ECB Press conference: Introductory statement
Willem F. Duisenberg, President of the European Central Bank
Ladies and gentlemen, the Vice-President and I are here today to report on the outcome of today's meetings of the Governing Council and the General Council of the European Central Bank. Similarly to last month, the Governing Council had a very heavy agenda with many of the items being of a rather technical nature or related to the legal implementation of decisions already taken at previous meetings.
Let me first turn to the Governing Council's in-depth discussion on recent economic, monetary and financial developments.
Today the Governing Council focused, inter alia, on various projections available for the world economy and the euro area. This material pointed unequivocally to some deceleration of real GDP growth in the euro area in 1999, compared with the widely expected growth rate of just below 3% in 1998.
In addition, the Governing Council took note of the apparently calmer conditions in world financial markets in November this year. A key feature has been the diminished volatility in financial markets.
However, the Governing Council pointed out that caution is warranted when interpreting the most recent developments and the projections available. Indeed, downward risks continue to exist.
In the view of the Governing Council, apart from global developments, the most significant risk for all forecasts is that confidence within the euro area and thereby domestic demand could be negatively affected. Confidence in the corporate sector has already declined. In this respect, the Governing Council emphasised the utmost importance of maintaining a sound and sustainable policy framework within the euro area, particularly in the interest of supporting confidence. This framework is characterised by the maintenance of a stability-oriented monetary policy, a conduct of fiscal policies which is consistent with the Stability and Growth Pact, and ongoing structural reforms in the labour and product markets, accompanied by continued wage moderation. Maintaining this policy framework will help to foster competitiveness and profitability in the corporate sector, thereby promoting investment. Equally, it will help to sustain and foster the employment growth that has been seen recently, thereby supporting private consumption.
Against this background, the Governing Council discussed in depth issues related to the conduct of monetary policy for the euro area. Let me elaborate on that discussion, which further prepared the ground for the setting of interest rates for the euro area. In the context of the stability-oriented monetary policy strategy, the main elements of which were announced in October this year, the Governing Council agreed on the quantitative reference value for monetary growth and the monetary aggregate to which it applies. Moreover, the Governing Council carefully analysed the data on monetary developments and made a thorough examination of the broad outlook for price stability.
The first reference value for monetary growth decided by the Governing Council, which plays a prominent role in the Governing Council's monetary policy assessment, will apply to the broad monetary aggregate M3 and has been set at an annual rate of 4 1/2%; it will be reviewed in December 1999. This rate is consistent with the maintenance of price stability according to the ESCB's published definition, while allowing for sustainable output growth. It has been derived by assuming that the trend growth rate of real GDP in the euro area is in the range of 2% to 2 1/2% per annum and the velocity of circulation of M3 declines at a trend rate of between 1/2% and 1% each year. Further details related to the derivation of the reference rate and the definition of the broad aggregate M3 are described in a separate press statement to be released today. With regard to the reference value, let me stress two points very clearly.
First, the reference value for M3 growth has been derived in an explicit medium-term context, in line with the ESCB's monetary policy strategy. Analysis of monetary developments relative to the reference value will provide a firm anchor for the conduct of the stability-oriented single monetary policy.
Second, the ESCB's monetary policy strategy does not entail "mechanistic" policy reactions to deviations of monetary growth from the announced reference value. In the first instance, deviations of monetary growth will be analysed thoroughly, in parallel with the broadly based assessment of the outlook for price developments.
Preliminary estimates for part of the euro area indicate that the average of the 12-month growth rates for the last three months (including October) was around 4.5%. Taking a medium-term perspective, the Governing Council took note of the fact that over the last two years the annual rate of M3 growth has constantly fluctuated in a range of 3.5% to 5.5%. It was concluded that this monetary trend appears to be broadly compatible with continued price stability in the euro area. In line with the ESCB's monetary policy strategy, the Governing Council will closely monitor developments in M3 in relation to the reference value.
As regards other financial indicators, average long-term interest rates in the euro area declined slightly in November to 4.15%. The decline in long-term interest rates, which has been substantial since June this year, is consistent with the view that markets currently have low inflation expectations.
The discussion on the appropriate interest rates for the start of Stage Three was further deepened during the deliberations of the members of the Governing Council on the broad outlook for price stability in the euro area. Prospects for price developments are generally seen as favourable as the rate of increase in the HICP, which stood at 1.0% in October, is expected to remain below 2% in the foreseeable future. However, this is conditional on import prices remaining subdued and wage developments continuing to be moderate.
In the same context, the Governing Council emphasised once again that budgetary positions are still far from being close to balance or in surplus, while debt ratios are still at a very high level. All the members of the Governing Council agreed that any tendency to relax the fiscal stance or to alter the strategy enshrined in the Stability and Growth Pact would risk endangering the credibility of the euro and the objective of price stability.
On balance, the outlook for price stability was judged favourably by the Governing Council. In an environment of substantial uncertainty, monetary policy will be guided by a continuous convergence of central bank interest rates towards the level considered to be appropriate for the monetary, financial and economic situation prevailing at the start of Stage Three.
Let me now give the floor to the Vice-President to report on various aspects of the preparatory work for Stage Three of Economic and Monetary Union
(1) Revision of the key for the capital of the European Central Bank (ECB)
Revised GDP data, which are used to calculate the key for the capital of the European Central Bank, have been received from the Commission of the European Communities. When the revisions are applied to the calculation of the capital key, variations of more than 0.01% occur. Article 2 of the original Decision of the Governing Council of the ECB of 9 June 1998 (ECB/1998/1) states that should revisions received before December 1998 result in variations of this magnitude, the key for the capital of the ECB may be revised. The General Council and the Governing Council have therefore considered and agreed to an adjustment of the key and the Governing Council has adopted the related ECB Decision.
Details of the adjusted shares of the national central banks (NCBs) are presented in a separate press release which is to be issued this evening.
Today, also in this connection, the General Council adopted an ECB Decision on the contribution of the non-euro area national central banks to the capital of the ECB, for which the adjustment of the key has knock-on implications. The Decision states that the non-euro area NCBs will pay up 5% of their subscriptions to the capital of the ECB. However, the four NCBs concerned will not actually be asked to pay their share since the amounts due are less than they can expect to receive as their share in the proceeds of the liquidation of the European Monetary Institute. These details were already agreed by the General Council at its meeting on 1 September this year and are now contained in a legally binding text.
(2) National legal framework for the monetary policy instruments and procedures in Stage Three of Economic and Monetary Union
As you are already aware, from January 1999, the single monetary policy will be defined and implemented by the decision-making bodies of the ECB, the Governing Council and the Executive Board. The operations of the monetary policy of the ESCB will be carried out in a decentralised manner by the participating NCBs. Therefore, the NCBs have prepared contractual and/or regulatory legal documentation (the national legal documentation) in order to implement the monetary policy framework of the ESCB as adopted by the Governing Council on 11 September 1998 and published in the report entitled "The single monetary policy in Stage Three: General documentation on ESCB monetary policy instruments and procedures".
The national legal documentation of each NCB has been assessed by legal experts from the NCBs and the ECB in order to ensure that it properly implements and complies with the monetary policy framework of the ESCB, which aims at establishing a level playing- field across the euro area. All eligible institutions wishing to access monetary policy operations and standing facilities in Stage Three should therefore contact their local NCB in order to prepare for the execution of that national legal documentation in good time before the beginning of Stage Three.
(3) Regulation of the European Central Bank on the application of minimum reserves
Today the Governing Council adopted the Regulation of the European Central Bank on the application of minimum reserves. The final specifications of the minimum reserve system to be used by the ESCB in Stage Three was the subject of a press release following the Governing Council meeting on 13 October this year. At that time it was announced that an ECB Regulation on minimum reserves would be published shortly thereafter. This commitment has now been fulfilled and the features of the ESCB's minimum reserve system are contained in a legally binding text.
Further details of this matter are contained in a separate press release, which will be issued to you this evening.
(4) Regulation of the European Central Bank concerning the consolidated balance sheet of the Monetary Financial Institutions sector
Today the Governing Council also adopted an ECB Regulation concerning the consolidated balance sheet of the Monetary Financial Institutions (MFI) sector. The purpose of this Regulation is to enable the ECB and the NCBs to collect the statistical material required for the establishment of the consolidated balance sheet of the MFI sector. The aim of this balance sheet is to provide the ECB with a comprehensive, statistical picture of monetary developments covering the aggregated financial assets and liabilities of MFIs located in the euro area.
(5) Payments systems issues
(i) Legal documentation for the correspondent central banking model (CCBM)
The correspondent central banking model (CCBM) is a system which will enable all collateral that is eligible for ESCB monetary policy operations to be used on a cross-border basis. It is a system that relies on bilateral relations between the NCBs involved and implies, inter alia, a regime of rights and liabilities between the NCBs.
There are two pieces of legal documentation involved in this issue. First, there is the so called "CCBM Main Agreement", which concerns the participating Member States and the ECBs, and second, there is what we call the "Out CCBM Agreement", which deals with the regulations for operations concerning non-participating Member States.
Today, the central bank Governors of all 15 Member States and the President of the ECB signed the "Out CCBM Agreement" and the members of the Euro system signed the "CCBM Main Agreement", "Eurosystem" being the term which we now intend to use to refer to the 11 euro area NCBs and the ECB. Further details of the CCBM and information concerning the forthcoming publication of a brochure on the subject are contained in a separate press release which will be issued to you this evening.
(ii) TARGET Agreement
Further to the Governing Council's agreement on the main features of the legal framework for TARGET in November this year, I am pleased to be able to inform you that today the TARGET Agreement has been signed by all 15 central bank Governors and the President of the ECB, thus allowing the non-euro area NCBs to be connected to TARGET. By entering into the TARGET Agreement today, the central banks of Denmark , Greece , Sweden and the United Kingdom have consequently agreed to adhere to the rules and procedures referred to in the TARGET Guideline, which regulates the relationship between the ECB and all euro area central banks. Finally, it gives me pleasure to announce that the central bank Governors of these four countries have committed their NCBs to adhere to the principles laid down in the policy statement on euro payment and settlement systems located outside the euro area, which was released to you on 3 November 1998 .
(6) Issues relating to accounting and financial reporting
Finally, today the Governing Council, having considered the observations of the General Council, adopted an ECB Guideline on the legal framework for accounting and reporting in the ESCB. This Guideline will not be published but will be available on request from the ECB.
A number of other decisions were also taken regarding the consolidated weekly financial statement of the ESCB. The formats for the external reporting of the financial accounts of the ESCB were agreed. It was decided that Friday will be the reporting date of the ESCB and that publication of the weekly consolidated balance sheet will take place on the following Tuesday. Further information on the accounting principles and techniques involved will be made available before the end of 1998, when the first consolidated balance sheet is to be published.
Transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB
Question: President Duisenberg, I have a question with respect to point 5 in your statement that says that you decided on a reference rate rather than on a range, and the reason you gave was that the Council believes that announcing a reference range might be falsely interpreted by the public as implying that interest rates would be changed automatically. On the other hand, you said that deviations from this reference rate will not be followed mechanistically by you. And I do not quite see why this should not also apply to a range?
Duisenberg: We simply felt that the announcement of a range was more likely to be interpreted by the public at large as triggering automatic reactions than the announcement of a rate, a reference rate. We may have been wrong in that feeling, but that was our - let's say - psychological estimate of public reactions. And then I should like to point out that, if you read that press statement, you will see the reference rate given as 4 1/2%, and specifically so. For the same reason, it has not been given as 4.5%, but rather as 4 1/2%.
Question: Is the harmonisation of tax rates in Europe desirable or useful or necessary for the success of Economic and Monetary Union?
Duisenberg: Whether it is desirable or useful or necessary has not been discussed by the Governing Council. If you want my personal opinion, I regard it as something that will happen over time. And over time means that it could take decades, a process of tax structures starting to look more like one another, without perhaps ever becoming totally equal.
Question: When you were in London a couple of days ago, you said you wanted the ECB to be one of the most open banks, central banks, in the world. Yet it is still not your intention to publish minutes, to publish votes or to publish inflation forecasts. How do you reconcile these two positions?
Duisenberg: I reconcile them by not defining openness as publishing everything that would be available. And that openness, by the definition of openness, is publishing, explaining every decision, every consideration, including the pros and cons. To be very open about that and to be frequent and immediate in that openness. And I think, I admit, we have been a central bank for only 5 months. I am still pretentious in thinking that, looking at our record of publications, etc., we already are the most open central bank in the world.
Question: Mr. President, I have noticed that your comments on the European economy were more cautious, significantly more cautious this time than last time and the times before. And I just wanted to get an indication of the forecast range for GDP growth that you implicitly assumed in your M3 forecast of 2-2 1/2%, whether that is still your latest forecast and whether there is in that forecast range a trend downwards or upwards. In other words, is this currently a symmetric GDP estimate?
Duisenberg: Very preliminary forecasts for GDP growth in 1999 indicate some slowdown, compared with 1998. In 1998 we already had to lower the estimate slightly from around 3%; it would be now in all likelihood be slightly, only slightly, below 3%. Our very preliminary forecasts for 1999 indicate a range of growth in the order of 2 1/2%, and they also indicate that this slowdown might be temporary, that it might pick up somewhat later next year. But, adding to that, I think the risks, as far as we can analyse and observe them, are on the down side.
Question (translation): President Duisenberg, are there any concerns which you or your colleagues have with respect to the stock of confidence in the euro, concerns which we should know about? That is my first question. It has been reported time and again - my second question - that leading policy makers in Italy, in France and in Germany are saying in small inner circles that they want to draw on central bank reserves to finance additional programmes within the scope of the European employment pact. If that were so - the first policy maker to say so was Mr. Prodi, who is no longer in office - what position would you take?
Duisenberg: With regard to the first question as to whether is there a certain concern which we have not told you about yet, the answer is "no". The concerns we have are implicit in the forecasts or assessments of the outlook as we see it developing in 1999. Perhaps, as I have just indicated in the answer to the previous question, there is some concern that there will be some moderation in the rate of growth and that the risks are more on the downside than on the upside. With regard to the second question, I can note that you refer to small inner circles. I was part of such a small inner circle last week, when I attended the meeting of the Ministers of Finance of the Euro-11 countries together with the Vice-President, and we did not hear any utterances or comments pointing in the direction you suggested. On the contrary, we heard a re-confirmation by the Ministers of Finance of their will to adhere to the Stability and Growth Pact.
Question: How do you think the European citizens will feel and experience what will happen after the New Year?
Duisenberg: They will feel as excited as I feel around the year-end. I do not know how they will feel. What we hope to inspire is that they, approaching that day and from that day onwards, look to the future with confidence, confidence in their own future and confidence in the European Central Bank.
Question: Mr. President, this reference value of 4 1/2% - I am wondering: with the changeover to a single currency, there has been a lot of talk about a change in this system, in structural changes, and that could have an effect on the money supply. And I am wondering what sort of assumptions there are now about how the money supply will be affected. First, are you considering it would be going up or possibly down? Second, there has been a lot of talk about the policy mix in recent weeks, and I am just wondering what are you assuming in terms of wage agreements with this reference value. We have seen agreements coming through on the order of 3.5%, e.g. in the chemical industry. Is this something you are also looking at?
Duisenberg: With regard to the uncertainties surrounding the changeover, the structure, they pertain not only to the development of the money supply, but to one thing in particular, i.e. also to the velocity of the circulation of money. The reference value, as I told you in my introductory remarks, has to be seen as the summing up or the addition of the trend rate of growth of the euro economy, which we estimate at between 2 and 2.5%, and with respect to which we have emphasised that, if the process of adjustment or change in the supply factors on the labour market structural policies were to continue, one could have a higher trend rate of growth. But this trend rate is based on past experience, with all the rigidities that were there. Then we have the trend value for prices which is defined as the rate of increase in the Harmonised Index of Consumer Prices (HICP), a rate below 2%. And, finally, on the velocity of circulation, we are also not quite certain about it. We estimate that the velocity of circulation is on a slightly downward trend of between one-half and one percentage point per year. Now, it is quite uncertain how the transition to the euro will in itself affect behavioural relations. And, in particular, more than you suggested regarding the money supply, it is quite uncertain what it will do to the velocity of circulation of money. So, we cannot do anything but assume that the trends in all three areas - the money supply, prices and velocity - will broadly continue in the future. That altogether forms the basis for our reference value, but it also forms the justification for calling it a reference value, rather than a target which it specifically is not. In practice, deviations of actual figures from the reference value over the medium term will also be evaluated and judged and can lead - but will not necessarily mechanistically lead - to monetary policy decisions.
Question (translation): Mr. President, in one month's time the European Central Bank will begin to use its powers. Some economic analysts say that you will then be the world's most powerful man in the economic field. Some European governments actually fear that happening. How will you respond?
Duisenberg: Well, I have never regarded Mr. Greenspan as the most important or powerful man in the world and neither do I regard myself - or the European Central Bank, for that matter - as, in qualitative terms, the most important man or institution in the world. We do recognise that, through our measures and through our attitude, we will have an important impact on the economic climate in the euro area. That is, I think that, if that climate were to be one of stability, continuity and growth, then we would be very satisfied and we would be all the more satisfied, the greater the extent is to which we can contribute to creating this climate.
Question (translation): Mr. Duisenberg, what do you think of the idea of the policy mix which Oskar Lafontaine launched in discussions with his statement that employment policy always also has something to do with monetary policy?
Duisenberg: No matter which Minister brought it up, my answer, in general, is that, of course, monetary policy and fiscal policy have something to do with employment policy, but I cannot but repeat what I have always said and what is said in the Treaty, namely that the best contribution monetary policy can make to the growth of the economy and to the growth of employment is to create a stable climate. A climate of price stability is the best thing we can deliver; and to the extent that we deliver price stability, then, as the Treaty says, without prejudice to the price stability, monetary policy should and will contribute to the other economic roles as specified in Article 2 of the Treaty on European Union.
Question: You mentioned tonight, as you have in the past, the importance of euro area governments engaging in structural reform in their labour and product markets. Do you see that urging governments to take actions on national territory is an important part of your role and is there a risk you'll be seen as interfering in national affairs if you continue to make those kinds of suggestions?
Duisenberg: I do see it as an important, I should say "almost" important, part of our role. Because if we don't urge governments to act in that way, who else will? And it is also an important part of our role because it is our task to help create the climate to do just that, and we feel not inhibited to point out that role that governments have to play on the basis of our analysis. Just as little as governments feel inhibited to point out the role the European Central Bank would have to play. We listen to one another, we hear one another, and we hope to come to the correct decision.
Question: I think there is strong pressure from the politicians, especially from the German Finance Minister, and how do you keep the independence of the ECB? Could you elaborate what kind of relation will be desirable?
Duisenberg: We keep and maintain the independence by strictly adhering to our mandate which includes that we are forbidden to follow instructions or suggestions from others, just as others are forbidden even to give such instructions. Apart from that, we will never shy away from a dialogue with other responsible authorities, a dialogue concerning our and other policies. So, we do participate in Euro-11 meetings; we do invite the President of the ECOFIN Council to every meeting of the Governing Council, as the Treaty prescribes. We do answer invitations and follow up on invitations from the ECOFIN Council to attend their meetings. We do anticipate so far as it goes even that the President of the ECOFIN Council has the right not only to attend the meeting of the Governing Council, but also to submit a motion for deliberation to the Governing Council. The only right he does not have is to vote on that motion.
Question: I wanted to ask you, when you said that your discussion about the rate level from the start had deepened on the broad outlook for price developments, it sounds as though the outlook is fairly favourable. How strongly should one interpret that? This is one thing I would like to ask you to talk more about.
Duisenberg: We have not reached conclusions, but we are now only four weeks away from actually entering Stage Three. And, before we go into that, we have to set the interest rate with which we will enter Stage Three. So it is only logical that our discussion, now that the moment of truth draws nearer, is intensifying and deepening and I might say livening up. But conclusions, we are not there yet.
Question: During this autumn, during the financial turbulence in Asia and Russia, the currencies in the euro area have been relatively stable, whereas currencies outside the euro area, such as the Swedish Crown, have lowered their value. The lowered value of a currency, as in the case of the Swedish Crown, does that make it more difficult if Sweden would like to join the euro area in some years?
Duisenberg: Whenever Sweden decides to join the euro area, if it decides to do so and when it decides to do so, one thing is certain: it will have to have demonstrated beforehand, a considerable time beforehand, that its exchange rate will not have been volatile vis-à-vis the euro for a prolonged period of time. That is what will be required.
Question: Though in view of the Europe-wide reform, structural reforms that you are talking about, that are taking place and the fact that the Bank of England is, if you like, a substantial shareholder in the new ECB, would it be more helpful if the Bank was actually on the inside of your Councils, rather than being sidelined, as it is at the moment.
Duisenberg: Well, apart from the Bank of England being a shareholder, although they have to pay up only 5 % of that capital subscription, so I would delete the word substantial. This is my personal opinion. I would have preferred the U.K. participating in the euro area and that's a normative political opinion which I have.
Question: What is the chance that Eurozone rates will have fully converged by the next meeting, the December 22 meeting, and what are the chances that we will get an announcement on December 22 of what the initial refinance rate will be?
Duisenberg: I cannot answer the question. I could answer the question if the date you had mentioned was 31 December and then my answer would have been that the chances are 100%.
Question: Mr. President, what about granting us the pleasure of helping us even before Christmas and making one of these long winter evenings short by holding yet another press conference for us before Christmas.
Duisenberg: On 22 December, to my recollection, that is just before Christmas, we will have a press conference.
M. Körber: Ladies and Gentlemen, I think this was a very good conclusion, because this will make sure that we meet each other here on 22 December for another prolonged winter evening, as Mr. Balkhausen put it. Thank you for coming and thank you for your patience.