Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Frankfurt am Main, 7 June 2001
With a transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I are here to report on the outcome of today's meetings of the General Council and the Governing Council of the ECB.
The Governing Council conducted its regular examination of monetary and economic developments and analysed their implications for the maintenance of price stability in the euro area. On the basis of the information available at today's meeting, the Governing Council concluded that the current level of interest rates remains appropriate to ensure that the euro area economy will be able to maintain price stability in the medium term, and thus decided to keep the key ECB interest rates unchanged.
Let me share with you our assessment of the information provided under the two pillars of the ECB's monetary policy strategy in some more detail.
As regards the first pillar, M3 growth has been on a gradual downward trend since spring 2000, driven predominantly by its most liquid components and reflecting the increase in the key ECB interest rates which occurred in the period between November 1999 and October 2000. Over recent months, M3 growth has stabilised. The three-month average of the annual growth rates of M3, adjusted - as explained in the last Monthly Bulletin - for the effects of holdings by non-residents of the euro area of money market fund shares/units, was 4.6% in the period from February to April 2001. In addition, as was also explained earlier, there are preliminary indications which suggest that holdings by non-residents of the euro area of other negotiable paper included in M3 may have contributed half a percentage point or so to the annual growth of M3 in recent months. The growth rate of loans to the private sector continued to moderate over recent months.
As regards the second pillar, inflationary pressures will ease over the medium term, although this is likely - for some months to come - to be overshadowed by short-term increases in inflation that relate mainly to oil prices and the impact of animal diseases on food prices.
Primarily as a result of the less favourable external environment, real GDP growth in the euro area is expected in 2001 to come down from the high level reached in 2000, and this should contribute to a dampening of upward pressure on consumer prices. This picture of a moderation in economic growth has been confirmed by recently released euro area survey data for May and by partial evidence from national accounts data of euro area member countries for the first quarter of 2001.
When looking beyond this year, the outlook for real GDP growth in the euro area is subject to uncertainty with regard to the global outlook for growth. Expectations are that economic growth will be supported by domestic demand and will remain broadly in line with trend potential growth. This is consistent with the strong economic fundamentals of the euro area, current and planned tax reforms, and favourable financing conditions.
Wage moderation will have to play an important role in containing inflationary pressures in the coming years. When looking back, as already indicated in my previous introductory statement, the wage developments seen so far have been satisfactory. Looking forward, there is ongoing concern about the emergence of second-round effects, so that wage developments need to be monitored very closely.
In this context, it appears particularly important that wage setters fully understand that current price developments are strongly affected upwards by factors which should only have a temporary impact on the inflation rate. The recent rise in HICP inflation, to around 3% in April 2001, was due mainly to developments in unprocessed food prices, the rebound in oil prices and increases in indirect taxes and administered prices. Moreover, the pass-through of the indirect effects of past rises in oil prices and last year's depreciation of the euro have played a role. All these factors will also show an upward effect in the inflation rate for May However, if no further unfavourable price shocks occur, this upward pressure should soon start to diminish, making it likely that annual HICP inflation will start to fall in the course of this year and be below 2% in 2002.
Nevertheless, there is a need to remain vigilant as regards future developments affecting the balance of risks to price stability, although weaker economic growth than that currently expected might reduce inflationary pressures. Close attention needs to be paid to factors which might entail a resurfacing of upward risks to price stability, including, in particular, wage developments, energy prices and recent movements in the exchange rate, which is an important indicator to be taken into account under the second pillar. Let me reiterate our position that we have a strong interest in a strong euro.
The current increase in the euro area fiscal deficit ratio, the first deterioration since 1993, is disappointing. Fiscal policy will have to resume the consolidation process and governments should abide by the commitments entered into under the Stability and Growth Pact and to those made in the context of their stability programmes. Progress along the road towards the medium-term objective of achieving budgetary positions "close to balance or in surplus" cannot be postponed.
Finally, the expansion of the growth potential of the euro area economy is an objective to be pursued with utmost determination. The best contribution monetary policy can make in this regard is to preserve price stability. Ongoing policy efforts to remove structural rigidities in the product and labour markets and to diminish disincentives created by tax, benefit and pension systems as well as to raise investment incentives through deregulation and privatisation are all working in this direction and should be taken as the main challenge for economic policies in the euro area.
Let me now give the floor to the Vice-President, who will inform you about some other issues.
First, next Thursday (14 June) will be another key date in the countdown to the cash changeover, when 200 days will be left before the introduction of the euro banknotes and coins. To date, already more than 8 billion euro banknotes have been printed. This represents over 80% of the launch stock. In order to mark next week's key date, the third media kit focusing on the production of the euro banknotes and coins and on the changeover modalities will be released in all 11 official Community languages as part of the Euro 2002 Information Campaign. Let me take this opportunity to emphasise that the Eurosystem is delighted with the positive response that the "Partnership Programme" has received. This is a very important communication channel of the Euro 2002 Information Campaign. So far, over 1,000 organisations from the euro area and beyond have been participating as so-called "Euro-Partners". By mobilising other significant players in the cash changeover process and assisting them in communicating with their staff, customers and business partners, the Partnership Programme helps to get the right information about the cash changeover to the right places at the right time.
Second, at its meeting, the General Council conducted its annual review of developments in public finances in the EU. It also carried out its annual review of the functioning of ERM II.
Finally, let me draw your attention to the calendar for meetings of the Governing Council and General Council in 2002. A separate press release listing the dates as well as the related dates for the press conferences is being released this afternoon.
We are now at your disposal for questions.
Transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB and Christian Noyer, Vice-President of the ECB
Question: Mr. President, I haven't heard you in a long time say, unprompted, that there's a strong interest in a strong euro. Could you give us a little bit of background on why you felt it was necessary to slip that phrase into today's communiqué? Is it an inflation problem? And the other question I have is: when you look at some of the most recent data, for example what we have seen over the past few days, does this mean that your growth projections - that are going to be released next week - will already be a little bit too optimistic?
Duisenberg: The phrase I used about the euro, that a strong euro is in the interest of the euro area, is indeed nothing new, but I believe I cannot repeat it often enough.
Question: It was not in the last communiqué - there must be a reason why you put it in this communiqué?
Duisenberg: Oh yes, well, we have to say it sometimes.
Question: Because it's becoming one of those times when you have to start saying it?
Duisenberg: Let's turn to the second question: the forecast to be published next week will be based on the broad forecasting exercise which has been executed by the staff of the ECB and all the NCBs. It was part of the input into the Governing Council's decision, but only part of the input. The forecast as such will, as usual, be published in the form of ranges for the various indicators. So I advise you to look at the ranges rather than at precise target or midpoint figures. And as such, I do not believe - although I cannot comment further on forecasts which still have to be released - I do not believe that they are already now too optimistic.
Question (translation): President Duisenberg, at previous press conferences you repeatedly mentioned GDP growth of 3% or just below 3% for the euro area. For some time now, though, you have only referred to potential growth. For the 3 hundred million citizens of the euro area, could you perhaps put a figure on how you and the European Central Bank currently assess future growth in the euro area? Second: What is the opinion of the Council concerning the reasons for the present weakness of the euro?
Duisenberg: I mentioned the growth figure in my introductory statement: I said, indeed, that for this year it is expected that the growth rate will come down from the high level reached in 2000. I also said that our expectation is that growth this year will be in the range of the trend potential growth of output. As to the reasons for this dampening in the outlook, it does reflect, of course, the global slowdown in economic developments mainly initiated by the slowdown in the United States. I can tell you that for next year and the year after we expect again some, albeit only slight, acceleration in growth, which will remain in the same order of magnitude.
Question (translation): Well, going back to my first question: I did not want you to say whether the economic situation as such is better or worse. My question was as follows: the three hundred million citizens in the euro area do not know what to make of your "potential growth" or "corridor". These people have a right to know whether the President or the Council of the ECB thinks growth will be 2%, or 2.5%, or 2.8%. I mean to say your language, or the way in which you are presenting this information... people do not understand that. That is why I was asking the question.
Duisenberg: Well, then I hope to be understood when I say that - and I repeat - we estimate the trend potential rate of growth of output at 2-2.5% and our expectation is that the actual outcome for 2001 and 2002 will be towards the upper end of that range.
Question: The second question was: Could you give me the reasons for the weakness of the euro?
Duisenberg: The euro has come down rather rapidly from the level it reached at the end of December last year. But it has also remained relatively stable. I will not characterise it as a continued weakness but as stable at a level which, to my mind, leaves some room for appreciation in the future.
Question: You say that you would not characterise the weakness of the euro as a continued weakness. But to what extent is the level, the exchange rate, the external value of the euro, an expression or a judgement on the credibility of the European Central Bank as an institution? And if there is a question about that credibility, to what extent are you personally part of the problem?
Duisenberg: Well, since I cannot answer the first question, I cannot answer the second question either. Part of the explanation is, of course, the outflow of capital from Europe in the form of both direct investment and portfolio investment, in particular to the United States which, according to our judgement and analysis, may not be inspired by exchange rate speculation but possibly by a phenomenon of strategic importance. Or it reflects a strategy by large European companies over a longer-term period. On its own it is likely to be temporary phenomenon.
Question: Mr. President, you mentioned that you are worried about fiscal deficits. Could you explain what kind of assessment the ECB has made and how wide the deviation is from stability programmes?
Duisenberg: Well, the expectation is that for 2001, the combined fiscal deficit of all euro area countries will be greater than in 2000. And that in itself runs counter to the trend which governments have set for themselves, in other words to move towards a situation where the budget is balanced or even has a small surplus. So, there seems to be, at least this year, an interruption - although we do hope that it is temporary - in the ongoing movement towards the ultimate goal to be achieved over the medium term.
Question: Some investment banks estimate that in the weak euro zone countries the deviation will be some 0.5%.
Duisenberg: I would not want to give specific figures even if I had them in my mind for individual countries. Today we approved the public finance report, the substance of which will be reflected in the articles and the tables of the Monthly Bulletin.
Question: Mr. President, the recent success of your statisticians to quantify the impact of the holdings of money market funds by foreigners seems to have had quite an impact on your monetary policy decisions, although you - or the ECB - had already known and told us about the scale of this impact. The same is true for the holdings of other marketable funds that you are now trying to quantify. Must we expect, once you can come up with a figure, that this might have an impact on your policy decisions again?
Duisenberg: I would not expect that. I have announced today, as I have done in the past, what the order of magnitude is likely to be of the other correction factor in the M3 figures. And, knowing this, I believe that in my explanation today of the considerations and assessment in particular by the Governing Council of the medium-term economic outlook, in terms of both growth and prices, you will find a suitable justification and explanation for the interest rate move we applied a few weeks ago.
Question: My question for Mr. Duisenberg is, up to what level do you think the declining euro would help the euro zone economy?
Duisenberg: As I said, a strong euro is in the interest of the euro area. And, therefore, your question seems to run counter to that statement. And I am not inclined to speculate on the impact. But I want to emphasise that the exchange rate as such is one, be it an important one, indicator we look at when assessing the medium-term outlook for inflation. This we want to be at, or preferably, under 2% over the long term. But the exchange rate has not less but also not more meaning for us than precisely that.
Question: Later this year, Mr. President, the retailers of consumer products will finally convert their prices to the euro standard. Mr. President, would you please comment on the risks for price stability out of this conversion?
Duisenberg: We see that coming. We urge the public at large, consumers, to be very vigilant in following the conversion as it is applied by all retailers. And in some areas there will also be not upward but downward roundings-off. In particular governments - most governments - have already decided to convert their prices - in as far as they have administered prices - in a downward direction. So we do not expect and do not anticipate that the conversion itself will have a significant impact on inflation. If it has an impact, then by definition it will be a temporary factor.
Question (translation): Two questions. Do you have any reason, when looking at the information from the national central banks, to think that cash amounts, for example in Deutsche Mark, in eastern Europe are being converted into dollars before the conversion to the euro - possibly including illegal earnings? Second question. What is your reaction to the criticism made by the Eurogroup chairman, Mr. Reynders, that you were not in Brussels at the beginning of this week when the Eurogroup met? And is it right, for the presentation of the euro, if the Eurogroup makes such criticism in public? Is it not possible for the two of you to get together and to sort out a common way of expressing things?
Duisenberg: The conversion into euro of national currencies of the euro area circulating outside the euro area is already under way. We are trying to monitor that but it is not easy. We have no indication of a large-scale conversion into non-euro area currencies. On the criticism, which I learned from the media, that I did not attend the Eurogroup meeting, I would like to point out that it has been a tradition since 1954 that the highlight of the annual International Monetary Conference, which is held in a different place every year, is the so-called Central Bankers' Panel in which the central banks, or central bankers, of the three main currencies in the world participate. And I did so. It would have drawn more attention had I not been there, than had I been in Brussels - where, and that is my second point, the ECB was vividly present, and was fully, adequately represented by the Vice-President. And, in the third place, I have to say that sometimes schedules do not fit quite well with each other. I can tell you that the next meeting of the International Monetary Conference will be on 2-4 June 2002 in Montreal, and the year after it will be on 1-3 June in Berlin. On both occasions you can be sure, if it happens to coincide with the meeting of the Eurogroup, that the ECB will be represented in the Eurogroup by the Vice-President.
Question: Mr. Duisenberg, there is now almost a daily stream of criticism of the European Central Bank from economists and from the financial markets. You seem to be saying that they do not really understand now what is the driving policy of the European Central Bank. Do you think this constant criticism, and it does appear to be almost daily, is undermining the work and the image of the European Central Bank at all? And if it is, do you think that there is something that can be done to counter it?
Duisenberg: Well, we are doing everything possible to counter it by continuing to explain our monetary policy actions over and over again, as I am doing today. And I think that there is only one way to counter that criticism, which, of course, I do not like but I see happening. May I say that the stream is not coming from all directions, and I think we can do nothing but continue to execute a transparent and understandable policy and to continue to explain that policy by every means we have.
Question: Mr. Duisenberg, it is more or less the same thing. If we read stories every day about the weakness of the euro, is this just a question of bad image or can we see a kind of "complot"?
Duisenberg: I cannot answer that question, but I do not believe in "complots".
Question: Mr. President, two quick questions: on balance, including all the latest available data, and irrespective of your decision today not to change interest rates, do you think that risks to price stability over the medium term are lower now than they were one month ago when you last changed interest rates? And, secondly, do you think that in a world without European Monetary Union some national central banks would have been more aggressive in cutting interest rates than you have been so far? In other words, are you satisfied with your "one size fits all" policy approach?
Duisenberg: First, if we thought that the risks to price stability today were lower than they were one month ago, I would not have said that we regard the monetary policy stance which we have as appropriate. This is not what we are saying. We are saying that it is appropriate, but we are not saying anything else.
Whether we are satisfied with the "one size fits all" approach? Oh yes, we are. But "one size fits all" monetary policy is a characteristic which we cannot change. We have one monetary policy for the entire area and regional monetary policy does not exist, and we have a mandate as a monetary authority which is somewhat different from mandates that other big central banks have, namely to maintain price stability as the primary goal of the ECB. And only when that is certain, as the Treaty states: "without prejudice to price stability", shall the ECB support the other goals of the European Community, but price stability comes first.
Question: This is a question quite similar to the one raised before, but let me ask it again. I would like to ask you about people's concern about a price hike caused by the introduction of euro cash. So, how do you judge this? Do you realise it, and what do you say to it?
Duisenberg: We realise that the fear exists and we urge the public to be very vigilant, as we are, to prevent it from happening. We also urge governments to counteract it by their own actions in the conversion process, which is inevitable. However, all investigations we have indicate that the effect will certainly be, if not absent, minimal.
Question: Do you regard your policy as still accommodating as far as the current level of real interest rates is concerned? Do you agree with some critics who say that actually by hiking interest rates in October you strangled the economy which was already coming down, as was seen in the data of Germany, for instance? I have another question about the dampening of the economy. I was a bit surprised to hear that the dampening reflects the global slowdown of the US economy. Didn't I hear you say many times that the impact of this slowdown for the European economy was not going to be strong because this is a closed economy, or rather an almost closed economy?
Duisenberg. The hike of interest rates in October was the last one to date. It was the end of the road which we started in the November of the year before. It was certainly not strangling the economy. Monetary policy - and certainly moves of the size we are talking about - does not have that effect. As to the substance of your question, in my introductory statement I characterised the strong economic fundamentals of the euro area; they have been accompanied by favourable finance conditions, and I think this gives an answer to your first question. Now, to your second question. I have always maintained that the slowdown in the United States would have an impact, but the impact would be limited. And I believe that the fact that it led us to anticipate that growth this year and next would come down somewhat from the - I am inclined to call them - "exceptionally" high levels recorded in the year 2000 to a level broadly consistent with the maximum range of the trend potential rate of growth, that is around 2.5%, represents a scaling-down of the growth forecast, which justifies my use of the words "limited impact".