Hearing at the European Parliament's Committee on Economic and Monetary Affairs and Industrial Policy on 8 December 1998 in Brussels
Introductory statement by Dr. Willem F. Duisenberg, President of the European Central Bank
It is a great privilege for me to meet this Committee for the first time in my capacity as President of the European Central Bank (ECB). As was the case when I previously appeared before the Sub-Committee on Monetary Affairs, I hope that we shall have a frank and fruitful exchange of views. Since September, when I reported to your Sub-Committee, the European System of Central Banks (ESCB) has continued to make further progress in finalising the preparations for the start of Monetary Union on 1 January 1999, and I am happy to say that we are practically ready. The Governing Council has continued to have a very heavy agenda, dealing in the main with the specification of the Eurosystem's monetary policy strategy, the regular monitoring of economic, monetary and financial developments as well as issues of a technical nature and legal implementation issues. Specifically, the Governing Council has met on three occasions since September. Following these meetings, the Vice-President and I have reported on the results of our deliberations at press conferences which were followed by question and answer sessions. Moreover, the statements made there were immediately made available in the form of press releases, together with various other documents explaining issues in more detail. The immediate release of this information to the press is a practice which I intend to continue in the future. From the start of next year, the Governing Council will meet every fortnight. The first meeting in each month will be followed by a press conference. We intend to publish a monthly bulletin, in the context of which we will explain in detail both our monetary and economic analysis and the assessment underlying our monetary policy decisions. Moreover, the members of the Executive Board also intend to be very active in giving speeches and interviews. The task of communicating and explaining our monetary policy is being taken very seriously. I should like to focus my remarks today on three areas, in particular. First - given its importance - I shall outline the monetary policy strategy which has been adopted by the Governing Council of the ECB for Stage Three of Economic and Monetary Union (EMU). Second, I shall discuss the view of the Governing Council on the current economic situation in the euro area and on the outlook. Third, I shall summarise our recent preparatory work for the start of the single monetary policy. After that, I shall of course be happy to answer any questions you may have regarding these and other matters.
A. The monetary policy strategy in Stage Three
You are aware of the fact that the primary objective of the single monetary policy, as laid down in the Treaty, is to maintain price stability. In order to give clear guidance with regard to expectations of future price developments, and in the interests of accountability and transparency, it was agreed by the Governing Council to adopt a quantitative definition of this objective. Price stability has been defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Needless to say, a persistent fall in the price level would not be consistent with the goal of price stability. The annual rate of inflation, measured on this harmonised basis, was 1.0% in October 1998. Overall, the objective of the ESCB is to maintain an environment of stable prices in the medium term. This reflects the need for monetary policy to be forward-looking, and to have a medium-term orientation. It recognises the reality that monetary policy is not able to control short-term movements in the price level. In October, the Governing Council announced that the monetary policy strategy would consist of two key elements and, just a week ago, it specified the remaining elements.
First, a prominent role has been assigned to money, as is reflected in the announcement of a quantitative reference value for the growth of a broad monetary aggregate, namely M3. The first reference value has been set at an annual rate of 4 1/2%. It will be reviewed in December 1999. The reference value for M3 is consistent with the maintenance of price stability, while allowing for sustainable output growth. This rate was derived by assuming that the medium-term trend growth rate of real GDP in the euro area is estimated to be in the range of 2-2 1/2% per annum and the medium-term trend decline in the velocity of circulation of M3 in the range of between 1/2-1% each year. In addition, it should be pointed out that monetary policy will not react to deviations of monetary growth from the reference value in a "mechanistic" way.
The second key element of the monetary policy strategy is a broadly-based assessment both of the outlook regarding price developments and of the risks to price stability in the euro area as a whole. The Governing Council recognised that it would be important, in parallel to the assessment of money growth in relation to the reference value, also to look at a wide range of other economic and financial indicators. The systematic analysis of all other relevant information about economic and financial conditions is designed to ensure that the Governing Council is as well-informed as possible when taking decisions about monetary policy.
B. Current economic developments and outlook
Against this background, the Governing Council discussed recent economic, monetary and financial developments in depth at its last meeting. The discussion included the consideration of available projections for both the world economy and the euro area in the next two years. Overall, these projections point to some deceleration of real GDP growth in the euro area in 1999, following growth in 1998 of just below 3% on the basis of current evidence. However, the general view is that this slowdown will be temporary. The Governing Council considers that the risks to economic activity continue to be on the downside. One reason for this is the continued uncertainty regarding the global environment. But there have been some positive signs lately, as world financial markets appear to have been calmer and less volatile in November. The Governing Council expressed its concern that, unless confidence is supported by appropriate economic policies, there could be a negative impact on domestic demand. In addition to the maintenance of a stability-oriented monetary policy, this requires, in particular, the conduct of fiscal policies which are consistent with the Stability and Growth Pact, wage developments which are in line with productivity gains and structural reforms in labour and product markets which will help to foster competitiveness and profitability in the corporate sector. This, in turn, will promote investment within the euro area and encourage employment growth. The main contribution that monetary policy can make to achieving sustained economic growth, higher employment levels and better living standards is to pursue the objective of maintaining price stability over the medium term. This objective was at the centre of our discussions regarding the appropriate level of the Eurosystem's key interest rate for the euro area at the start of Stage Three. When the discussion of the appropriate level of interest rates was deepened further in early December, the Governing Council considered both the monetary data and the prospects for continued low increases in the HICP. At the present juncture, preliminary estimates put the average of the twelve-month growth rates of M3 for the last three months, up to October, at around 4.5%. Over the last two years, the annual rate of M3 growth in the euro area has fluctuated in a range of 3.5-5.5%. The Governing Council has come to the conclusion that this monetary trend currently appears to be broadly compatible with continued price stability in the euro area. If import prices remain subdued and wage developments continue to be moderate, then the rate of increase in the HICP is expected to stay below 2% in the foreseeable future. This prospect of low inflation is a view which financial markets appear to share, with average long-term interest rates in the euro area falling to a level just above 4% by the end of November. The Governing Council also considered the development of budgetary positions, emphasising that they are still far from being close to balance or in surplus and that debt ratios have remained at very high levels in many Member States. Any relaxation of the fiscal policy stance in the euro area, or a tendency to alter the strategy embodied in the Stability and Growth Pact would place the credibility of the euro and price stability at risk. Overall, the Governing Council has judged that the broad outlook for maintaining price stability is favourable. Against this background, there was a co-ordinated reduction of key interest rates by all national central banks in the euro area on 3 December 1998, reflecting a consensus reached in the Governing Council on the basis of a common assessment of the economic, monetary and financial situation in the euro area. Whereas all indicators suggest a favourable broad outlook for price stability, prospects for growth in the euro area have weakened, and the international environment is still dominated by uncertainty, so that the risks appear to be predominantly on the downside. The co-ordinated move on interest rates demonstrated that, in effect, Monetary Union has already begun. Moreover, this joint reduction in interest rates has to be seen as a de facto decision about the level of interest rates with which the euro area will start Stage three of EMU and which it intends to maintain for the foreseeable future.
C. Preparatory work for Stage Three
I should now like to elaborate briefly on some decisions other than those on the monetary policy strategy which have been taken by the Governing Council since September in the context of the preparatory work for Stage Three of EMU. First, the framework for our monetary policy instruments was completed with the specification of some final elements of the minimum reserve system. The ESCB will apply a reserve ratio of 2% on a specified liability base. An ECB Regulation was published last week, with which the features of the ESCB's minimum reserve system have been set out in a legally binding text. Several major decisions were also taken with respect to TARGET, the real-time gross settlement system established by the ESCB. The ECB has published the third progress report on the TARGET project, providing further details on the legal framework and its technical implementation. The final text of the TARGET Guideline was adopted, and, last week, the TARGET Agreement was signed by the Governors of all 15 EU central banks and the President of the ECB. TARGET now stands ready to fulfil its task as the exclusive payment system to be used for all monetary policy-related operations with the Eurosystem as from the beginning of Stage Three. The Governing Council also approved the Guideline for the initial transfer of foreign reserves from the euro area national central banks to the ECB, as well as a set of legal documentation relating to the management of the ECB's foreign reserves, which specifies the roles which the ECB and the euro area national central banks respectively will play in this regard. With respect to the management of domestic assets and liabilities, a further ECB Guideline was adopted, which sets out the reporting obligations of euro area national central banks vis-à-vis the ECB. Whenever they exceed a certain amount, such transactions are subject to prior approval by the ECB. These provisions are necessary to ensure the singleness of the ECB's monetary policy. In order to strengthen the framework set up to prevent counterfeiting, the Governing Council confirmed the decision taken by the European Monetary Institute (EMI) to establish a Currency Analysis Centre and a Counterfeit Currency Database, which will store technical data relating to counterfeit euro banknotes and coins. The contents of the database will be made available to all national central banks of the EU Member States and to the respective law enforcement bodies involved in combating counterfeiting. Let me close my introductory statement with a few remarks on the preparations for the changeover weekend, the period from 31 December 1998 to the early morning of 4 January 1999. You are aware of the fact that, following the publication of the euro conversion rates, banking and financial institutions will have to finalise a broad range of migration operations to the euro under severe time constraints. Likewise, the ECB and the euro area national central banks will have to complete the final migration of their IT systems and operational procedures from the national currencies to the euro so as to ensure the availability of the entire complex infrastructure to the markets by the morning of 4 January 1999. In order to support a smooth transition to the euro, the Governing Council has set up a "Changeover Weekend Committee" which will organise the monitoring of developments regarding the final migration to the euro, both prior to and during the changeover weekend. An early-warning system has been established, consisting of central communication points at the ECB and at the euro area national central banks, which will monitor all relevant events which occur both within and outside the ESCB. In the case of unexpected events occurring in the banking and financial industry during the changeover weekend, the Governing Council will be prepared to take appropriate action. In such an event, the ECB will co-operate closely with other public authorities to orchestrate the necessary policy responses. Thank you for your attention. I am now at your disposal to answer any questions you may have.