Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,Lucas Papademos, Vice President of the ECBFrankfurt am Main, 10 April 2008

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. Let me report on the outcome of our meeting, which was also attended by Commissioner Almunia.

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. The latest information has confirmed the existence of strong short-term upward pressure on inflation. In fact, we are experiencing a rather protracted period of temporarily high annual rates of inflation, resulting mainly from increases in energy and food prices. The latest information also clearly confirms our assessment of prevailing upside risks to price stability over the medium term, in a context of continuing very vigorous money and credit growth. The economic fundamentals of the euro area are sound. Incoming macroeconomic data continue to point to moderate but ongoing real GDP growth. However, the level of uncertainty resulting from the turmoil in financial markets remains unusually high and tensions may last longer than initially expected. Against this background, we emphasise that maintaining price stability in the medium term is our primary objective in accordance with our mandate. The firm anchoring of medium to longer-term inflation expectations is of the highest priority to the Governing Council and there is certainly no room for complacency in this regard. We believe that the current monetary policy stance will contribute to achieving our objective. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We will continue to monitor very closely all developments over the coming weeks.

Allow me to explain our assessment in greater detail, starting with the economic analysis.

According to Eurostat’s second estimate, quarter-on-quarter real GDP growth in the fourth quarter of 2007 was 0.4%, following 0.7% in the previous quarter. The latest information on economic activity also underpins previous expectations of moderate but ongoing growth in the first quarter of 2008. Overall, the euro area economy has sound fundamentals and does not suffer from major imbalances.

Looking ahead, both domestic and foreign demand are expected to support ongoing real GDP growth in the euro area in 2008, albeit to a lesser extent than during 2007. While moderating, growth in the world economy is expected to remain resilient, benefiting in particular from strong growth in emerging economies. This should continue to support euro area external demand. Meanwhile, investment growth in the euro area should provide ongoing support to economic activity, as capacity utilisation is high, profitability has been sustained and there are no significant signs of supply constraints on bank loans. At the same time, as a result of the improved economic conditions and wage moderation, employment and labour force participation have increased significantly and unemployment rates have fallen to levels not seen for 25 years. While being dampened by the impact of higher energy and food prices on purchasing power, consumption growth should continue to contribute to economic expansion, in line with real disposable income growth.

The uncertainty surrounding this outlook for economic growth remains high, and downside risks prevail. The risks relate mainly to the financial market turbulence, which could last longer than initially thought and could have a broader than currently expected impact on the real economy. Moreover, downside risks also stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices, as well as from protectionist pressures and the possibility of disorderly developments owing to global imbalances.

With regard to price developments, according to Eurostat’s flash estimate, the annual HICP inflation rate was 3.5% in March 2008, after 3.3% in February. This outturn confirms the ongoing strong and lately further increasing short-term upward pressure on inflation, resulting largely from sharp increases in energy and food prices in recent months. Looking ahead, the annual HICP inflation rate is likely to remain significantly above 2% in the coming months, moderating only gradually over the course of 2008. Accordingly, we are currently experiencing a rather protracted period of temporarily high annual rates of inflation.

The risks to the outlook for inflation over the medium term remain clearly on the upside. These risks include the possibility of further rises in energy and food prices, as well as of increases in administered prices and indirect taxes beyond those foreseen thus far. Most importantly, there is a risk that price and wage-setting behaviour could add to inflationary pressures. In particular, the pricing power of firms, notably in market segments with low competition, may prove stronger than currently expected, and stronger than expected wage growth may emerge, taking into account high capacity utilisation and tight labour market conditions.

Against this background, it is imperative that all the parties concerned meet their responsibilities. Second-round effects stemming from the impact of higher energy and food prices on wage and price-setting behaviour must be avoided. In the view of the Governing Council, this is of key importance in order to preserve price stability in the medium term and thereby the purchasing power of all euro area citizens. The Governing Council is monitoring wage negotiations in the euro area with particular attention. In this context, the Governing Council is concerned about the existence of schemes in which nominal wages are indexed to consumer prices. Such schemes involve the risk of upward shocks in inflation leading to a wage-price spiral, which would be detrimental to employment and competitiveness in the countries concerned. The Governing Council therefore calls for such schemes to be avoided.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. Annual M3 growth remained very vigorous at 11.3% in February, supported by the continued strong growth of MFI loans to the private sector. While annual M1 growth has moderated further in recent months, as higher short-term interest rates have increased the opportunity cost of holding the most liquid components of M3, the growth of time deposits remains extremely strong. This reflects the relatively flat yield curve, which has made it more attractive to hold monetary assets remunerated at close to market rates than to hold riskier, longer-maturity instruments. Overall, the impact of the flat yield curve and a number of other temporary factors suggest that annual M3 growth currently overstates the pace of the underlying monetary expansion. However, even after taking such effects into account, a broad-based assessment of the latest data confirms that the underlying rate of money and credit growth remains strong.

The growth of household borrowing has moderated over recent months, reflecting the impact of higher key ECB interest rates since December 2005 and cooling housing markets in several parts of the euro area. However, the growth of loans to non-financial corporations has remained very robust. Bank borrowing by euro area non-financial corporations grew at an annual rate of 14.8% in the year to February 2008. Overall, bank loans to the domestic private sector have grown at around 11% on an annual basis for the past two years.

For the time being, there is little evidence that the financial market turbulence seen since early August 2007 has strongly influenced the overall dynamics of broad money and credit aggregates. Notwithstanding the tightening of credit standards reported in the bank lending survey for the euro area, continued strong loan growth to non-financial corporations suggests that the supply of bank credit to firms in the euro area has not been significantly impaired by the financial turmoil thus far. Further data and analysis will be required in order to obtain a more complete picture of the impact of the financial market developments on banks’ balance sheets, financing conditions and money and credit growth.

To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment that upside risks to price stability prevail over the medium term, in a context of very vigorous money and credit growth and with no significant signs of supply constraints on bank loans to households and non-financial corporations. The economic fundamentals of the euro area are sound. Incoming macroeconomic data continue to point to moderate but ongoing real GDP growth. However, the level of uncertainty resulting from the turmoil in financial markets remains unusually high and tensions may last longer than initially expected. Against this background, we emphasise that the firm anchoring of medium to longer-term inflation expectations is of the highest priority to the Governing Council. We believe that the current monetary policy stance will contribute to achieving this objective. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We will continue to monitor very closely all developments over the coming weeks.

Regarding fiscal policies, the intentions reflected in the latest round of stability programmes imply a rise in the euro area general government deficit ratio in 2008. Further fiscal pressures are likely to arise as overly optimistic macroeconomic assumptions are already being revised downwards and political demands for fiscal loosening are increasing. In this situation, countries with fiscal imbalances are urged to make further progress with structural consolidation, in line with the requirements of the Stability and Growth Pact. At the current juncture, particularly prudent and stability-oriented fiscal policies would also contribute to containing inflationary pressures.

Turning to structural reforms, we welcome the launch of the 2008-10 cycle of the renewed Lisbon strategy for growth and jobs by the European Council. The favourable labour market trends in the euro area suggest that economic reforms are paying off. However, many challenges remain as overall employment is still below the Lisbon target of 70% and unemployment is still unacceptably high. Moreover, productivity growth remains weak, constraining general income growth. Therefore, we strongly encourage euro area countries to increase reform efforts, in particular to foster market integration and to reduce rigidities in product and labour markets that restrict competition, employment flexibility and wage differentiation, and we support them in these efforts. They would not only promote employment and support potential growth, but would also contribute to moderating price pressures.

We are now at your disposal for questions.

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Question: With regard to the financial crisis, I think it is fair to say that it has already lasted longer than many anticipated. Yesterday, the German Finance Minister, Peer Steinbrück, suggested that it might well last into 2009, or through 2009, and the continuing tightness in the money market seems to suggest that, too. You came out with a six-month repo agreement this week that was heavily over-subscribed, and you have already seen what the bid rates were. Can we expect more longer-term repos to ease the tension and put more confidence in the money market, perhaps even a pre-announcement of a repo programme of three and six-months repos; and second, it is all very well to keep on saying “we need to avoid second-round effects on the economy and on inflation”, but if we see the wage demands and, indeed, the wage settlements occurring in countries like Germany, but not only Germany, haven’t we already been seeing these second-round effects for some time?

Trichet: With regard to the financial turbulence, you know that we have always said that it was a very significant market correction, with episodes of turbulence and a very high level of volatility, and that it was ongoing. From the very beginning, our judgement was that it was very serious and that it was an ongoing process – remember that we were the first in the world to take very bold decisions to cope with what we considered to be a very serious market correction.

As regards our recent decisions, you mentioned that the Governing Council of the ECB had decided to embark on a six-month refinancing operation and that it had been oversubscribed. That is true, and it meant that there was high demand for this kind of refinancing. And we are looking at it very carefully. We will continue to do what we judge to be appropriate, utilising the instruments that have been at our disposal since the very beginning of the ECB. It is the mark of the ECB that we have had the appropriate instruments right from the beginning of the turbulent episode that we are presently observing, unlike other central banks. We will continue to look at it carefully. I don’t want to suggest that we will take any new decisions at this stage.

On your question regarding second-round effects, you know that, for us, it is key to live up to our mandate: we have to deliver price stability in the medium term, in line with our definition, and to continue to solidly anchor inflationary expectations. This is essential, first, to deliver price stability, second, to permit the financial markets and the money markets to incorporate a low level of inflation in the various medium and long-term market interest rates. In that way, we are contributing in an appropriate manner to calming down the financial markets. I insist on that point: by solidly anchoring inflation expectations, we are making a major contribution to financial stability, and to the orderly functioning of markets. As regards price settings and wages you know that we have always recommended moderation. This recommendation was for all countries and all social partners in the euro area. At this stage, first, we will reinforce our call for social partners to be responsible. The second-round effects that we observed in the first and second oil shocks created mass unemployment in Europe. Before the second-round effects following the first oil shock, there was no mass unemployment in Europe – all economies were close to full employment, or at full employment. So, it is very serious. It is very serious for us to deliver price stability and for protecting against inflation all economic agents, households, in particular the most vulnerable and the poorest of our fellow citizens, because they cannot protect themselves against inflation. It is also extremely important for job creation, and for preserving the first success of the euro since its creation, namely a very dynamic job creation. Once more, we are making a very strong call on all social partners in Europe.

Question: The euro is dropping against the dollar, so the markets are interpreting your remarks as the ECB being slightly more concerned about growth than inflation. Not more concerned about growth than inflation, but to have increasing concerns about growth, and that you have changed your language a little bit. You have said that tensions may last a little bit longer than anticipated. Interest rate futures before the press conference today suggested that markets had all but priced out interest rate cuts this year. Are you still comfortable with that stance? And my second question would be: were there any calls for interest rate cuts or indeed interest rate increases today?

Trichet: On your first question: As you know, I never comment, on the day to day evolution of markets in general, and much less so in real time at this very moment! That would be very strange. I would only say that the sentiment of the Governing Council is today the same as in our last meeting. So if there is any interpretation that it goes in another direction, it would be a wrong interpretation. On your second point, we were unanimous in taking that decision after due meditation and discussion of the situation,. As was the case during the last meetings of the Governing Council, it was obviously very complex, multi-dimensional discussion. After weighing up all the elements of the situation, we were unanimous in maintaining rates at 4%.

Question: I wondered if you could elaborate on this disconnect between ample credit growth and tightening lending standards. This is something which I fault us for not looking at more closely so far, but why exactly is this happening? I mean, a reasonable explanation here is that banks are looking at their lending standards and have concluded that they were not so bad after all, and that with tightened standards they have actually made fairly prudent extensions of credit in the past, which would obviously be a positive piece of news. But I wondered if you could give us some sort of insight into why these two metrics seem to diverge so much these days. And my second question is: having a masochistic streak, I am going to ask you about currencies, but in a way I hope you would feel in a position to answer. Obviously, we all know that an economy imports disinflation when the currency appreciates. There is a view out there that this relationship is not what it once was and is in flux, or at the very least is frequently assumed to be stronger than it is. I wonder if you have any views on this that you would like to share with us?

Trichet: On your first question, the bank lending survey undoubtedly indicates that banks are tightening their credit standards, and we have no reason to call that into question. It is clearly what it is telling us. On the other hand, as you have mentioned, we see very dynamic growth continuing in outstanding loans, in particular, as I mentioned in the introductory statement, as regards non-financial corporations, where the figure jumped to 14.8%. This is a magnitude of three times GDP in value terms for these particular outstanding loans. And it is more than last time. The turbulence started in August last year and we still see this continued dynamism. We do not think that it comes from a repatriation of instruments that were off-balance-sheet and are coming onto the balance sheet. Our staff who are analysing the situation do not see evidence of that. It might come from the fact that a number of firms want to be as liquid as possible and so are drawing from their credit lines, standby credit, confirmed credit. That can be understood in the present circumstances. It could also be that they are embarking less on issuing instruments like bonds and commercial papers and have less access to stock issuance, and prefer to draw from banking loans. So there is probably a certain degree of substitution. But what we have in front of us and what we have to take into account as an important counterpart of the monetary aggregates is this dynamic outstanding loan to the corporate sector I mentioned. As I said, we continue to do a lot of work to understand better what the underlying factors are that explain this phenomenon. We do not observe this phenomenon with regard to households. There is a continuing slowdown of the growth of households’ outstanding loans, and also a continuing diminishing of credit for housing. As regards the exchange markets, you asked the theoretical question of the pass-through and of what happens in the domestic economy when you have moves in the exchange rates. It is a very interesting question. It is true that it looks to be very much less acute and significant in comparison with what we observed perhaps twenty years ago, or even perhaps ten years ago. This is a matter for reflection and meditation, but as you suggested, I am not particularly eloquent on the exchange rates. And I will remain disciplined, because in this domain verbal discipline is absolutely of the essence.

Question: First, if my calculations are right your swap line with the Fed is now fully drawn down. Has the Governing Council given any thought to expanding that line, and could you give us a sense of whether you still see extraordinary pressure on dollar funding markets in the euro zone? Secondly, does the Governing Council have an opinion on a subject that’s been much discussed recently which is whether or not coordinated action among global central banks is required to staunch the ongoing credit crisis in the short term and whether measures such as outright purchases of mortgage-backed securities are worth considering? And finally, one of your colleagues recently commented that the Federal Reserve’s “risk management” approach to monetary policy – he commended that approach but said it wouldn’t suit the ECB and the euro zone for a number of reasons including lower exposure of euro zone banks to sub-prime, lower debt levels and a weaker transmission of financial shocks to the real economy. Given the fact that you’ve said that you expect the financial turbulence to last perhaps longer, does that argument express the sentiment of the Governing Council accurately?

Trichet: On the accord that we have with the Federal Reserve and that other central banks also have with the Federal Reserve, as you know we have this accord on an ongoing basis. So we will judge the situation, and if we judge at any time that there is no new need for that accord to function, we will interrupt it. But at this stage I would say we certainly do not see that to be obvious, so we will continue to participate in this agreement at this stage. On the coordinated action of central banks, of course this swap agreement with the Federal Reserve is a good example of such coordinated action. We started this action, as you remember, last year. So it’s an ongoing process. In a way there has been another sort of coordinated action because when I look at what has been done by other sister central banks, I see that they have very much improved their own set of tools and instruments in order to be as able as we have been since the very beginning to cope with the unexpected tensions and unexpected challenges that we all have had to cope with. I really believe that as regards the functioning of the money market it’s very important that the central banks remain in close contact, as they are. It’s obvious when you look at certain indicators that there is some kind of arbitrage, over the Atlantic, for instance. As regards the three-month interbank money market and the overnight swap interest rates in three months’ time, we have exactly the same kind of spreads, and that says something about the kind of challenges we all have to cope with. Let me mention again that as far as we are concerned, we make a clear distinction as regards what we need to do to deliver price stability and be credible in the delivery of price stability on the one hand and our responsibility as regards the smooth functioning of the money market on the other hand. We have made that distinction since the very beginning, since the first day, we have taken seriously the challenge that we have had to cope with. We have been bold and I would say with the benefit of hindsight everybody recognises that our analysis was lucid. But since the first day we have also said that we have our monetary policy stance, which is designed to deliver price stability, and once the interest rate is decided then we implement our monetary policy with a view to maintaining the very short-term interest rates at the level of our decision whatever the tensions are, whatever the challenges are. As regards your last point I have said often that we are, on the two sides of the Atlantic, facing different economies, different economic structures, different levels of flexibility of the economies, and different shocks. I have said that we are also facing different imbalances and, to be clear, we are not imbalanced as regards investment and savings on this side of the Atlantic, while there is obviously a big difference between savings and investment on the other side of Atlantic. So all this makes the two economies, the various shocks they have to cope with, and the reaction to shocks in the two economies different, and that’s the reason why, again, as regards the ECB’s Governing Council, we have our own response to the present situation. I think we should not overestimate the difference that exists between our own response to what we have in front of us and what the US Fed has in front of it. What counts for us – it’s clear – is that we have a mandate, we have one needle in our compass, we do not have two needles in our compass. We have to deliver price stability, and we believe – not only in Europe but in a large part of the world – that by delivering price stability and being credible in the delivery of price stability we not only deliver price stability but also create the conditions for job creation, for sustainable growth and, particularly in this period of turbulence, also to calm down the financial markets by solidly anchoring the inflationary expectations that are embedded in medium and long-term market interest rates. And let me again mention the fact that, with this mandate for the central bank, we created 15.7 million jobs in the euro area from 1 January 1999, the start of the euro, up to the end of 2007. 15.7 million jobs, which is more than three times as many as during the equivalent period of nine years before the euro was introduced and more than in the United States. This is not necessarily very well known but is the reality of the figures and of the facts.

Question: Can I just follow up on my colleague’s question earlier? You did not answer the question about whether you thought the options, such as the outright purchase of mortgage-backed securities, was an option for central banks. Just a couple of other things as well: on the bank lending survey, if I am right, we are about due the latest one. Did you have a preview of that at today’s meeting? Can you give us some flavour of what it said and whether it is still consistent with your statement that there are no significant signs of supply constraints on bank loans? And then on exchange rates, can I ask about the euro-sterling exchange rate, which we have not heard you talk about at all? Would you describe recent movements in the sterling-euro exchange rate as excessive? And do they pose – given the size of the UK as a trading partner for the euro zone – do they pose a risk to euro zone growth?

Trichet: On your first point, we do not envisage at all the solution that you have been mentioning, and, as far as we are concerned, we consider that we have in our framework all the instruments that are necessary. As I said, we did not invent any new instruments, we did not enlarge the eligibility of the collateral of our own refinancing operations and, at this stage, I would say that we are reasonably satisfied with the present framework. Of course, I do not exclude any further decision that we could take when the time comes: we will follow the situation cautiously, but at this stage, there are absolutely no such intentions.

As regards the bank lending survey, we have no anticipation of what we could see in the future. I would say that I only fully confirm what I have already said. It seems to me very normal, in the present situation that the banks are more cautious, more attentive, they look at the credit risk with great caution and, so, I am not surprised at all by the response that we are receiving from the banks. And, again, still we have this level of growth of outstanding loans, which is very important. And we have to take this as a given, as these are the figures that we have in front of us. I gave you one explanation, perhaps we have other explanations. It relies very much, to my understanding, on the fact that demand from the corporate sector is strong.

Question:Did you publish a new bank lending survey today?

Trichet: No.

As regards your point on the exchange rate, let me say again – because I would not like you to interpret my silence on the exchange rate – that I deplore the excessive volatility of exchange rates. I was concerned by the recent excessive moves, and, as I have already said – but it is even truer, certainly at the moment – I have observed with great attention and interest what has been said by the US authorities, including the highest authority, which is the President of the United States, as well as the Secretary of the Treasury and my colleague Ben Bernanke. On the UK, I would only say that excessive volatility is not welcome for any of us and I guess that it is not welcome for the United Kingdom, as it is not welcome for us.

Question: When you talk about price stability still being the main target and the medium to long term, you mentioned already that the 2% goal was reached last autumn or so. When will we next see 2% inflation?

Trichet: It is a good question. As you know, what we do ourselves is we publish projections of our own staff. And those projections incorporate a large element of range, because we consider that we are in a universe which remains uncertain. Nobody is, of course, the master of the price of oil, or the master of the price of commodities, or the masters of the price of agro-food products. We are the master of other prices: Economic agents, price-setters are the masters of domestic prices. Governments are the masters of a lot of prices: administrative prices, indirect taxation – which has a direct impact on inflation; they are also the masters, as social partners in their turn, of the wages and salaries in the public sector and the civil service. So, we have a lot of prices that we fix, but others that we do not. And the protracted period of high inflation which we are in, is, as I said, due very much to those phenomena of oil, energy, commodities – let us not forget commodities other than oil, because we have also had very protracted prices increases in this domain – and food.

The projection of our staff for 2009 is that HICP would be between 1.5% and 2.7%. And if we were to restart this exercise at the level of staff at the moment, the figures would not probably be exactly the same, because a number of factors would have to be taken into account: parameters would have changed in a number of directions. Again, it is a very multi-dimensional exercise – you have a number of parameters that have changed: the price of oil, the price of commodities, the exchange rate, etc. But all that being said, within the horizon of 18 months, which is the horizon for decisions that we take today – today, for instance, we took the decision to maintain interest rates at 4% when some, as you know, are publicly calling on us to decrease rates – we will, we think, we trust, that we would deliver price stability in line with our definition after this lag of, say, 18 months. That being said, I remain cautious and prudent. We remain alert – permanently – and it is in this perspective that I said that we had a protracted, but temporary period of very high inflation. We remain permanently alert because all depends on our own credibility and on the solid anchoring of inflationary expectations, because the price-setters today take into account what they expect to be inflation in the medium run after this hump has progressively disappeared.

Question: I know you told us that the decision today to keep rates on hold was unanimous. But can you tell us whether maybe the concerns from some countries, like Spain and Ireland which have different pressures on their local economies, are growing, or are you – as it were – all singing from the same hymn sheet?

Trichet: We are, at the level of the 320 million people of the euro area, in exactly the same situation as the Federal Reserve is with 300 million people or more. We both look at the economy as a whole. We have a single economy with a single currency and we have differences. You mentioned a number of countries: Ireland is certainly a country which is not necessarily at the average of the euro area, just as California, Florida or Alaska are not necessarily at the average of the US. When we take a snapshot of the situation today in the US, state by state, and in the euro area, country by country, I would say that we have approximately the same standard deviation of inflation and of rate of growth. This is what our own research, which has been published and confirmed, has shown. So you have to take this into account. The Governing Council looks at the continent as a whole, from Helsinki to Lisbon, from Nicosia to Dublin, from Malta to Ljubljana – these are the geographic dimensions of the continent which is a single economy with a single currency.

Question: Before the G7, let me ask you a couple of questions about your new colleague, and about the Bank of Japan. Your colleague Mr Fukui has left and, after that, we had no central bank governor for three weeks. This was a very unusual situation. How do you see this situation? Second, yesterday, our new governor Mr Shirakawa was chosen; do you know him? And what is your impression of him and what do you expect from the new Bank of Japan? Finally, at the G7 meeting our new governor Mr Shirakawa is trying to discuss the experience of the Japanese financial crisis ten years ago. What kind of thing could the participants in the G7 meeting learn from Japan’s experience ten years ago?

Trichet: First of all, let me take advantage of your question to repeat how much I have appreciated Toshihiko Fukui. He was a very impressive governor of the Bank of Japan, and a very wise participant in all our meetings at the level of the G7, at the level of the G10, and at the level of the global economy meeting in Basel. And I have already had the opportunity to say how we had all appreciated enormously his contribution. I know Mr Shirakawa. I have been in touch with him. In his previous position, he had been in touch with a lot of important persons in all central banks, including here in the ECB where he has a lot of friends. So I am expecting that we will have a very close relationship with him and with Bank of Japan as we had in the past. And this is very important because the “brotherhood” of central bankers is certainly going to remain, particularly through a period of very difficult challenges and very demanding circumstances, of the utmost importance. We have a level of confidence between us which is priceless. This is true across the Atlantic, across the Channel, across the Pacific, and with all the central bank governors of the emerging countries that are also playing an important role in the present circumstances, particularly because their own economies are providing a persistent dynamism in the global economy which is very important at the present time. Of course, all experiences are welcome. We live in a world where wisdom based on experience, the accumulation of experiences is probably more important than ever. Those who have lived through great difficulty have discovered things, just as when you x-ray an object or a body you see things that you do not see in normal times. So having the chance to have lived in very demanding times and to have observed exceptional circumstances is important.

Question: I have two questions. The first one: today, how worried are you about this financial turbulence? And the second one is about Sweden. What is your opinion about Sweden not being part of the euro?

Trichet: On the first question, taking into account the diagnosis that we made even before the start of the turbulent episode it was clear that an important market correction was both unavoidable and necessary because we had, before the turbulent episode, an under-pricing of risks in general in global finance that was documented. This diagnosis was shared with other central bankers. When we discussed it in Basel at the end of 2006, we were thinking that a market correction was unavoidable and necessary. So, I am no more and no less worried than I have been since the start of the turbulent episode. What is clear is that it takes time for this market correction to proceed. But I think it would be wrong to say “it is a total catastrophe, it has been going on for a much too long period of time” because a lot of work has been done in the private sector – a lot of corrections have taken place. The private sector has certainly learned a lot and taken a lot of decisions that are going in a better direction, namely paving the way for a more sustainable pace in global finance and the global economy. But it is also equally important to be pretty conscious that we might also have in front of us very difficult challenges, and we have to be alert. We have to be permanently alert. It is no time to be complacent in any domain – that is absolutely clear. As regards Sweden, Sweden is welcome in the euro area. Sweden is a country which has no opting-out clause, so as soon as Sweden meets the Maastricht criteria, Sweden is committed to joining the euro area. The euro area is now a little bit different from when we started: stricto sensu we started with 11 countries – we are now 15. We are now 320 million, and I already mentioned the geographic dimension of this vast economy with a single currency. So again, Sweden is indeed very welcome.

Question: This new sentence in the opening statement which says that the financial market turbulence could “last longer that initially thought”. A couple of points: during this turbulence you have ventured to give us an idea of when you think things might … the air might clear. Do you have a new sense of when the air might clear? And you also say in this statement it could have a broader than currently expected impact on the real economy. How?

Trichet: First of all, this is very much the reflection of the perception of the market itself. One measure of the market perception was that, before the end of last year, the measure of tensions that I mentioned – the three-month interbank money market in comparison with the overnight interest swaps – had a hump on three months and was lower before three months – say one month, two months – and lower after three months – six months, one year. So you had a hump at these months. After the end of last year, we could see that the hump had disappeared. There was an increase in the spread up to three months and then it remained at an elevated level. That is a reflection of the fact that the market itself, in its own functioning – at least if you consider that this is a pertinent indicator – was thinking that it was not only a short-term episode but, perhaps, a longer-term episode – an ongoing process which would take more time. This is one of the readings of what we see. But since the very beginning we didn’t believe that it would be an episode that would not last – we said it’s an “ongoing process”. And I never said, myself, we are guessing and hoping that within two months, or three months, or six months, tensions will evaporate. I never said that because we did not believe that.

Question: The second part of the question was: you say in the statement that the financial turbulence, because it’s lasting longer, perhaps could have a broader than currently expected impact on the real economy. How?

Trichet: We will see. I said that not all economies are alike. We see a number of factors operating on the other side of the Atlantic which we do not see here. As I mentioned in the Introductory Statement, uncertainty is there. We know that we are living in a world which is uncertain. We have to remain alert. We have the immense luck to have a compass, and that is important of course. And we know that by sticking to what our compass indicates, we not only do our job and are faithful to our mandate, but we are also contributing to calming the tensions and contributing to sustainable growth and job creation. That’s our mindset at the moment I’m speaking.