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Introductory Statement (issues paper) at a dinner with members of the Internationaler Club of Frankfurter Wirtschaftsjournalisten

Speech by Jürgen Stark, Member of the Executive Board of the ECB
Frankfurt am Main, 10 July 2007

I

The external environment

  1. Global economic activity continues to be robust. For major emerging markets the indicators point to a continued expansion. Short-term indicators for the US economy continue to suggest a bottoming out of the US economy in the near future.

  2. Global inflation developments remain strongly influenced by changes in commodity prices. Overall, risks to global inflation remain on the upside.

Real economy and price developments in the euro area

  1. Recent data support the baseline scenario of a robust and broadly based expansion.

  2. With a declining unemployment rate and employment expectations pointing to continued job creation in the second quarter, the labour market situation continues to improve.

  3. Capacity utilisation survey measures point to emerging constraints in the economy.

  4. The balance of risks to the inflation outlook is clearly on the upside. Survey and hard data for input and output prices suggest price pressures both in the manufacturing and services sector. Although latest labour cost indicators continue to point to contained wage developments, a pick up in wage growth is likely over the course of 2007.

  5. Impact of global factors on domestic inflation: Downward pressure of globalisation on euro area manufacturing import prices is not yet receding.

Monetary developments and financing conditions

  1. Monetary and credit growth remain robust and continue to point to upside risks to price stability in the medium- to longer-term. The continued moderation in the growth of M1 and loans to households suggests that monetary developments are being influenced by previous interest rate increases.

  2. The real cost of financing of non-financial corporations in the euro area remains at a rather low level from a historical perspective.

II

The monetary and economic analysis of the ECB

  1. The ECB has adopted a broad based approach encompassing economic, financial markets and monetary indicators, as well as time-series models and structural models. This wealth of information is organised in terms of our economic and monetary analysis.

  2. Within the economic analysis, the Macroeconomic Projections are the main organising framework. They are largely informed by independent sources of evidence (analysis of indicators, surveys and anecdotal evidence). The macroeconomic models used within the process mainly serve the purpose of ensuring coherence.

  3. Within the monetary analysis, a thorough analysis of all indicators of monetary trends helps to identify at an early stage shifts in underlying inflation dynamics.

  4. The policy-relevant information in money regarding the outlook for price developments is in the persistent trends of monetary developments.

  5. Technological innovation, globalisation, demographics and policy reform, inter alia – are altering the behaviour of the euro area and global economies. Such structural forces are changing the way inflation is determined and the transmission mechanism of monetary policy. Obviously these forces have important implications for monetary policy. It is important that these implications encompass both the monetary analysis and the economic analysis. However, challenges are often portrayed as particularly large for the monetary analysis (notably because financial innovation is seen as undermining “money demand stability”). This is simply not correct. Structural changes have also had relatively profound implications for aspects of the economic analysis. To give two examples: (1) the impact of domestic economic slack on inflation may have diminished (“flattening of the Phillips curve”) and (2) the pass-through of exchange rate movements to domestic price dynamics has moderated. Such developments on the economic analysis side must also be better understood and factored into policy discussions. The ECB therefore constantly works on enhancing both the economic as well as the monetary analysis.

III

Globalisation and monetary policy

  1. Over the medium to long-term, inflation is a monetary phenomenon. Globalisation may only impact relative prices, over a temporary period.

  2. Evidence on the importance of global slack in the determination of inflation is not conclusive. If domestic slack is less important, emerging domestic inflationary pressures take longer to become evident. The need for a central bank to stabilise inflation expectations and act in a pre-emptive manner becomes even more important.

IV

Economic governance in the EU

  1. The EMU countries can only reap the full benefits afforded by monetary union and the single market if all political players respect the treaty and act in accordance with their mandates. The EC Treaty assigns clear responsibilities to both monetary and economic policy in the EMU. The ECB with its single monetary policy for the euro area has been assigned the task of maintaining price stability in the euro area. In contrast, economic policies are in national responsibilities. However, member states have to coordinate their measures to achieve the goals of the treaty laid down in Article 2. A further coordination of economic policies in the euro area could be fruitful exercise given the lack of possible adjustments via the exchange rate channel within the institutional framework of the monetary union. However, mandates for monetary and economic policies should not be mixed up. Price stability can only be delivered by a fully independent central bank.

  2. The European Council’s recent decision to confirm the inclusion of price stability in the list of the Union’s objectives was important to underpin the existing monetary policy framework. The EU leaders also agreed to annex a new protocol to the Treaties, in the context of the Intergovernmental Conference. This protocol underlines that an Internal Market which includes a system ensuring that competition is not distorted is indispensable for the good functioning of the EU economies.

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