Hearing at the Committee on Economic and Monetary Affairs of the European Parliament
Speech by Jean-Claude Trichet, President of the ECB, Brussels, 27 September 2010
Dear Madam Chair,
Dear Honourable Members,
We are having our regular meeting at a time of considerable progress in Europe on matters of economic governance and financial regulation. I would like to congratulate the European Parliament, and especially this Committee, on the adoption of the EU financial supervisory package. Witnessing how the Parliament has worked on this issue makes clear to me that the institution has truly made a ‘quantum leap’ in its role following the Lisbon Treaty. The European Parliament was instrumental in pursuit of an ambitious reform with a true European perspective. As a European institution, the European Central Bank very much appreciates your efforts and support in this regard.
Un autre paquet législatif va arriver sur la table de votre Commission cette semaine: la réforme de la gouvernance économique. J’ai pleine confiance en la capacité et la volonté du Parlement, et en particulier de la Commission ECON, de poursuivre une fois encore une approche résolument européenne sur ce dossier. Ici aussi, nous avons besoin d’un véritable bond en avant pour assurer un meilleur fonctionnement de notre marché unique à 27 et une totale cohésion de l’union monétaire, qui est le cœur de l’intégration européenne.
Wie üblich werde ich auch heute mit der Einschätzung des EZB-Rats zur aktuellen wirtschaftlichen Lage beginnen. Im Anschluss daran möchte ich mich auf zwei Themen konzentrieren: die Reform des wirtschaftspolitischen Rahmens der Währungsunion, und die Zukunft der internationalen und europäischen Finanzmarktregulierung.
Economic and monetary developments
Since the previous hearing in June, incoming data have been better than expected at that time. The economy grew strongly by 1.0% quarter-on-quarter in the second quarter of this year, which would correspond to an annualised rate of growth of around 4%. Looking ahead, we expect the recovery to proceed at a moderate pace, with a positive underlying momentum but also with continuing uncertainty surrounding the outlook.
The annual rate of inflation in the euro area stood at 1.6% in August, a slight decrease from the figure of 1.7% in July. This is in line with our expectations. Looking ahead, the rate of inflation could increase slightly in the short term, but it should remain moderate over the policy-relevant medium-term horizon. In our view, risks to this outlook are tilted slightly on the upside, but euro area inflation expectations remain firmly anchored in line with our definition of price stability.
Our monetary analysis confirms that inflationary pressures over the medium term remain contained. This is reflected in weak growth of money and credit. The subdued growth in loans conceals the fact that growth is positive for households but – in line with patterns observed in earlier recoveries – still negative for enterprises.
As regards our non-standard measures, we decided earlier this month to continue conducting our regular refinancing operations with fixed interest rates and full allotment of the amounts demanded by euro area banks, at least until mid-January 2011. We will also carry out three additional fine-tuning operations in the remainder of this year when the 6-month and 12-month refinancing operations mature, in order to ease the transition to the regular refinancing operations. Through our Securities Markets Programme we have continued to intervene in moderate amounts in some segments of euro area bond markets. As I have explained to Parliament before, this intervention is designed to help improve the functioning of the transmission of our monetary policy.
Overall, the Governing Council views the current monetary policy stance as accommodative. Given moderate price developments and firmly anchored inflation expectations, the ECB’s key interest rates are appropriate. Let me re-emphasise that all non-standard measures taken by the Eurosystem during the period of acute financial market tensions are fully consistent with our price stability mandate and they are temporary in nature.
Turning to budgetary policies, a return to credible, sound and sustainable fiscal positions is urgently needed. We call on all countries to undertake ambitious fiscal consolidation. Positive fiscal developments, which might arise, for example, from higher-than-expected economic growth, should be used to make faster progress in this respect.
Let me now turn to the specific topics, beginning with the reform of economic governance.
II. Economic governance – update on the state of play
President Van Rompuy has recently informed you about progress made by the Task Force under his chairmanship. Work has advanced on some issues, notably on the European Semester. On other issues, such as reinforced budgetary surveillance and a new macroeconomic surveillance framework, more ambition is required. Both for the ECB and for euro area governments, the central objective must be to achieve all that is necessary to ensure the smooth functioning of our monetary union.
Once the European Commission has presented its legislative proposals, the European Parliament, as co-legislator, will have the responsibility of designing an effective framework for economic governance. The negotiations over the supervisory package have demonstrated that the Parliament is not willing to accept compromises based on the “lowest common denominator”.
Ideally, a ‘quantum leap’ in strengthening EU and euro area economic governance would require a Treaty change. This means that, short of an immediate or rapid Treaty change, we have to exploit to the maximum all the possibilities for EU secondary legislation under the current Treaty to achieve this ‘quantum leap’. The ECB counts on the support of the Parliament in its belief that the appropriate reform of economic governance – especially of the euro area – needs to exploit to the full the scope offered by the Lisbon Treaty.
ECB Board member Lorenzo Bini Smaghi has recently presented to you our position on the various aspects of economic governance reform, including a number of important issues related to crisis resolution. He has also outlined the economic rationale underlying our position. Let me today stress what we consider to be indispensable elements of a reformed framework of fiscal and macroeconomic surveillance, which is the centre of ongoing discussions.
The new framework should be well targeted, notably on countries with high debt levels and significant losses of competitiveness. Public debt levels, as well as the evolution of deficits, can be a source of financial instability and contagion across countries sharing a common currency. So, debt should receive a reinforced status in budgetary surveillance, in both the preventive and corrective arms of the Stability and Growth Pact. I am concerned that substantial progress is still needed to give public debt the prominent role it has in the letter of the Treaty.
Progressive losses of relative competitiveness within the monetary union are another source of severe instability. A new system of surveillance to check and correct macroeconomic imbalances where they are emerging is needed. This idea has garnered support in principle, but concrete measures to make it operative and sufficiently binding are still to be agreed.
Once imbalances and vulnerabilities have been identified, there must be effective follow-up, including dedicated country missions, specific policy recommendations, increased public peer pressure and eventually a set of clear adjustment measures. Since the vulnerabilities of any one member can have direct effects on other members, this surveillance framework must be supported by a graduated system of incentives and sanctions, which can be activated sufficiently early in the process and which should be commensurate with the severity of the infringement.
Indeed, a core, absolutely indispensable, element of an effective surveillance mechanism is a functioning mechanism of incentives and sanctions – both financial and non-financial – in particular for the countries in the monetary union. I am sure that the Parliament will adopt an ambitious stance on this matter.
The relevant procedures should be “quasi-automatic”, based on Commission proposals rather than recommendations. The ECB has proposed a reversal of the voting procedures that lead to the adoption of incentives and sanctions. Such decisions would be considered adopted unless a qualified majority in the Council were to vote down the Commission proposal. The role of the Commission would therefore be significantly strengthened.
Moreover, in order to internalise the requirements of membership in monetary union, the European rules need to be “owned” by the Member States. Strong national fiscal frameworks, including the creation of independent monitoring institutions and the adoption of national fiscal rules that reflect the requirements of the Stability and Growth Pact, are essential steps in this regard.
Surveillance cannot be effective unless it can rely on complete and accurate statistics. We call for a strengthening of the duties and powers of the European Statistical System, and a reinforcement of the mandates for data collection, adequacy of resources, accuracy and relevant auditing. Changes must go beyond the recent Council Regulation on Eurostat, which focuses on statistics for the excessive deficit procedure.
Crucially, the independence of analysis, judgement and surveillance should never again be put into question. I expect that the Commission will come forward with concrete proposals for governance reform to address this issue. To reinforce independent fiscal monitoring and assessment further, the ECB is also in favour of an advisory body of “wise men and women” at EU level, who would provide a “second opinion”.
To summarise, the “checklist” for a review of proposals for euro area governance would be affirmative answers to the following five questions:
First, does the fiscal surveillance framework effectively address the weaknesses that might give rise to a future crisis?
Second, is there a macroeconomic surveillance framework that can trigger effective adjustment of imbalances, of external indebtedness and of losses of competitiveness?
Third, are the enforcement mechanisms of fiscal and macroeconomic surveillance quasi-automatic and the enlarged sanctions sufficient to protect other members and the monetary union as a whole?
Fourth, does the framework include appropriate independence in surveillance, and impeccable quality checks of analysis and statistics?
And finally: are the new principles of economic governance anchored within national frameworks?
We will follow very closely during the next days the responses to those questions given by the Van Rompuy Task Force on the one hqnd, and by the College of the Commission on the other hand. I hope that they will be up to the crucial challenges at stake. If it were not the case, and if the responses were too timid in our opinion, we would make clearly the point and inform your Committee.
III. Financial sector issues
Let me now briefly turn to the last topic we selected, namely financial sector issues.
There is considerable political momentum at global and EU level for strengthening regulation and oversight. We need to sustain this momentum because there is still a great deal of work to do, particularly in terms of implementation.
Basel III is a key achievement in this context. It forms the core of the financial reform, striking the right balance between the overall objective of strengthening the resilience of the financial sector and the need to support lending to the real economy.
I cannot speak about supervision without, once again, commending the European Parliament for the adoption of the EU supervisory reform package. The establishment of the European Systemic Risk Board and the European Supervisory Authorities, coupled with the changes to the Capital Requirements Directive, should make the regulatory and supervisory framework more robust. It should enable supervisors and regulators to steer the financial sector towards a more sustainable condition: to be truly serving the needs of the real economy, to withstand shocks including systemic ones, and to avoid dangerous imbalances and excesses. As the date of establishment of the ESRB is approaching, the ECB is reaching out to ESRB members to ensure that the new body will become fully operational as of 1 January next year.
The new supervisory architecture is only one aspect of the financial reform agenda. For example, the Directive on Alternative Investment Fund Managers is under consideration to ensure proper management of alternative investment vehicles. Here, we believe it is equally essential to ensure appropriate and timely reporting to authorities on investment activities so as to control systemic risk. Progress on the recent legislation on short selling and OTC derivatives is equally essential, to ensure proper market functioning and regulatory oversight.
Finally, moral hazard posed by systemically important financial institutions needs to be kept in check, and the problem of adverse incentives stemming from the over-reliance on external ratings also needs to be addressed.
This is what I have in mind when I say that we need to maintain the momentum on financial sector reform. It will be a long process, and authorities will achieve the objectives that I believe our citizens are calling for only with sustained and indefatigable efforts.
Thank you for your attention. I am now at your disposal for questions.