Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,Lucas Papademos, Vice President of the ECBFrankfurt am Main, 6 November 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. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.

On the basis of its regular economic and monetary analyses, at today’s meeting the Governing Council decided to reduce the key ECB interest rates further by 50 basis points, following the previous coordinated interest rate cut on 8 October 2008. The outlook for price stability has improved further. Inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009. The intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time. In such an environment, taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate. At the same time, the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration. All in all, the information available and our current analysis indicate a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely. At this juncture, it is therefore crucial that all parties, including public authorities, price-setters and social partners, fully live up to their responsibilities. The level of uncertainty stemming from financial market developments remains extraordinarily high and exceptional challenges lie ahead. We expect the banking sector to make its contribution to restore confidence. The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective. In so doing, it supports sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.

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

When analysing current developments in economic activity, we face an extraordinarily high degree of uncertainty in large part stemming from the intensification and broadening of the financial market turmoil. The world economy as a whole is feeling the adverse effects, as tensions increasingly spill over from the financial sector to the real economy and from advanced economies to emerging market economies. In the case of the euro area, the latest survey data confirm that momentum in economic activity has weakened significantly, with sluggish domestic and external demand and tighter financing conditions. Looking forward, it will be crucial to lay sound foundations for a recovery. For this to materialise as early as possible, it is of the utmost importance to maintain discipline and a medium-term perspective in macroeconomic policy-making, and to avoid second-round effects. It is equally important that the banking sector takes fully into account the significant support measures adopted by governments to deal with the financial turmoil. These measures should be supporting trust in the financial system and should help to prevent undue constraints in credit supply to companies and households. In combination with the recent broad-based falls in commodity prices, these measures should help to restore confidence.

In the view of the Governing Council, a number of the downside risks to economic activity identified earlier have materialised, particularly those stemming from the financial market tensions. Other downside risks continue to relate to disorderly developments due to global imbalances and rising protectionist pressures, as well as to the possibility of renewed increases in commodity prices.

With regard to price developments, annual HICP inflation has remained considerably above the level consistent with price stability since last autumn. However, it has been steadily declining since July, falling – according to Eurostat’s flash estimate – to 3.2% in October, from 3.6% in September and 3.8% in August. The continued high level of inflation is largely due to both the direct and indirect effects of past surges in energy and food prices at the global level. Moreover, strong wage growth in the first half of the year, in spite of a weaker growth momentum, combined with a deceleration in labour productivity during the same period, resulted in a significant increase in unit labour cost.

Looking forward, recent sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009. Depending, in particular, on the future path of oil and other commodity prices, some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year, particularly due to base effects. These movements would be short-lived and therefore not relevant from a monetary policy perspective. Looking through such volatility, however, upside risks to price stability at the policy-relevant horizon are alleviating. The remaining upside risks relate to an unexpected increase in commodity prices, as well as in indirect taxes and administered prices, and the emergence of broad-based second-round effects in price and wage-setting behaviour, particularly in economies where nominal wages are indexed to consumer prices. The Governing Council calls for these schemes to be abolished. It is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability.

Turning to the monetary analysis, the annual growth rates of broad money and credit aggregates, while still remaining strong, continued to decline in September. Taking the appropriate medium-term perspective, monetary data up to September confirm that upside risks to price stability are diminishing but that they have not disappeared completely.

A closer examination of the money and credit data indicates that the recent intensification of financial tensions has already had an identifiable impact, particularly in the form of outflows from money market funds and greater inflows into overnight deposits. However, the full impact of investors’ uncertainty on their portfolio allocation behaviour is still to be seen in the coming months. Both portfolio shifts between non–monetary and monetary assets and shifts between different types of monetary assets can therefore not be ruled out in the period ahead. Hence, such effects will need to be taken into account when assessing monetary growth and its implications for price stability over the medium term.

There is also some evidence in the September data that the recent intensification of the financial tensions has triggered a slower provision of bank credit to euro area residents, mostly taking the form of smaller holdings of securities. At the same time, for the euro area as a whole, up to September there were no indications of a drying-up in the availability of bank loans to households and non-financial corporations. In particular, the maturity composition of loans suggests that non-financial corporations continued to obtain funding, also at relatively long maturities. However, more data and further analysis are necessary to form a robust judgement.

To sum up, the intensification and broadening of the financial market turmoil is likely to dampen global and euro area demand for a rather protracted period of time. In such an environment, taking into account the strong fall in commodity prices over recent months, price, cost and wage pressures in the euro area should also moderate. At the same time, a cross-check of the outcome of the economic analysis with that of the monetary analysis confirms that the underlying pace of monetary expansion has remained strong but has continued to show further signs of deceleration. Hence, when taking all information and analysis into account, there is a further alleviation of upside risks to price stability at the policy-relevant medium-term horizon, even though they have not disappeared completely. At this juncture, it is therefore crucial that all parties, including public authorities, price-setters and social partners, fully live up to their responsibilities. The level of uncertainty stemming from financial market developments remains extraordinarily high and exceptional challenges lie ahead. We expect the banking sector to make its contribution to restore confidence. The Governing Council will continue to keep inflation expectations firmly anchored in line with its medium-term objective. In so doing, it supports sustainable growth and employment and contributes to financial stability. Accordingly, we will continue to monitor very closely all developments over the period ahead.

In the area of fiscal policy, medium-term challenges, such as population ageing, strongly underline the need for fiscal policy to focus on medium-term sustainability and thereby build confidence. Accordingly, and as recently confirmed by the ECOFIN Council and the European Council, the fiscal policy provisions of the Maastricht Treaty and the Stability and Growth Pact should continue to be applied fully. The fiscal rules are one of the indispensable pillars of EMU and the single currency, which must remain firmly in place so as not to undermine the confidence in fiscal sustainability. Finally, the current situation calls for ensuring the high quality and timeliness of statistical information on government interventions to ensure the transparent and accountable use of public funds.

Turning to structural policies, the ongoing period of weak economic activity and high uncertainty about the economic outlook will require a significant degree of resilience from the euro area economy. The current situation should therefore be seen as a catalyst to foster the implementation of necessary domestic reforms so that countries may fully exploit the benefits offered by the enhancement of international trade and market integration, in line with the principle of an open market economy with free competition.

We are now at your disposal for questions.

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Question: At a time when the Bank of England has just cut interest rates by 150 basis points, one might almost be disappointed by a rate cut of only 50 basis points. The markets, however, were not disappointed, one of the reasons being of course that they have more or less priced in another 50 basis point reduction for December. Obviously, we know that you never pre-commit, but how wrong do you think the markets are in their estimation?

The second question is, given that we are ahead of an EU Summit on the financial crisis, and more importantly of a global summit, what do you hope will come out of these in terms of measures?

Trichet: With regard to your first question, the Governing Council was unanimous in thinking that a significant decrease in rates was appropriate in the present circumstances, where we see an alleviation of the upside risk to price stability. We discussed several options, including diminishing rates by 50 basis points and diminishing rates by 75 basis points. After having checked and discussed the pros and cons of the different options, we decided unanimously that it was appropriate to decrease rates by 50 basis points. As regards the future, I would only say that, as you rightly mention, we never pre-commit: we always do what is appropriate to be able to tell our fellow citizens that we will deliver price stability in the medium term according to our mandate. It is essential at this time for households to be confident that they will have price stability in the medium term. The next decision-making meeting will be an important one, because we will have the projections of our staff, and so we will then have the occasion to review facts, figures, data and projections. At that stage, we will again do whatever is necessary in order to continue to be able to say that we will deliver price stability.

With regard to the Summit, it is an important rendezvous. At the end of this week, an important meeting of the G20 finance ministers and central bank governors will take place in Brazil. There will be then a summit of the Heads of State and Government in Washington. I would say that this is work in progress, and it seems to me that a lot of directions have already been identified as being the right ones for the financial market. In sum, these are: more transparency; less short-termism; more elimination of what is pro-cyclical in the functioning of the present global financial system; a jump up in terms of risk-management at the level of all institutions concerned; and, last but not least, more discipline in macro-policies at the level of all major participants in the global economy. That certainly sums up the avenues that we would judge appropriate at this stage.

Question: Could I just ask you very briefly why you actually decided not to cut rates by 75 basis points? I mean, are you waiting for your own, new economic and inflation forecasts next month? Does this mean that it keeps the door open for rate cuts next month?

Can you also give us a quick preview of the ECB bank lending survey, which I believe is coming out tomorrow, and also of the survey of professional forecasters?

Trichet: Again, as usual, we examine all the arguments. What is important is that we were unanimous in considering that the alleviation of upside risks to price stability was sufficiently clear to permit us, for the second time in less than one month, to substantially reduce interest rates. All in all, the decision to cut the interest rate by 50 basis points appears to be the right and appropriate one. I have to say again that we are never pre-committed, and we will see what is appropriate, taking into account the new information that we will become available in the month leading up to our next decision-making meeting, which will take place, as you know, in Brussels.

As regards the bank lending survey, which will be published tomorrow at 10 a.m., there are indications of a continuing net tightening of credit standards, particularly for loans to enterprises, for which the tightening has increased significantly by 22 percentage points. It is clear that the most important reasons for the net tightening were the expectation of future economic activity and the industry outlook in general. These were the main reasons that banks gave us for this tightening of their lending. I have to say that, with regard to loans to households for consumer credit and for house purchase, there was some tightening, but this was significantly less intense than the tightening that we saw for enterprises. Again, all of this information will be published tomorrow, at 10 a.m.

The survey of professional forecasters is part of our overall analysis of the inflation expectations, and it is one of the ways we have of measuring their anchoring. It is something which is very important, as I stressed on behalf of the Governing Council a moment ago. In our extraction of information from the financial market, there has been a very clear regaining of control over inflation expectations. To give you one figure that I think is interesting: if you take the bond market and you extract from the bond market, the indexed and non indexed bonds, the five years forward, five years break even inflation rate you have figures, for instance, that were, at the beginning of July, at the level of 2.50%, or even more, at 2.55% or so. At the moment we are at a level of a little bit more than 2.10%. So, a very significant reduction, and that is part of the overall sentiment that we have that not only upside risks to price stability have been alleviated but there has also been a significant regaining of control of inflation expectations, which is very important. From the last figures that I have given you can substract an element of risk premia that would give you a break even which would be very much in line with our definition of price stability over the medium term.

Question: Are there any indication that we are actually in a recession now?

Trichet: We will see what our next staff projections will be. It is clear that, increasingly, depending on the “vintage” of the projections, indications from all private and public entities are that after the very recent intensification of the financial turbulence, in particular since mid-September, which marked a new episode in the intensification of the financial turbulences, the impact on the real economy is more and more important. Negative figures for growth in 2009 are gradually appearing. But we will see exactly what we have in the projections when we look at them in one month’s time.

Question: You have an interesting sentence in the Introductory Statement which says that inflation rates are expected to continue to decline in the coming months, reaching a level in line with price stability during the course of 2009. Also interesting is the sentence that is not there – again – which is the current monetary policy stance will contribute to achieving our objective. Why is that sentence not there? And if I were to draw a conclusion from that that the scope for further easing is there – which is, in fact, the conclusion that I am tempted to draw – would I be wrong?

Markets are currently pricing in, at the minimum, another 25 basis point reduction in December. You have, in the past, actually commented on one month forward expectations, so, given your desire to be predictable, I wonder if you would do that again.

Thirdly, although the Euribor rates have come down, the spreads between the Euribor and the OIS rates have not, in fact, narrowed, despite the ECB’s bevy of money market operations. Is that a disappointment?

Trichet: On the future decision – again – we are never pre-committed. We just decreased rates today by 50 basis points. We had decreased rates less than a month ago by 50 basis points and everybody can see that why we took these important decisions. Future decisions will depend on our own judgment based on facts, figures and data. I do not exclude that we could decrease rates again. That being said we are not pre-committed in any respect: we will do whatever is necessary to take into account the situation as it will unfold progressively and to take into account the fact that, in any case, we have to be – my colleagues and myself in the Governing Council – able, at any time, to continue to tell our fellow citizens: “you can have confidence; we will deliver price stability in the medium term”. And the fact that I am able to say, on behalf of the Governing Council, that we could have the headline inflation in line with our definition of price stability next year is something which is very important, for the confidence of our fellow citizens.

As regards the tensions in the money market and the fact that some spreads, including between the three-month Euribor interbank deposit and the OIS, for instance, are at a level which remains significant, I would say that we have taken very important decisions in particular as regards the supply of liquidity on an unlimited basis and at fixed rates. I would also say, as I said in the introductory remarks, on behalf of the Governing Council, that we have also noted the very important decisions which have been taken by governments and all this has paved the way for these tensions to be alleviated. I asked the commercial banks which make up this market to be up to their own responsibility, fully taking into account what we have decided here, what the governments have decided and to reflect those very important decisions in the behaviour of the interbank market and, of course, the Euribor. Again, we are in market economies; these decisions are based on the decentralised decisions taken by market participants and, in this case, banks. But I ask them, on behalf of the Governing Council, to be fully up to their own responsibility in the present circumstances.

Question: Just three quick questions Mr Trichet. First of all you have the sentence in here where you talk about how even stronger downside movements in HICP inflation cannot be excluded, but they are not relevant from a monetary policy perspective. Is that the Governing Council’s way of saying, you see no serious threat of deflation, as crazy as it seems to ask that question given what we were talking about six months ago?

My second question to you is whether in the process of lowering interest rates there is a virtue in frontloading lower interest rates, or is that what you are trying to do right now in light of the fact that the slowdown was similarly rapid.

And my third question to you, just to follow up, you said three times that you expect the banks to live up to their responsibilities and you repeated it a fourth time in your response to the last question. That sounds almost like a threat: live up to your responsibility or else what? What exactly are you trying to convey here?

Trichet: On your first question, we are totally pragmatic, we look at facts and figures and we have to be very clear on the words and what they mean. We see a disinflation process at stake, and it is visible because we see headline inflation going down, even if it is still at the level of 3.2%, which is substantially higher than our definition of price stability. But when we look at other indications, at the monetary aggregates, they are obviously growing quite fast. Of course, we have to look at the new figures extremely carefully, taking into account the fact that we have been living in a different universe since the 15th of September. Nevertheless, when we look at the increase in all these components and counterparts of the monetary aggregates, we see them continuing to grow, as a group, quite fast. Look also at compensation per employee and unit labour cost, for example. Deflation would mean a decline in a large number of nominal values. But when we look at compensation per employee, this was 1.9% in 2005 and 2.2% in 2006. If we look at the second quarter of 2008, it was 3.5%. If we look at the unit labour cost – of course taking into account the progress of labour productivity, which is quite slow at the present stage in the cycle – then it is even more striking. In 2005 and 2006 the increase in the nominal unit labour cost was around 1%, but in the second quarter of 2008 it was at the level of 3.2%. I do not want to tell you anything other than the fact that we are pragmatic and we will look at facts and figures. But we have to beware of straying too far from facts and figures. The facts and figures that the Governing Council has do not suggest a decrease in nominal values, which is the mark of deflation. But we will see how things develop and do all that we can to maintain confidence on the part of households in the fact that we will deliver price stability and do all that is necessary to permit financial stability to be restored. You know what decisions we ourselves have taken, which are historically extraordinarily bold, as well as the decisions taken by our sister institutions on all sides of the Atlantic, the Channel and the Pacific.

Regarding frontloading, we do exactly what we think is appropriate when we think that it is necessary. We have just taken decisions that are clearly very important: two 50 basis point reductions in rates in less than one month. We have never done that before, but we judge that it is appropriate. We are neither frontloading or backloading or anything of the kind. We can act at any time to do what is needed, taking into account our mandate. This is the reason why we say that we are never pre-committed. Our position is that we try to do exactly what is needed at any moment in time, without being hampered by pre-commitments that could actually prevent us from doing whatever may be necessary.

On your last point, there is no threat of any kind, there are strong encouragements. This is not the first time that we have encouraged governments to behave in ways that we judge to be appropriate from our own standpoint, or encouraged social partners or price-setters or now commercial banks.

Question: Mr President, two questions: the first one, have you been in contact with other central banks like the Bank of England before making your decision today?

The second question: the Federal Reserve, in order to get the unsecured money market going again, has started buying up commercial paper directly from banks and also from corporates. Did the ECB Council consider such a move? And would it be possible according to the rules governing the ECB?

Trichet: We are in permanent contact with what I call the sister institutions, not only with the Federal Reserve, the Bank of England and the Bank of Japan, but also with the other industrialised countries’ central banks and with the emerging economies’ central banks. We are in permanent contact, but each of us takes its decisions on the basis of our own analysis, taking into account our own responsibility. We do this in circumstances which by definition are never alike because we do not have the same economies with the same structure and the same flexibility, we do not have the same shocks to cope with. All of us do what is appropriate for our own economies in the present circumstances, and it is very important that central banks can demonstrate a high level of responsibility and an intimate exchange of views at all times.

As regards the commercial paper issue, as you know, from the very beginning of the euro, we have had a collateral framework which was much more open than many others. Private paper in particular was eligible when it was not eligible in the normal collateral framework in a number of other central bank traditions. The decisions we have taken over the recent period have even extended the eligibility of our collateral. So at this stage we consider that our present framework is appropriate to help the functioning – and to foster a more normal functioning – of the markets, particularly of the short-term markets, in general. We continue to follow this evolution very carefully.

Question: Two specific questions and one general one if I may.

First, just going back to the bank lending survey: previously yourself and other members of the Governing Council have refrained from talking about a credit crunch in the euro zone. Would you talk about a credit crunch now?

Secondly, on this appeal to banks to make their contribution to restoring confidence, I wonder if there is any role you see the ECB playing, perhaps in terms of coordinating national initiatives to get the money markets working again – there had been a discussion about exchanges and things on the national level, but surely the ECB should have a role?

Thirdly, a more general question, perhaps you could give us your thoughts on the art of central banking in these circumstances. Do you think it is better for a central bank which is facing a serious risk of undershooting its inflation target, should they be getting interest rates down as fast as they can, maybe by 150 basis points, for example, or is the role of a central bank to be more of an anchor for stability, not to be overreacting and to be exuding confidence and calm at these moments?

Trichet: As regards your first question, we see at the moment I am speaking no credit crunch, when we look at the figures that have been published thus far. That being said I am very cautious because, as I said, since mid-September we have had a very significant intensification of tensions associated, in particular but not exclusively, with the collapse of Lehman Brothers. Since then we have been in a situation where we have to be particularly attentive. But I cannot say that we are observing a credit crunch right now. As I said, on behalf of the Governing Council, we have to continue looking very carefully at all new data in order to have a more robust analysis and a more robust judgement.

As regards your second question on the money market, it is absolutely clear that in the euro area we have a single money market, by definition, a single currency and a single interest rate: the EURIBOR is for the whole euro area. All members of the Eurosystem, the ECB itself and the various NCBs, would transmit the same message: that we have done a lot to permit the banks to be in a totally different environment, where the banks know that they have unlimited access to our refinancing on a one-week, one-month, three-month and six-month basis, and that they have a collateral framework that has been enlarged. They are in a totally different environment in comparison with what existed before. The governments of the euro area as well as the governments of the EU took themselves very important decisions in a number of areas, including recapitalisation and guarantees. All of these elements have to be taken fully into account. I accept that it takes time to realise that you are in a very different new environment, and I also understand that there is a certain asymmetry between the decisions that you take to toughen considerably your risk management and the decisions that you take to get back to a more normal position. We encourage the commercial banks very strongly, through all channels, to take fully into account all the decisions that have been made.

As regards your third question you know that the central banks are a brotherhood of mutual admiration which is very strong, with a very high level of mutual confidence. Each of us is in our own environment with our own economies, which have different shocks, different levels of flexibility, many different features. You cannot say that two economies are alike, and this is true on both sides of the Channel, on both sides of the Atlantic and across the Pacific. I believe that we are all doing what is required in the circumstances, which are exceptionally tense, exceptionally uncertain and challenging. I think it is important that we take up our own responsibilities, and that all observers see us doing so, and that we don’t hesitate to do things that we might not necessarily have done before. This is clear for all of us.

Question: This might be nit-picking slightly, but earlier you said that you discussed several options on rates, and then you went on to say that you discussed a 50 basis point cut and a 75 basis point cut. But that’s only two. Was there another option there as well?

The second question is: you talked about growth recovering over the course of 2009. Could you be slightly more specific? I mean, can we assume that it won’t be towards the end of 2009 in your view? Another question on the volatility of the euro in recent weeks. Are you concerned about that? And was there a discussion of, perhaps, intervention by the ECB?

Trichet: As regards your first question I explicitly mentioned two options. I would not say that no other figures were mentioned. Perhaps some people mentioned the figure “25” at a certain moment, but the two main options were 50 and 75 basis points, with the substantial difference being that, ultimately, taking everything into account, we were unanimous in judging that 50 basis points was appropriate in the present circumstances.

As regards your second question on the projections, we will publish our staff projections and discuss the projections in general at our next decision-making meeting in Brussels, and all what I would confirm is that the main difference that can be seen in all the various projections at the moment – I am talking about all the projections; we do not stick exclusively to our staff projections ourselves – both in the private and public sector - is that the projections, as far as real economic growth is concerned, are more and more going down, depending on the vintage. The more recent the projections, the more they incorporate this intensification of financial tensions I was talking about and the impact on the real economy.

As regards your third question on volatility we are observing on the exchange market – not only for us, but for all, absolutely all, currencies – a considerable level of volatility, which reflects the tensions in question. Clearly you have the phenomenon of repatriation of capital in the place where they are managed, and this is creating considerable volatility. I never comment on interventions, as you know.

Question: In the last cycle of lowering rates, the key rate went to 2%. Given that this crisis seems to be worse, could it make sense to go even lower, or this is a crisis that needs to be fought with other tools as well, like fiscal stimulus?

Trichet: I expect you will ask this question again at our next meeting in Brussels, and I will be delighted to tell what we do next time. I do not pre-commit even on a very short-term basis. I will certainly not pre-commit on a longer-term basis.

Question: In fact, I wanted to ask you about volatility, particularly with regard to the Swiss franc, which in the last couple of weeks reached an all-time high and is now coming down again. I was wondering if tackling that is part of your “intimate relationship” with the Swiss National Bank, to use your words from before.

And on the meeting tomorrow – maybe you could give us a benchmark. What would you consider a successful meeting tomorrow in Brussels?

Trichet: As regards the Brussels meeting, everybody knows what is at stake and what we need to concentrate on as regards the present financial turbulence. And that’s all I would say.

On the Swiss franc issue – this is of course the main issue for our Swiss friends and colleagues. And they are taking their own responsibility in a situation which is different from other economies. I have nothing particular to tell them and no particular advice to give them, but I am sure that they are doing what is appropriate.

Question: When you were speaking about the Washington financial summit – I think it was in that context – you said that more discipline needs to be exercised in macroeconomic policy. There are suggestions that the G20 might be well advised to consider coordinated fiscal stimulus to maintain aggregate demand and avoid the dangers of a liquidity trap. How do you reconcile that with what you were saying about discipline in macroeconomic policies?

Trichet: I think that of the many reasons why we are observing this bust phenomenon, which has followed a boom phenomenon – we have to be fully aware that after the boom you have the bust; these are two sides of the same coin – you certainly have an absence of discipline at a global level. I am not thinking of any particular economy, but I think that, among the lessons to be drawn from the present episode in global finance and the global economy, we have to take into account the need to introduce –through different means, a new framework, perhaps peer surveillance, perhaps other means – a way of avoiding the persistence of very large imbalances, both domestic and external. That is certainly something we are all aiming at addressing. This is easy to say, and much more difficult to introduce in the global economy with the real functioning of the global economic and financial system. I think that this is one of the issues that we have to reflect upon. And this is a long-term consideration. I am not suggesting that the fine-tuning of the present situation through fiscal stimulus would be part of it. This is a totally different question, a totally different issue, one which leads back to the consideration of Bretton Woods itself.

Question: Do you worry about the amounts of money being given to the ECB, to the overnight deposit facility, instead of being provided to the money market? And are you thinking of targeting that problem by, say, changing just the interest rate on the deposit facility?

Trichet: This is one of the issues that we are looking at very carefully. It is associated with the strong encouragement that I gave a moment ago for commercial banks to live up to their responsibilities. It is clearly not normal to ensure large supply of liquidity, which, at the end of the day, ends up in our deposit window. So we are reflecting on the best way of improving this.

Question: I suggested an instrument, one of the options…

Trichet: I won’t mention any particular instrument. Perhaps the encouragement – the strong encouragement – that I mentioned earlier will work. This is my working assumption at this stage, but I’m not ruling anything out!

Question: J ust to expand on what my colleague just said, you mentioned that we perhaps need greater control of global imbalances, both internally and externally. Are you thinking of some sort of global institution, or new rules, to control imbalances? I mean, it’s a result of macroeconomic policy. You have different actors in different countries. Are you thinking of some sort of global cooperation on that issue?

And more on the short term, I am not quite sure I understand your position on fiscal policy. Are you supporting what we are seeing in the euro area in some countries, which are indeed trying to stimulate demand by more aggressive discretionary fiscal policy, or do you think this is a bad idea?

Trichet: This is the first time that we have had a very large episode of financial turbulence in the industrialised world itself, at the heart of the industrialised world, and we are particularly attentive to that. But we had previously great difficulties in the emerging world – for instance in the 1980s, when we had entire continents which were broke and bankrupt. I myself was Chairman of the Paris Club at the time, and at that time we had to cope with 52 countries defaulting simultaneously. There we had to see how to organise – or not – the rescheduling of their debt, because they had defaulted depending on the qualification of the conditionality that they were embarking on with the help of the IMF. We have forgotten that we have had very difficult episodes, not to mention the Asian crisis, which was also very dramatic. In most cases, you can see that there is something which is lacking in the global framework – an appropriate level of surveillance; surveillance ensuring greater discipline. And it is true for everyone. It is true for the industrialised world; it’s true for the emerging world. So, how do you do that? How do you reintroduce a level of discipline which seems indispensable in order to avoid problems at a global level? This is an open question. I won’t say that it’s easy to answer, but it has to be addressed. Otherwise, we will have more problems.

As regards Europe, what the Governing Council of the ECB says is very simple: you apply the Stability and Growth Pact. Follow all the rules as they are. You don’t change the rules. You don’t change the Stability and Growth Pact. We are lucky enough to have a framework which is one of the pillars is EMU: Economic and Monetary Union. Monetary Union is the euro. We know what that is. We have a single currency and single monetary policy decisions that I am explaining at the moment. And we have an economic union. The core of the economic union is very much the Stability and Growth Pact. I would sum up our position in this way, and the President of the Eurogroup has publicly said exactly the same. We stick to the Stability and Growth Pact – all of its provisions as crafted in the last reform by national governments. It’s as simple as that.

Question: The ECB has said that the Irish Government’s potential exposure arising from its own guarantee scheme for banks is a cause for concern, that our public finances in Ireland are going to breach the European Commission limits, and that this could get worse if our guarantee scheme is called upon for use. If our banks now pass on rate cuts – and they have already announced this afternoon that they are going to – is this going to turn into some kind of vicious circle for both the financial sector and

Trichet: Why would it be bad for the rate cuts to be passed on?

Question: It seems that they think it will put them in a less fortunate capital position.

Trichet: We are decreasing our own rates. It should normally be something that they would appreciate. If they pass on the rate cut, it will be neutral. They would be passing on the rate cut that we ourselves have triggered. It’s clear that the decisions which have been taken – not Ireland in particular; all of the governments that have taken bold decisions – are decisions which have been taken in extraordinary circumstances to allow commercial banks and the financial system in general to function much more normally. These are bold decisions, obviously, taken for very good reasons. And we ourselves are echoing these decisions. It means an additional effort, in terms of risk taken by Governments. And this is one of the reasons why I am saying that commercial banks should take full account of the fact that it is not just us. Governments too have taken bold decision. And these should be seen for what they are, namely decisions that increase the risks for the governments themselves and therefore decrease the risks for the banks.

Question: Last week Mario Draghi, the Governor of the Banca d’Italia, suggested linking house loans not to the EURIBOR, but to the official rate. What do you think? What is your opinion about that?

Trichet: We are back to what I said earlier. We really consider that commercial banks have to live up to their responsibilities. What we are observing as regards the spreads on the market today illustrate the fact that, collectively, they have not yet done this. We do not want to have an economy which is a planned economy. We are in an economy which is a market economy and has to function as a market economy. But they have, collectively, to understand that they are in a different universe. I do not think that the index should necessarily be changed: we should instead see the EURIBOR going down to a level that takes into account all the decisions that have been taken.

Question: Could you please be more specific about your expectations about the meeting next weekend in Brazil?

Trichet: We are all happy to attend under the chairmanship of Brazil this meeting of the G20 at the level of Ministers of Finance and Governors. It will be a good occasion to look at the situation, compare notes, have a full global view of the situation, which, again, is not only the situation as seen from the industrialised countries, but also the situation as seen from the emerging economies. We will also have the opportunity to continue the work very carefully prepared by the Financial Stability Forum, looking at all the avenues considered appropriate for the improved functioning of global finance. So, I expect substantial added value from the meeting in Brazil.

Question: I am sorry, I have to nitpick again. Was a 100 basis point cut discussed at all?

Trichet: No.