Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Governor Fernández Ordóñez for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Rehn.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Inflation rates are likely to stay above 2% in 2012. However, over the policy-relevant horizon, we expect price developments to remain in line with price stability. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest survey indicators for the euro area highlight prevailing uncertainty. Looking ahead, economic activity is expected to recover gradually over the course of the year. At the same time, as we said previously, the economic outlook continues to be subject to downside risks.
Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Over the last few months we have implemented both standard and non-standard monetary policy measures. This combination of measures has helped both the financial environment and the transmission of our monetary policy. Further developments will be closely monitored, keeping in mind that all our non-standard monetary policy measures are temporary in nature and that we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest signals from euro area survey data highlight prevailing uncertainty. At the same time, there are indications that the global recovery is proceeding. Looking beyond the short term, we continue to expect the euro area economy to recover gradually in the course of the year, supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area economy. However, remaining tensions in some euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment, are expected to continue to dampen the underlying growth momentum.
As we said previously, this economic outlook continues to be subject to downside risks, relating in particular to an intensification of tensions in euro area debt markets and their potential spillover to the euro area real economy, as well as to further increases in commodity prices.
Euro area annual HICP inflation was 2.6% in April 2012, according to Eurostat’s flash estimate, after 2.7% in the previous four months. Inflation is likely to stay above 2% in 2012, mainly owing to increases in energy prices, as well as to rises in indirect taxes. On the basis of current futures prices for commodities, annual inflation rates should fall below 2% again in early 2013. In this context, we will pay particular attention to any signs of pass-through from higher energy prices to wages, profits and general price-setting. However, looking ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.
Risks to the outlook for HICP inflation rates in the coming years are still seen to be broadly balanced. Upside risks pertain to higher than expected commodity prices and indirect tax increases, while downside risks relate to weaker than expected developments in economic activity.
The monetary analysis indicates that the underlying pace of monetary expansion has remained subdued, with somewhat higher growth rates in the past few months. The annual growth rate of M3 was 3.2% in March 2012, compared with 2.8% in February. Since January we have observed a strengthening in the deposit base of banks.
The annual growth rates of loans to non-financial corporations and loans to households (adjusted for loan sales and securitisation) stood at 0.5% and 1.7% respectively in March, both slightly lower than in February. The volume of MFI loans to non-financial corporations and households remained practically unchanged compared with the previous month.
Money and credit data up to March confirm a broad stabilisation of financial conditions and thereby, as intended by our measures, the avoidance of an abrupt and disorderly adjustment in the balance sheets of credit institutions. In this context, the April bank lending survey indicates that the net tightening of credit standards by euro area banks declined substantially in the first quarter of 2012 as compared with late 2011, for both loans to non-financial corporations and loans to households, also on account of improvements in funding conditions for banks. As also indicated in the bank lending survey, the demand for credit remained subdued in the first quarter of 2012, reflecting weak economic activity and the ongoing process of balance sheet adjustment in non-financial sectors. The full supportive impact of the Eurosystem’s non-standard measures will need time to unfold and to have a positive effect on the growth of loans when demand recovers. In this context, it should be noted that the second three-year longer-term refinancing operation was only settled on 1 March 2012.
Looking ahead, it is essential for banks to strengthen their resilience further, including by retaining earnings. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.
To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.
It is of utmost importance to ensure fiscal sustainability and sustainable growth in the euro area. Most euro area countries made good progress in terms of fiscal consolidation in 2011. While the necessary comprehensive fiscal adjustment is weighing on near-term economic growth, its successful implementation will contribute to the sustainability of public finances and thereby to the lowering of sovereign risk premia. In an environment of enhanced confidence in fiscal balances, private sector activity should also be fostered, supporting private investment and medium-term growth.
At the same time, together with fiscal consolidation, growth and growth potential in the euro area need to be enhanced by decisive structural reforms. In this context, facilitating entrepreneurial activities, the start-up of new firms and job creation is crucial. Policies aimed at enhancing competition in product markets and increasing the wage and employment adjustment capacity of firms will foster innovation, promote job creation and boost longer-term growth prospects. Reforms in these areas are particularly important for countries which have suffered significant losses in cost competitiveness and need to stimulate productivity and improve trade performance.
In this context, let me make a few remarks on the adjustment process within the euro area. As we know from the experience of other large currency areas, regional divergences in economic developments are a normal feature. However, considerable imbalances have accumulated in the last decade in several euro area countries and they are now in the process of being corrected.
As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term. This is the best contribution of monetary policy to fostering growth and job creation in the euro area.
Addressing divergences among individual euro area countries is the task of national governments. They must undertake determined policy actions to address major imbalances and vulnerabilities in the fiscal, financial and structural domains. We note that progress is being made in many countries, but several governments need to be more ambitious. Ensuring sound fiscal balances, financial stability and competitiveness in all euro area countries is in our common interest.
We are now at your disposal for questions.* * *
Question: Was there a discussion at all about moving the interest rate to the downside because there was speculation in the market, but you know, they are a little bit like children who need more candy. Was there a discussion at all about this?
Draghi: No, we did not discuss any specific move on interest rates but we certainly discussed our general monetary policy stance, which we found accommodative in view of an economic outlook that is becoming more uncertain.
Question: Is it correct that you have changed your introductory statement to show that you no longer see upside risks to inflation in the short term? Has your assessment changed?
Draghi: I will read to you again what I have just said. It is very important what I said at the beginning of page 3 of my introductory statement: “…risks to the outlook for HICP inflation rates in the coming years are still seen to be broadly balanced. Upside risks pertain to higher than expected commodity prices and indirect tax increases, while downside risks relate to weaker than expected developments in economic activity.”
Question: Previously you said that you see upside risks to price stability in the short term. Do you still see those right now, or no longer?
Draghi: I said there are upward risks and downward risks. So the risks are broadly balanced.
Question: You have been talking for the last days with Spanish and Catalan authorities. Here we have the impression maybe that after all the cuts, all the austerity, all the reforms, there is no reward from the markets or from the ECB. So these people say that the ECB now should give extra help to countries like Spain. What could you say to those people?
Draghi: I would say that the government of Spain has made a very significant effort in policy reform. It is a series of reforms that - I don’t need to remind you - have been taken in a very short time. We have to acknowledge this significant effort. The measures that we have taken, namely the LTROs, have been successful in avoiding a major credit crunch. And of course we would need time to see how this money and when this money will propagate to the real economy, making credit conditions less difficult than they are today. But we can actually see quite clearly that we have avoided an otherwise major credit crunch, worse than what we are seeing today. So these measures, from this viewpoint, have been successful. I think that, and this is true for a variety of countries in the euro area, there has been significant progress on the fiscal front. I think that perseverance, given the amount of progress that has already been achieved, is very important in order to reap, in the end the gains. And together with this, structural reforms are also very important.
Question: Austerity is not working; unemployment in the euro zone has reached its highest level in 15 years. Many politicians, such as Francois Hollande, are calling for a shift in focus away from cuts and towards growth. Are they right?
Draghi: I will not comment on specific statements by important politicians.
But, let me go back to what I said during my last parliamentary hearing, when I briefly hinted at the need for a growth compact.
Let me make two preliminary observations in this respect. First of all: there is absolutely no contradiction between a growth compact and a fiscal compact. In fact, growth is sustainable in the long run if it is based on a variety of pillars, one of which is fiscal stability. The second observation is that I certainly agree when you say that we have to put growth back at the centre of the agenda. What does this growth compact mean? It refers to a variety of ideas that have been expressed in a number of places, and I certainly don’t claim any patent on this concept. But, if one had to summarise, it means basically three things. First of all, there must be a continuation of structural reforms in all the economies of the euro area. These structural reforms are different for different countries, but one can find some common themes. The first common area is the set of structural reforms in product markets. Our minds go back to the need to complete the single market as a first step, and to increase competition. You have to reform the product markets and the labour markets together, because you have to have more competition in both. Labour market reforms have three features: first they should increase flexibility, second they should increase mobility, and third, they should also increase equity in the labour market. Now we basically have a situation which is imbalanced against young people. Youth unemployment rates are going up and this is because of distortions in the labour market at the present time. You also want to make sure that you have an unemployment insurance system that makes these mobility and flexibility requirements realistic. So these are two more or less common areas.
Now what is the difference with five, six or ten years ago? It’s that now we need to have a common European discipline when implementing these reforms. That is not unlike what we have been able to put in place for the fiscal side: monitoring and discipline at the euro area level. To some extent, the six-pack proposals and the Euro 2020 plans are all proposals that are going in this direction and need to be implemented. That is the first group of ideas. If undertaken with conviction and thoroughness, this will free energies in the private sector that will create jobs. That was the lesson of the 1980s in many countries. The second area is what we can do at the euro area level to create jobs, basically by increasing investment and enhancing infrastructures. There are many proposals, such as increasing the European Investment Bank (EIB) action and redirecting the EU funds towards the low income areas. When we talk about infrastructure and fiscal consolidation, it is certainly much better to consolidate through the reduction of expenditure, especially current expenditure and not capital or investment expenditure, rather than through increases in taxes. But the third point is of a different nature. It is not really technical; it is mostly political and is probably the most important. Collectively, we have to specify a path for the euro. How do we see ourselves ten years from now; what has to be in place in ten years’ time? If we want to have a fiscal union, we have to accept the delegation of fiscal sovereignty from the national governments to some form of central body, but how do we get there? Talking about a transfer union cannot be the starting point of this path. That is why the fiscal compact is so important, that is the starting point. But we also have to highlight what this path is and what conditions have to be in place in order to see what will happen to the euro in ten years’ time. In other words, clarity about our future, about our common European future, is one important ingredient of growth.
Question: Mr Draghi, if we put a lot of emphasis on things that governments can do, you said there was no discussion today within the ECB Council about further policy steps – I take it, neither in this month nor in coming months. Does this mean that you are of the opinion that the ECB has done all it can do at the moment in terms of supporting growth? Or, if conditions were to deteriorate, are there steps that you could take? Do you think you have the firepower left?
If I could just, very cheekily, ask Mr Constâncio a question about EU bank rules, namely whether he is now satisfied, whether he thinks that the Basel III rules are actually being implemented at the EU level, following last night’s meeting in Brussels.
Draghi: As I have said before, we discussed the monetary policy stance quite extensively. We found it accommodative. .Both our nominal interest rates are historically low, and real rates – short-term real rates – are negative in all euro area countries. Also, nobody could deny that liquidity is abundant in the euro area. But having said that, any exit strategy remains premature.
Constâncio: I can be very brief, because, as you know, there was no agreement yesterday, so that we do not yet know what the final version of the Directive will be. It will be discussed again at the next Ecofin Council meeting.
Question: I wanted to ask you about the problem of liquidity from the ECB. Do you think that this enormous liquidity in Europe is a threat? Will the ECB consider carrying out new three-year tenders in the future?
Draghi: Again, as I have said, we think that the monetary policy stance is accommodative. As I have also said, any exit strategy would be premature. And as we always say: we never pre-commit.
Question: The ECB hasn’t bought debt in the secondary market in the last month and a half. Why aren’t the recent market tensions, particularly the ones Spain is suffering, reason to reactivate the Securities Markets Programme (SMP)?
Draghi: As you may remember, the SMP was created to address malfunctioning or non-functioning in the channels of transmission of monetary policy. To this extent the instrument is still there, but, as I have said many times, it is neither eternal nor infinite in its application.
Question: You painted your idea of what the governments should do in the near future. A common discipline for reform, redirection of the European funds and then also a common pact. Do you really think the politicians will follow your suggestions and, in particular, do you think Italy is on the right path to following your suggestions?
Draghi: This is very difficult to answer. I never guess what the politicians will do in general, and especially not whether they will follow my suggestions. Also, I think they are on average smart enough not to need my suggestions to take decisions. That is what I felt when I hinted at the growth compact in parliament: clarity of vision for the next ten years. Thinking back to what we did collectively in the 1990s regarding the euro that was the methodology we put in place: clarify; define a path, at the end of which was the euro; and specify what conditions would have to be in place for the euro to become real. And I think we are now at a stage which is not too different, in a sense, from that one, although history has clearly changed now. As regards Italy, I think that remarkable progress has been achieved, so I think the government needs to be encouraged in its efforts. It has achieved a remarkable fiscal consolidation and I can only repeat what I have said before: it really is on a good path.
Question: When you talk about how the euro looks in ten years and about some of these structural economic reforms, isn’t it a little bit late, two and a half years into the crisis, for Europe to be talking about how to grow faster on a longer-term basis? It would seem that right now the important thing is how this stimulus money will somehow get to these countries that are in a lot of trouble, and it doesn’t seem like you’re advocating any near-term stimulus, but rather a longer-term economic reform path.
Draghi: Yes, it seems like that, and that’s exactly right. I was hinting at the 1980s as a time from which we could learn some lessons, but the 1970s were years of very high deficits and we basically all found ourselves, more or less to the same extent, in a situation of high inflation and recession. It was called “stagflation” at the time. We learned that to get out of that situation we needed to carry out structural reforms, that basically increasing current spending, and stopping fiscal consolidation would not be a great help. I hinted at different ways of introducing stimulus in the economy when I was talking about the growth pact. There are lots of measures that could stimulate job creation in the private sector, and there are a certain number of measures at European level that could address the infrastructure spending issue. And again, on the subject of fiscal consolidation, I always say that it is much better to consolidate by reducing current government expenditure, rather than via a contraction in expenditure in infrastructure or investments, or raising taxes. Unfortunately, countries often found themselves in urgent situations, where they basically had no time and therefore had to do the easiest thing, which is to raise taxes and reduce capital and investment expenditure. But even though this can be understood to be a short-term measure, it should be corrected in the medium term.
Question: You described your understanding of a good growth compact. How many years will it take until we see the fruits of such a pact? And what could happen in between? Do we just have to suffer recession for years or what is your expectation?
Draghi: What happens in between, in a sense, depends on the main actors involved in this process. It is up to them how long it takes. But I wouldn’t want to sound as dramatic as you make me sound. Many of these things are already designed; some of them are in place. Work has been done. Now we have to give the sense that this is an overall joint effort. On your specific projection of having to suffer years of recession, let me say first of all that at euro area level, there are huge divergences, as you know. There are countries that are not in a recession, and which are actually almost at full employment, and there are countries that are in a recession. At euro area level, these averages tend to offset each other to some extent, albeit not completely. But so far, we basically think that the indications we saw in April are not enough yet for us to change our baseline scenario, which foresees a gradual recovery in the second part of the year.
Question: You ended your introductory remarks by telling us that progress has been made in many countries on fiscal, financial and structural reforms, but that several governments need to be more ambitious. You then told us about the remarkable progress made in Spain and Italy, so I am just wondering, who exactly does that leave that needs to be so much more ambitious?
Draghi: I think that, overall, governments need to be more ambitious in quickly tackling the remaining problems. So if speedy action is needed in the banking system, go ahead and take that action. If greater transparency is needed in your budgetary policy, go ahead and implement it. If you look at all the countries, you will find things that have been done and things that need to improve. Let me say one thing, however. The fiscal progress − not only referring to Spain and Italy, but more generally − has actually been substantial and I think this is insufficiently acknowledged. Why am I saying this? Because if you look at how much progress has been made by different countries, you will find that 10 out of 17 countries have achieved fiscal consolidation by the end of 2011 beyond their targets expressed in their stability programmes. And if you look ahead to the end of 2013, you will find that 15 out of 17 countries should have deficits at or below the reference value of the excessive deficit procedure by then. So I think it is now time to look at what has been achieved with a certain sense of accomplishment, though not complacency.
Question: I wanted to ask whether you think that the lack of confidence that we have in Europe vis-à-vis the Spanish banks is fully justified, and whether you think that the last stage of the financial reform which is being carried out now, where they are creating bad banks, can be the right path for bringing back confidence in the Spanish financial system, and finally whether you think that the stability fund can be the instrument to finance these bad banks, as Spain requested. Is it correct for Spain to look at it that way?
Draghi: I think we have full confidence that the actions needed, both on the fiscal front and on the banking front, will be undertaken. The track record of the country is good. We look at debt levels for the past few years, so we have every confidence in the success of this. Now, with respect to the specific actions taken by the government to address the banking system, we will have to look at them. We have not yet looked at them and not yet analysed them. But as I said, we have absolutely no doubt that the action will be taken and will be as speedy and transparent as the other European countries and as the markets themselves require it to be.
Question: I would like to know if you think that the positive effects of the LTRO have vanished and if the markets can expect another credit operation of this kind?
Draghi: On the second part of your question, as I said before I can’t comment because we never pre-commit.
On the effects of the LTRO – I think it is too early to say that they are vanishing, because we have to understand these effects fully and that requires time. What we see now are several things. The first is, as I said before, that we avoided a major credit crunch - or at least a credit crunch which would have been much worse than what we are seeing today. Second, we have seen that the degree of net tightening from the supply side has been going down markedly over the last three months. The third thing we see, which is also positive and is relatively new, is a strengthening of the deposit base in several banks in the countries that are in the greatest difficulty. This is a positive sign. It means that deposits are flowing back in these banking systems. The fourth thing is that the M3 growth pace has recovered from what it was at year-end. It is still subdued, but it has recovered. Finally, there continues to be a significant drop in some of the key indicators of the financial market uncertainty and volatility such as some of the key spreads, and a significant drop in the repo rates and others. So, for the time being, we look at all these events on an almost daily basis, and we find things that we did not find the last time. For example, this strengthening of the deposit base was not visible when I gave my last press conference. So all this indicates that we need some more time.
Question: On Sunday, there will be very important elections, not only in France, but also in Germany and Greece. Does it frighten you that in these countries some parties, which are very euro-sceptical or very euro-critical and have the explicit target to leave the euro or the austerity programme, are becoming more and more popular? And especially in France, are you afraid that if Mr Hollande wins the election the fiscal compact will be put in question?
Draghi: Unfortunately I have to disappoint you because I am not going to comment on any of this. I don’t have any better insight into these political developments than any of you.
Question: Unemployment, especially youth unemployment, is dramatically high in several euro area countries, like Spain, Greece, Portugal and others. Has this particular issue been discussed, and also perhaps the need for some unconventional measure that may help to relieve the situation in these countries, in other words social explosions or disruptions?
Draghi: As I said before, we have to create jobs. Who is going to create jobs? The private sector creates jobs and some would be created by the public sector through spending on infrastructure. These are jobs that could be sustained. The youth unemployment versus the average unemployment is a different issue, and I think I briefly commented on this before. That has to do with distortions in the labour markets, which caused the youth segment of the labour market to be flexible, while the rest of the labour market is completely and fully protected. This means that every time you have a decrease in economic activity which causes unemployment, this unemployment hits the youth segment more than the rest of the labour market. Now we are all aware and agree that this has very serious long-term social consequences, and it is something that should be addressed. That’s why I mentioned before labour market reforms as one part of the growth compact, provided that they have the three requisites flexibility, mobility and equity.
Question: You said you discussed quite extensively your monetary policy stance today. And I was wondering whether there were things you did consider tweaking or changing. Could you give us a flavour of that? And I think your unlimited liquidity arrangement runs out in a couple of months and we are all assuming that you will extend it, but how long could that extension be?
Draghi: I would not call it “tweaking” things. We fully analysed the monetary policy stance and found it accommodative. Nominal rates are historically low and short term real rates are negative. At the same time, there is wide unanimity about the fact that an exit strategy is premature. Regarding the full allotment arrangement, we will make announcements about that in June.
Question: Mr President, I think it is said that the ECB supports the idea that the ESM should provide support directly to Spanish banks. How urgent is it and under what conditions could the countries which are opposed be convinced to agree to it? Do you have any plans?
Draghi: First, these mechanisms are useful but they cannot replace either fiscal consolidation or reforms as the way to restore stability. This is an important European instrument for times of crisis and it should be viewed as such. Second, we did not have a successful experience with the EFSF. Its functioning fell short of both expectations and needs because it was created in a way that it could hardly be made to work. We think that the ESM should work better; we want to make sure that the ESM can be used if need be.
Question: I have a question regarding a comment made by the French President, Mr Sarkozy, in his debate with Mr Hollande last night. He basically took credit for the LTROs, saying that he sold the idea to the German Chancellor, Angela Merkel, at a gathering in Strasbourg on 24 November – which was two weeks before the Governing Council meeting when it was decided. I was just wondering, is that true? Did you speak to either of them two weeks before it was decided by the Governing Council? And, if so, where does that leave the ECB’s treasured independence?
Draghi: I did not know anything about such an agreement.
Question: About employment, you said before what the countries have to do to create jobs. But is the problem only one of more flexibility, more mobility, more equity, but do you think that we need also less taxation in Italy and elsewhere?
Draghi: I don’t refer to Italy specifically but I think I said that in the European context at the present high level of taxation, the ideal fiscal consolidation would see more expenditure reductions than raising taxes. And if you have to reduce government expenditure, you would address reductions in the current expenditure, rather than in the so-called capital or investment, expenditures. It’s understandable that under extreme urgency, governments do take the easiest road, which is the one of raising taxes and reducing capital expenditure. Because it’s much more difficult and complex to reduce current expenditure. But in the medium term or when the urgency is past, this should be corrected.
Question: I won’t ask you something about French elections as you seem very careful about this subject.
Draghi: Yes, also about Greek and German elections.
Question: So, do you still see signs of stabilisation in the economic outlook? Or have the uncertainties grown bigger than you thought before?
Draghi: I think we saw stabilising economic activity at low levels in the first three months and then the most recent survey data show uncertainty prevailing. So we will be able to be clearer in our assessment next month, when we have more data and more analysis available.
Question: I know this event is obviously about high finance and economics, but can I just ask you about the people affected by austerity, the people in countries like Spain? Do you understand the anger that a lot of people feel in a country like Spain? And what about the perception that you do hear often on the streets in a country like this that Spain is being held hostage to the financial markets?
Draghi: Well, on another occasion I was asked whether I can understand the anger of people, especially young people; jobless, young people; poor, jobless, young people. And my answer was yes, I can understand it very well. Of course, when this takes a violent form I can only condemn this, but this doesn’t detract from our being understanding and even in a sense sympathetic. But the answer we can give as policy-makers is to make sure that the policies that are implemented or suggested are the policies we are convinced are going to be the right ones. In other words, we will try to do our job as best we can. And this is probably the best way to address your question– be clear, be sincere, be straight with yourself and with others.
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