestic demand have heightened. Notably, renewed increases in oil prices pose downside risks to the growth projections.
With regard to consumer prices, annual HICP inflation has remained around 2.1% over the last months, with a flash estimate standing at 2.1% in June. This development reflects counterbalancing forces. Inflationary pressures from higher energy prices were offset by rather contained underlying inflationary pressures and, on average, moderate wage increases. In the June 2005 Eurosystem staff projections average annual HICP inflation is expected to lie between 1.8% and 2.2% this year and between 0.9% and 2.1% in 2006.
However, upside risks to these projections remain. As in previous years these relate mainly to oil price developments, indirect taxes and administered prices. In this regard, continued responsibility on the part of social partners is very important in order to avoid second-round effects in wage and price-setting following past price increases.
Vigilance is also warranted as regards the results of the monetary analysis. Over the last few months, money and credit have continued to grow robustly in the euro area, mainly reflecting the stimulative effect of the low level of interest rates. The strong growth exhibited by the most liquid components of M3 entails risks to price stability in the medium to longer term. At the same time, the low level of interest rates also contributed to a further strengthening of credit growth in the first quarter of 2005.
In sum, the economic analysis suggests that underlying domestic inflationary pressures remain contained in the medium term. However, it is necessary to emphasise conditionality of this assessment and the related upside risks to the projections for inflation. Cross-checking with the monetary analysis supports the case for ongoing vigilance.
Fiscal developments in the euro area in 2004 were far from satisfactory. The average fiscal deficit in the euro area broadly stabilised at 2.7% of GDP. This is a level which not only implies a rising debt ratio which could become unsustainable, but also leaves little safety margin for short-term budgetary relief in case of adverse developments. Little progress was made in restoring sound fiscal balances last year in countries with significant imbalances. The aggregate euro area fiscal deficit-to-GDP ratio is not expected to improve much in 2005 and the average debt-to-GDP ratio is projected to deteriorate further. The foreseeable increase in the fiscal burden on account of the ageing population requires further consolidation of public finances. Furthermore, the quality of public finances needs to be improved to strengthen the economic growth potential.
Discussions on a revision of the Stability and Growth Pact continued in 2004, resulting in a report adopted by the ECOFIN Council in March 2005. The budget implementation in 2005 and the preparation of the budget for 2006 both provide the first opportunities for all parties involved to rigorously implement the provisions of the Pact, so as to show that the Pact remains an effective framework for fiscal policy coordination and discipline. Finally, 2004 saw significant revisions of past deficit and debt figures in a few countries, undermining the effectiveness of EU fiscal surveillance. It is of vital importance that the reliable compilation and timely reporting of government finance statistics is ensured.
Turning to the issue of structural reforms, the ECB welcomes and supports the renewed impetus for economic reform as a result of the relaunch of the Lisbon Strategy, its stronger focus on growth and employment, and the new governance framework aimed at improving the delivery of reforms. The new "Integrated Guidelines" for 2005-08, comprising both the new Broad Economic Policy Guidelines and the new Employment Guidelines, should now set the stage for concrete action at the EU level and by Member States. A decisive and comprehensive set of measures aimed at realising a more dynamic and competitive European economy with flexible labour and product markets is urgently needed in order to deal with the ongoing challenges from globalisation, rapid technological change and ageing populations and to provide for a greater resilience to shocks. Together with successful communication on the need and the benefits of such reforms, this will improve the short-term economic outlook and unlock Europe's growth and employment potential.
Monetary Policy in a vast and diversified euro area
Let me now turn briefly to the issue of inflation and growth differentials within the euro area. The magnitude of inflation dispersion across euro area countries is similar to the dispersion observed in the 14 US Metropolitan Statistical Areas. In a monetary union inflation and labour cost differentials across regions or countries are the natural way of adjusting relative prices in the face of asymmetric demand or supply developments. Such adjustments within the euro area have been larger and more frequent than anticipated. From that point of view the euro area is more flexible than had been expected by many observers. Whilst generally adjustments of relative prices are economically justified, there are cases where inflation differentials may be due to inappropriate national economic policies and rigidities in labour and product markets.
As regards the dispersion of real GDP growth rates in the euro area, it has, since 1999, remained very close to its historic average without there having been any signs of increased divergence so far. Whilst lasting real growth differentials reflect often welcome catching up processes or convergence phenomena, there are cases where they are instead a reflection of structural deficiencies in some countries. Such divergences between countries are independent of whether or not these countries share the same currency, and in any case cannot be addressed by monetary policy. Countries that show a relatively poor performance in terms of long term growth potential and long term trend of sustainable job creation are also those whose domestic economy has been less flexible. For these countries structural reforms are highly advisable.
Other issues raised in the European Parliament’s draft resolution on the ECB’s Annual Report 2004
Mister President, honourable Members of the European Parliament, I am pleased to note that you share our view that the regular dialogue between our institutions can be deemed a success. The ECB is grateful for the suggestions made by the European Parliament and considers them with great care. In this respect, I can report to you that last year the ECB decided to henceforth publish its Financial Stability Review, in line with a proposal made by the European Parliament.
I note – and welcome – that on many important issues the views expressed in the draft resolution are very close to those held by the ECB, such as the statements regarding the ECB’s monetary policy conduct in 2004 and the diagnosis that the relative weakness of economic activity can be attributed to a lack of structural reforms. Your position with regard to the reform of the Stability and Growth Pact was also very close to the views of the ECB in this respect.
Furthermore, I welcome the fact that the draft resolution compliments us for the work we undertook to prepare for the enlargement of the European Union, which marked another milestone towards an ever closer Union. The ECB’s thorough preparations for this enlargement enabled the smooth entry of the ten new national central banks into the European System of Central Banks.
The ten new Member States have made a commitment to ultimately join the euro area. We share your view that the best possible preparation for adopting the euro is a high level of sustainable convergence, in accordance with the Maastricht criteria. The convergence reports issued by the ECB and the European Commission in October last year examined in detail the substantial progress made by the new Member States in terms of nominal convergence. However, none of these countries have yet fulfilled all the conditions required for joining the single currency.
One of these conditions is participation in the Exchange Rate Mechanism II for at least two years before the examination. In June 2004, three new Member States – Estonia, Lithuania and Slovenia – joined ERM II. In May 2005, Cyprus, Latvia and Malta also entered ERM II. The inclusion of the new currencies in the mechanism has proceeded in a smooth and orderly manner.
Although there are many topics on which we entirely share the views expressed in the draft resolution, there are some issues on which we have a different opinion. The draft resolution urges the ECB to consider the publication of “summary minutes”. Yet we continue to see great advantages in the communication channels chosen by the ECB. The approach chosen by the ECB to communicate to the public almost in real time its monetary policy decisions and the underlying rationale avoids any market uncertainty, facilitates expectation formation and thus enhances the effectiveness of monetary policy. The ECB approach of presenting the economic reasoning behind its decisions has achieved a high degree of monetary policy predictability and has allowed long-term inflation expectations to be anchored at healthy levels.
I would like also to underline that the level of transparency the ECB has introduced since its creation has been exceptional: we were the first important central bank to introduce a detailed real time economic and monetary diagnosis and explanation of the monetary policy decisions. In this respect we contributed to change the state of the art of central banking since now all central banks are giving at least some explanations immediately after their decisions. We are also the first important central bank and, until now, the only one having a press conference after the decision of the Governing Council. Our communication concept permits to attain a very high level of transparency whilst underlining that the pertinent decision making entity is the Governing Council as a whole and not particular individuals.
In the draft resolution, concerns are also raised about the joint work of the ESCB and the Committee of European Securities Regulators in the field of clearing and settlement. The ESCB has attached the utmost importance to transparency in this respect and openly consulted both market players and the European institutions. We have provided the European Parliament with extensive and up-to-date information through various channels and stand ready to continue to do so. It should be stressed that the ESCB-CESR standards are clearly not intended to pre-empt any future legislative acts in this area. Thus, should a directive on clearing and settlement be adopted at a later stage, these standards would have to be amended accordingly, if necessary.
Let me also tell you that we have read with utmost interest the draft resolution on the implementation of an information and communication strategy on the euro and the EMU. Amongst the measures suggested in this resolution is for the ECB to undertake a yearly quantitative analysis of the benefits of the single currency for citizens. I am not sure at this stage that such a yearly quantitative report would be the most appropriate means for reasons of methodological and data constraints. But I will reflect on all appropriate means to enhance communication on the interest of the single currency for our fellow citizens of the euro area through the wide range of tools we have – from the press conference, the publication of the Annual Report and the Monthly Bulletin, up to the speeches and articles delivered and published all over the euro area.
I would also like to express my reservations regarding the proposed publication of data pertaining to the volumes of €500 banknotes issued by each NCB. Detailed data on banknote flows are sensitive as they could be used for the planning of raids and robberies. Due to their confidentiality, such data are exempted from the obligation to grant public access to ECB documents.
Monsieur le Président, si vous me le permettez, je voudrais ajouter trois réflexions sur la situation européenne présente après les résultats des référendums français et néerlandais. D’abord l’évolution historique de l’Europe a son temps propre, qui ne peut être apprécié que dans la durée. Je suis confiant dans la capacité de l’Europe à surmonter ces difficultés présentes et j’ai partagé le sentiment de confiance et de résolution qui a été exprimé dans la déclaration commune que votre président Josep Borrell Fontelles a signée avec Jean-Claude Juncker et José Manuel Barroso.
Ensuite, les défis et les chances que l’histoire européenne et mondiale, la démographie, la technologie et l’économie lancent et offrent en ce moment à l’Europe sont si importants qu’ils rendent plus urgentes encore la réalisation du nécessaire programme de réformes imaginé à Lisbonne et relancé à Bruxelles lors du Conseil européen de Mars.
Enfin, chacun peut être sûr que nous serons à l’avenir comme par le passé totalement fidèles à notre mandat. Le projet de constitution ne comprend pas de changement au fonctionnement de la Banque Centrale européenne et de la monnaie unique, qui ont des fondations très solides données par le Traité de Maastricht. L’Europe peut compter sur la Banque Centrale Européenne et sur l’Eurosystème pour demeurer, en toutes circonstances, une ancre de stabilité et de crédibilité pour préserver la confiance.