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Introductory statement to the press conference (with Q&A)

Mario Draghi, President of the ECB,Vítor Constâncio, Vice-President of the ECB,Frankfurt am Main, 6 June 2013

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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, Finance Minister Dijsselbloem.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information has confirmed our assessment which led to the cut in interest rates in early May. The underlying price pressure in the euro area is expected to remain subdued over the medium term. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. Medium-term inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%. At the same time, recent economic sentiment survey data have shown some improvement from low levels. The accommodative stance of our monetary policy, together with the significant improvements in financial markets since mid-2012, should contribute to support prospects for an economic recovery later in the year. Against this overall background, our monetary policy stance will remain accommodative for as long as necessary. In the period ahead, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.

Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP contracted by 0.2% in the first quarter of 2013, following a decline of 0.6% in the fourth quarter of 2012. Output has thus declined for six consecutive quarters, with labour market conditions remaining weak. Recent developments in economic sentiment survey data have shown some improvement from low levels. Looking ahead to later in the year and to 2014, euro area export growth should benefit from a recovery in global demand, while domestic demand should be supported by the accommodative stance of our monetary policy and by the recent real income gains due to lower oil prices and generally lower inflation. Furthermore, the significant improvements in financial markets seen since last summer should work their way through to the real economy, as should the progress made in fiscal consolidation. At the same time, the remaining necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. Overall, euro area economic activity should stabilise and recover in the course of the year, albeit at a subdued pace.

This assessment is also reflected in the June 2013 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP declining by 0.6% in 2013 and increasing by 1.1% in 2014. Compared with the March 2013 ECB staff macroeconomic projections, the projection for 2013 has been revised marginally downwards, largely reflecting the incorporation of the latest GDP data releases. For 2014 there has been a marginal upward revision.

The Governing Council continues to see downside risks surrounding the economic outlook for the euro area. They include the possibility of weaker than expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.4% in May 2013, up from 1.2% in April. This increase was, in particular, accounted for by a rebound in services prices related to the unwinding of the Easter effect and an increase in food prices. More generally, as stated last month, annual inflation rates are expected to be subject to some volatility throughout the year due particularly to base effects relating to energy and food price developments twelve months earlier. Looking through this volatility, the underlying price pressure over the medium term is expected to remain subdued, reflecting low capacity utilisation and a modest pace of economic recovery. Over the medium term, inflation expectations remain firmly anchored in line with price stability.

This assessment is also reflected in the June 2013 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.4 % and 1.3 % in 2013 and 2014, respectively. In comparison with the March 2013 ECB staff macroeconomic projections, the projection for inflation for 2013 has been revised downwards, mainly reflecting the fall in oil prices, while the projection for 2014 remains unchanged.

In the Governing Council’s assessment, risks to the outlook for price developments are broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices and indirect taxes, as well as higher commodity prices, and downside risks stemming from weaker economic activity.

Turning to the monetary analysis, recent data confirm that the underlying pace of monetary and, in particular, credit expansion continues to be subdued. Annual growth in broad money, M3, increased in April to 3.2%, from 2.6% in March, mainly due to a base effect and special factors. The same factors have impacted on the annual growth rate of the narrow monetary aggregate, M1, which increased from 7.1% in March to 8.7% in April.

The growth of loans to the private sector continued to be weak. The annual growth rates of loans to households (adjusted for loan sales and securitisation) remained at 0.3% in April, broadly unchanged since the turn of the year. The annual negative growth of loans to non-financial corporations (adjusted for loan sales and securitisation) increased from -1.3% in March to -1.9% in April. This development stemmed, in particular, from net redemptions in short-term loans, which could reflect reduced demand for working capital against the background of weak order books in early spring. More generally, weak loan dynamics continue to reflect primarily the current stage of the business cycle, heightened credit risk and the ongoing adjustment of financial and non-financial sector balance sheets.

In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs. Further decisive steps for establishing a banking union will help to accomplish this objective. In particular, the Governing Council emphasises that the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and therefore require swift implementation.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

With regard to fiscal consolidation and structural reforms, the Governing Council welcomes the progress made and encourages governments to continue with determined efforts. It is essential that euro area countries do not unravel their efforts to reduce government budget deficits. The new European governance framework for fiscal and economic policies should be applied in a steadfast manner. In this respect, the Governing Council considers it very important that decisions by the EU Council to extend the time frame for the correction of excessive fiscal deficits should remain reserved for exceptional circumstances. At the same time, it is necessary to continue, where needed, to take legislative action or otherwise promptly implement structural reforms. Structural reforms should, in particular, target competitiveness and adjustment capacities in labour and product markets, thereby helping to generate employment opportunities in an environment of unacceptably high unemployment levels, especially among young workers, prevailing in several countries. Combined action on the fiscal and structural front should mutually reinforce fiscal sustainability and economic growth potential and thereby foster sustainable job creation.

We are now at your disposal for questions.

Question: On several occasions, you have mentioned the need to provide more credit to small and medium-sized enterprises (SMEs), and at the last press conference in Bratislava you also mentioned the possibility of doing something to restart the securitisation market, as well as the market for asset-backed securities (ABSs). Could you give us a progress report on the work being done on that front? Have you scaled down your ambitions there? I think the Vice-President has mentioned in a speech that maybe expectations were a bit excessive in that regard.

* * *

In terms of interest rates, did you discuss the possibility of cutting them? Was your decision unanimous?

Draghi: At today’s meeting, we had an ample discussion on the various non-standard measures that could be utilised to repair the monetary policy transmission channels. In this context, we discussed ABSs, we discussed LTROs, we discussed enhancing the framework for additional credit claims, and we discussed our collateral policies. Most of these measures, which we will continue to discuss, address funding problems first and foremost. Let’s consider this. Second, some measures, for example the LTROs, are easier to implement and have clearer consequences. However, other measures, such as a negative rate on the deposit facility, which we also discussed and are now technically ready for, may, as I have said on numerous occasions, have several unintended consequences. Nevertheless, neither on this front nor on any of the others, do we see any reason to act at this present point in time. Really, these measures are all on the shelf.

The issue of ABSs is more complicated than the others, however. You have to take into account, and I think I have said this in the past, that the ABS market has been dead for many years. And it has been dead for several reasons. Some relate to the problems caused by ABSs both during and prior to the crisis, while others are associated with the liquidity and capital requirements for ABSs. Once you have analysed this, it is clear that we are talking about specific ABSs for SME loans. Even before the crisis, ABSs for SME loans were very little, probably the smallest component of the ABS market, if I am not mistaken. This was because it is difficult to put SME loans in an ABS and correctly rate and price it so that it can be traded like other forms of ABS that contain much more standardised products. Having said that, there is a task force working on this together with the European Investment Bank, and if they produce something, it will be collateralised, it will be guaranteed by other institutions. We will then certainly look into the possibility of accepting it as collateral. But, in any case, this is not something for the short term anyway. It will take a long time. In order to ensure the functioning of an ABS market, we first need to change the liquidity and capital regulatory framework for these types of ABSs, which is a long-term project.

In answer to your second question, at our last meeting I said that the Governing Council would look at all incoming data, would monitor closely all the developments, and would stand ready to act. Today, we had a full, very rich discussion on the data that have come in since last time, as well as on the changes that have taken place, and some changes are for the better. Some survey data have turned out better than expected, for example, the flash estimate for the inflation rate in May is 1.4%, higher than in the previous month, while other data, such as those concerning credit developments, are not as good. However, by and large, the Governing Council agreed that there was no change in direction that would justify taking action at this point in time. Having said that, I can only repeat what I said last time, in that we will monitor all incoming data very closely and stand ready to act.

Question: You mentioned that these various instruments are on the shelf. Isn’t this adding to the volatility in the financial markets? –The ECB kind of dangling these things out there for people to look at and then seeing what various officials say? Also, it seems like other central banks (for example, the Federal Reserve System when it talks about tapering or not tapering) are now a source of volatility in the financial markets. What role is the ECB playing in this and what can be done to limit it?

And my second question is on unemployment. You mentioned again that it is unacceptably high. Have you seen anything done by a government during the past year to eighteen months that you have been talking about this which makes you say “hey this country has done a good thing and it should be replicated elsewhere”?

Draghi: In response to the first question, frankly the ECB has not done anything to increase volatility in the markets. If you think that the ECB has done anything that is comparable to what is happening in the other central banks, we would not agree with this perception. I think that all in all we are currently taking a much more conservative stance, although our monetary policy remains accommodative and, as I said, it will stay accommodative for as long as needed. But, certainly, we have observed an increase in global volatility, coming from major monetary policy decisions or announcements of decisions that may be taken in the coming months. However, I do not think that the ECB has in any way been a source of this; I cannot really find any data to support this.

The second point concerns unemployment. The Governing Council is of the persuasion that the present levels of unemployment are the result of a combination of cyclical factors, as well as structural factors. As of cyclical factors, , there is no doubt that the labour market in general is experiencing the combined effects of a credit crunch and the unavoidable fiscal consolidation that many of these countries have had to undertake. It is also true that, in several markets, some structural factors are blocking the labour markets. As I have said several times, it seems like labour market flexibility has been placed squarely only on the shoulders of the young population, which is one of the major reasons why youth unemployment is so high in some countries. Another reason, however, is that a fast-moving world, in other words globalisation, does require new skills and investment in human capital, meaning that youth unemployment can also be explained on the basis of a mismatch of skills and human capital. So what governments should do is repair the structural weaknesses in these markets. As far as the ECB is concerned, we anticipate that a gradual recovery will gain ground, albeit at low levels, in the second part of this year.

Question: You have reiterated twice now that monetary policy would remain accommodative for as long as necessary. I was wondering whether issuing a more formal forward guidance would be a way to ease monetary policy further?

My second question concerns banking union, which you also refer to in your opening statement. You said that a swift implementation of the SSM and the SRM was needed, so would a so-called resolution board, as was put forward recently by the Franco-German deal be adequate for the ECB to start banking supervision on time and properly?

Draghi: With regard to the first question, we have already given some forward guidance in terms of liquidity availability – last time or the time before, I said that the fixed-rate full allotment would be maintained for the whole of next year until July 2014 at least, and as long as it is needed. In other words, if it is needed beyond that date, it would be prolonged. We have not addressed yet other types of formal guidance as other central banks have done, and we are reflecting on it. As I mentioned before, we have a range of different instruments. This one would be more on the standard side, while others would be more on the non-standard side.

With regard to your second question, yes, we are confident that the single resolution mechanism will be in place by the time the single supervisor takes over. We are not unaware of the many difficulties involved in establishing a single resolution mechanism. There are diverging views on the right pecking order or whether there should be depositor preference. You are all aware of these differing views, but we are relatively confident that this can be overcome in time. A different thing would be the existence of a single resolution authority, where the divergences are related to whether or not treaty change was required. But certainly, the establishment of a single resolution mechanism would already constitute significant progress and would help the single supervisor take over with great confidence.

Question: Maybe I can ask again the first question about whether or not today’s decision was unanimous. I did not hear a yes or no. Were there perhaps some members who called for a rate cut?

And, secondly, now the ECB is 15 years old, what we see in the press is that there are a lot of different opinions from Executive Board members on what to do. You emphasised that it is difficult to act on some topics but it seems that there are some divisions and no agreement on rates or on whether or not to buy ABSs or the negative deposit facility and so on. So, is there a time when your authority could be at stake?

Draghi: Well, on the first question, there was a consensus by the Governing Council in the assessment that changes were not enough to warrant immediate action. So, it was more a discussion based on the analysis than on the decision.

As regards your second question I think too much is being done in terms of dramatisation of different views. You have different views in all central banks and in a period of such great uncertainty you obviously have a variety of opinions. That is actually very good. But we have to make a distinction. You can have disagreements about certain measures but differing perceptions about the other measures I mentioned, namely ABSs, very long-term refinancing operations, enhancement of additional credit claims, collateral and so on and so forth. These are all topics under discussion. When people do not have definite views – because, as I said before, these are very complex issues, we study them together. While one studies and explores ideas there will obviously be changes of views and your own view may change during the discussion. So, to depict a dramatisation or contrast about these measures is certainly a vast exaggeration. I think there was some sort of rumour that we would use ABSs to buy the credit claims of Italian companies towards the government. I still wonder who had this idea – I really do not know who came up with it, because it is impossible. But it only lasted for a week and then disappeared, so I do not think that there is anything to be dramatic about.

Question: Mr Draghi, I guess the weather has turned a little better, at least in Frankfurt. People are starting to go on their summer holidays. There are still capital controls in Cyprus throughout this period. Do you have a view on how long they should last? And is it damaging that they are going on so long and are capital controls something that you could ever envisage happening again inside the euro area?

And a second question on OMTs: obviously we will have the Karlsruhe court next week discussing that. Can you just confirm that the legal documentation for that is actually all ready but you are not going to publish it until you actually need to use it? And does that help when you have things like the German Constitutional Court holding hearings on it?

Draghi: Well, on the first point, capital controls, as you know the ECB is not responsible for capital controls. Capital controls are under the domain of the European Commission. And the European Commission is working actively with the Central Bank of Cyprus, with the supervisors there, to assess when would be the time to lift capital controls. The ECB is aware that capital controls distort profoundly the markets in the euro area and we made clear our view at the time and, certainly, if compatible with the stability of the financial flows of the island, the sooner the capital controls are lifted the better. But this is not our responsibility.

The second point, about the legal documentation on the OMTs, is that it is ready and is about to come out. Not today, no, but frankly, you ask me this question every time and I cannot really see the issue. What is the issue about that? Anyway, if it becomes an issue it is ready to come out. If it has to be an issue it is ready to come out. We never thought that it would be an issue.

Question: My first question is also on OMT and Karlsruhe next week. You have emphasised in the past the importance of OMT for calming down the markets and the euro crisis. So, I just wanted to know what you’d think if the Court put in question the OMT – let’s say at least politically. What could be the consequences for markets?

And the second question is on fiscal policy. In your statement you extended the paragraph on fiscal policy and you also mentioned the new framework, saying that it’s necessary to limit the extension of the time frames to exceptional circumstances. I just wanted to know, do we have such circumstances at the moment, for example, if we look at France?

Draghi: When we all look back at what OMT has produced, frankly when you look at the data, it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent time. Before OMT we had some expectations of deflationary risks, and that’s over. I think I see that as the greatest achievement of this monetary policy measure. You have stock prices, which went up everywhere – from, say, 30% in Germany to 39% in Spain – which means that the cost of capital has gone down, creating a much more favourable environment for investments. You see TARGET2 balances – I just received the data an hour ago. TARGET2 balances, today, are at the level they were in early December 2011, before the first three-year LRTO was undertaken. TARGET2 balances, for Germany have declined by €160 billion since then. There are people who are convinced that TARGET2 balances are a big risk for countries. The data should prove to these people that now the risks are lower after OMT. Ten-year sovereign bond yields declined spectacularly in several countries but went up in Germany. And that’s very important for the saver, for the German saver, for insurance companies and pension funds. I can continue with this: volatility indices. OMT has brought stability, not only to the markets in Europe but also to the markets worldwide. The same thing if you look at US stock prices. Of course, in other jurisdictions other things have happened at the same time. So, I am saying that, looking back, one can only be quite satisfied with the results obtained by this operation.

About Karlsruhe, about the constitutional court, I’m absolutely confident that the court will decide in total independence and will analyse, will consider with thoroughness, fairness and competence all the advice from all sides.

Your second question was about fiscal measures. The position of the ECB is that these two-year extensions should be given in exceptional circumstances and, more importantly, should be coupled with a commitment to undertake structural reforms. And I’m saying this because, very often, these fiscal adjustments are combined with a lack of competiveness in the countries concerned. So, if a country just gets a two-year extension and in two years’ time comes back with a higher deficit, a higher level of debt and the same degree of competitiveness – that is to say very little – I don’t think the markets will be happy, and they’ll very soon punish this country or other countries like that. The plea here is don’t get too optimistic about the present market condition; don’t interpret the present market condition as one that would allow any protracted relaxation of fiscal standards without undertaking structural reforms at the same time, without increasing competiveness. That’s the message that I would have. And that’s the message in the Introductory Statement – that is what is meant.

Question: I have two questions. First, could you give us some data on the development of bank deposits at the European Central Bank during the last four weeks? Have the deposits been reduced?

Second, why are you not willing to speak at the hearings in the Federal Constitutional Court of Germany?

Draghi: I will answer the second question first. It is not that I am not willing. We thought about who would be the most suitable person and we decided, all of us, that it would be Mr [Jörg] Asmussen. He is in charge of the legal department, and legal affairs on the Executive Board, and he knows the German legal system much better. Incidentally, the ECB did not receive a request for me to go there, but just for the institution to be represented. Having said that, you know that I do not shy away from making my ideas and my views clear, so I will certainly find plenty of opportunities to do so, as I have today. So, it was really about deciding who would be the best person for the court.

In answer to the first question, we continue to experience a decrease in excess liquidity, we continue to experience LTRO repayments, and these repayments have currently reached approximately 60%, or perhaps slightly below 60%, of the net injection that took place in the early months of 2012. This is a positive sign, because it shows that financial conditions are continuing to normalise and that banks do not need to rely solely on the ECB for their funding as they can get funding from other sources. For example, deposits in the stressed countries have once again become a source of funding; the interbank market in the non-stressed countries is again becoming a source of funding; and so on and so forth. It is also a sign, however, that this liquidity is not being used in the system. So, it is a good sign from the point of view of financial markets stabilisation but I would also say that the fact that LTROs are being repaid is a symptom of the underlying credit weakness. All in all, the ECB is the only central bank where the liquidity component of money creation is shrinking. That is also a good thing, because we, unlike other central banks, can gradually downsize our balance sheet without having to take any decisions that would, or could, create volatility. This is an automatic process that is not deflationary. It is not that credit has been cut; credit is not there yet. Finally, I am sure you have not forgotten that, in the early months of 2012, how some people were saying how big, immense were the risks that we were undertaking with these measures. Have we seen any of these risks materialise?

Question: I would like to go back to the economic outlook. At what point do you think that the economy needs to have bottomed out this year for your scenario of a recovery later on to still materialise? It is June already, so I am wondering how long you think we have in that respect?

And second, going back to SME lending, if I understand correctly you are saying that there is very little that the ECB can do about the short‑term cyclical fragmentation in the lending markets, because of the recessions across the euro area. But, over the long term, it seems as if the only logical way to deal with this is if the banks are properly recapitalised first. So, going into summits, for example the one at the end of this month, are you going to ask for a quid pro quo from governments to commit to recapitalisations or restructuring, before the ECB will commit to unveiling a plan on SMEs?

Draghi: Your first question is the key question we are always asking ourselves, and not only when we meet. One answer is to ask yourself what are the drivers of this recovery, which is going to be gradual as I have said many times. Currently, exports are the main driver. Exports have increased in almost all countries, especially in Germany, Spain and Italy. The second driver is our own accommodative monetary policy, which will gradually find its way through the economy. Third, low inflation is increasing people’s purchasing power. The lower price of oil is also an important factor. Finally, although less than in other countries, such as the United States or United Kingdom, you have a wealth effect coming from the improvements in financial markets and, as I said before, you have a lower cost of capital for investment. On the other hand, you have a quite broad weakness in domestic demand and consumption, particularly because of the high levels of unemployment. There is something I would like to mention that is linked to this. When you talk to healthy banks that do not need to be recapitalised, you ask them why they are not lending more. The answer you get is that the net rate of return, adjusted for the risk of lending, is not high enough for them to lend. We have made a significant contribution to increasing the net rate of return, because it includes funding rates, which have gone down. But the perception of macroeconomic risk is still there, and that is a question of time.

On the second question, one reason why banks do not lend is risk aversion, which is both micro, with respect to their clients, and macro, with respect to the general economic environment and the high uncertainty that still prevails in some parts of the euro area. Of course, I take for granted that there are sectors of economic activity in certain countries, such as construction in Spain, which needed to be downsized anyway. So, you have a certain amount of deleveraging taking place, for one reason or another, in various parts of the euro area, and that is encouraging. The second point is about banks being recapitalised. We do not want to repeat the mistakes made in 2011, when we had the European Banking Authority running stress tests without a backstop being agreed by governments. I am sure you remember that in the United States it was the other way round. First, they determined the backstop, and then they conducted the asset quality management review and, miraculously, the capital needs of these banks came out exactly equal to the backstop that had been allotted. We do not have these magic powers. But we at least want to make sure that there is an explicit commitment by governments, by the European Stability Mechanism and by the Eurogroup to provide a backstop, in case the asset quality review undertaken by the ECB, the national supervisors, the third-party private sector assessor and other national supervisors, which will exert peer pressure, finds capital shortfalls. Let me quickly add two things. First, I think the situation has changed significantly in the past two or three years, and for the better. Banks have raised capital and substantially reduced their leverage, which is not what we expected three or four years ago. In fact, the current situation is different to how we had imagined it would be two, three, four years ago. Second, before using a backstop there are many ways for a bank to recapitalise itself. First, you have supervisory action. Second, you can go to the markets. Third, you can merge. You can do many other things before you use the backstop, but it is extremely important, psychologically, to know that, if you have a capital shortfall that cannot be addressed by all these measures, it can be addressed by the backstop. This is vital, and we have already asked, and will continue to ask, for this commitment.

Question: I would like to go back to the topic of interest rates. Can we deduce from your description of your discussion today that fewer members called for an interest rate cut today than had called for a fifty-basis point cut last month?

Draghi: I’m sorry, what you’re saying is …

Question: Last month you told us that a number of Governing Council members had actually pushed for a more aggressive easing, and I wonder whether the number of Council members who called for a rate cut today were fewer than those who had hoped for a more aggressive easing in the previous month? That’s my first question.

My second question is: You have repeatedly said that the ECB is technically ready for negative interest rates. Are you equally technically ready to move both the main refinancing rate and the deposit rate to zero, and do you see any non-technical obstacles to having both rates at the same level?

Draghi: As to the first question, frankly the discussion was not on whether to cut rates or not. The discussion was on whether we had had enough of a change since last time to warrant action now, and the prevailing consensus, the vastly prevailing consensus if you will – and I can go on and on adding adjectives to this – was that basically the changes that have taken place are not sufficiently one-directional as to warrant action now. Having said that, as I said before, we stand ready to act and will continue monitoring all incoming data closely.

On the second point, I told you we are technically ready, we have looked at that, but we won’t pre-commit. I’m not going to tell you what we will do next month or in two months’ time, or in six months exactly, but I will say that all the groundwork for venturing into negative territory for the interest rate on the deposit facility has been done. Whether this will be combined with other measures or not, I am not in a position to tell you now.

Question: But my question was whether you are you technically ready to have the main refinancing rate and the deposit rate both at zero or whether this presents a problem?

Draghi: This question implies a possibility that I am going to tell you exactly what we are going to do about the main refinancing operations. And I am not going to tell you this now.

Question: There was a report yesterday about a radical cure that the ECB is preparing for banks in autumn, just in preparation for the SSM competences. There was talk about the opposition of some countries, such as France and Italy, to this radical cure. I am asking you if it is true at all. ]

Second, what influence did the possible change in the monetary policy of the Federal Reserve have on your rate decision today? Of course, I know you will say that it is another central bank and you’re in another cycle, but some people say this was also very important.

Draghi: In answering the first question, I would simply not use the term “radical cure”. What we are going to do is – and I think we did say it clearly – we are going to have an asset quality or balance sheet review of the banks that are going to be taken under this Single Supervisory Mechanism. We have agreed on having this review done by the ECB the national supervisor, and also other national supervisors working jointly, as that way we will increase peer pressure. We would increase reciprocal disclosure, mutual disclosure and fourth, a private sector assessor. That’s been agreed. I don’t know of any disagreement about that. So I don’t know where these reports are coming from.

On the second point, what is happening in the rest of the world is, as someone said before, having consequences on volatility and interest rates all along the yield curves, and we will certainly look at that in our monetary policy decisions, in the discussion of the monetary policy decisions, but our monetary policy is completely independent. So, it does pursue price policy stability as an objective, price stability in the euro area and in the medium term. We take into account all incoming information in taking our decisions, but in terms of it having any direct influence, no, I would say absolutely not.

Question: I have two questions. The first one is: do you see any risk of deflation in some countries in the euro area?

The second question is, yesterday, the IMF issued another mea culpa with regard to the austerity measures which were imposed on Greece. I wondered if the ECB also had some mea culpa to offer.

Draghi: Well, not really.

First, on deflation: the price path that has been foreseen by the staff projections is lower than the price path foreseen in previous staff projections, both for this and next year. This is mostly due to a decrease in the price of oil. If you discount oil and food, you see that the difference between the two price paths, of the previous and of today’s projections, is much smaller. Second: is there deflation? We must first ask ourselves what deflation is. Deflation is a protracted fall in prices across different commodities, sectors and countries. In other words, it is a generalised protracted fall in prices, with self-fulfilling expectations. Therefore, it has explosive downward dynamics. We do not see anything like that in any country. Also, when we look at which prices are falling, we see that the fall in prices is actually limited to certain categories of goods and – when discounting oil and food, as I said before – these decreases are due to less regulation, for example, or to the introduction of technologies which increase productivity. Of course, the falling price of oil is very important because now we really have to understand whether it is a structural fall in price, i.e. whether it is going to stay because of the shale gas in the United States and elsewhere (as apparently it is not only in the United States), or whether it is something transitory. Also, monetary policy has to look beyond volatility which, as I think I said in the introductory statement, is going to continue to be present in price developments – so do not be surprised if you see bumps in the price paths in the months ahead, because there is going to be volatility there. But you have to look through volatility and you need to ask yourself how inflation expectations are behaving. There you see that inflation expectations remain firmly anchored, and this is the case whether looking at the inflation expectations derived from the financial markets or those from the surveys. The Survey of Professional Forecasters (SPF) shows that inflation expectations have been anchored at 1.9% for 15 years, since the creation of the ECB. So, all in all, we do not see deflation. Furthermore, we would certainly consider any deflation very seriously because it is a threat to our ability to pursue our objective of maintaining price stability. If we were to see deflation, we would have to sit down and think carefully, but we do not see it. In addition, some of these changes I hinted at are actually changes in relative prices, so they are positive. They show that there is real adjustment taking place, which can be seen in the export levels, which have gone up in some of the stressed countries.

On your second point, on the issue of mea culpa, no, I do not think we do; in fact, one good thing, as far as I understand, about this IMF paper is that the ECB is not being criticised. So, that is one thing. There has been a statement by the European Commission this morning which responds to this IMF paper. It makes several points and I do not want to go back over these points. I want to say something different. Looking at the present situation, Greece has undertaken an extraordinary adjustment process. There is ownership of this adjustment by the government and we have to acknowledge the progress that this country has made. If we think back to a few years ago, it would have been unthinkable. Of course, if this paper by the IMF – which I have not read – decides to offer mea culpa and identifies the reasons for mistakes that have been made and other things, we will certainly have to take them into account in the future. However, often this mea culpa is in fact, as I will call it, a mistake of historical projection, i.e. you tend to judge the past by today’s standards. We cannot forget that four or five years ago, when the discussions about the adjustment in Greece were taking place, the climate was, in general, much worse. There was a fear of contagion there and very high volatility. That is, in a sense, where the fragmentation of the euro area really started. So, it is always very hard to pass ex post judgement on what happened four years ago. Having said that, rather than looking backwards, why do we not look forward and take stock of the extraordinary progress made and the positive path that has been taken?

Question: You talked about dramatism a few minutes ago and I am afraid I will be a little bit dramatic now because I am from a country that has an unemployment rate of 27%, which is a number of a great depression, a fiscal policy that is contractionary and a monetary policy in Spain and also in other countries that is also contractionary because credit is not available to small and medium-sized companies. Are you telling the Spanish, Portuguese, Irish or even Italian people that the ECB can’t do anything else with inflation actually lower than 2%?

Draghi: Well, I am not sure I get the point, but I think I get it. First, the fact that inflation is low is not, by itself, bad; with low inflation, you can buy more stuff. Second, we don’t see deflation and that is what we have to fear. We don’t see that yet. Third, fiscal consolidation is and remains unavoidable. It should be clear I think to everybody that you cannot have growth with endless debt creation. Sooner or later, you are going to be punished and the whole thing stops and that’s exactly what happened after the financial crisis in many countries. Fourth, are there ways to make fiscal consolidation growth-friendly? The answer is yes. Fiscal consolidation in most countries has taken the shape of increasing taxes and there are many reasons for that. Often this was done in an emergency situation or unfortunately because the easiest thing to do is to raise taxes. Now that is not growth-friendly and it is not growth-friendly because it happens in parts of the world where taxes are already very, very high. So what would be a better way? A better way would be the difficult way, namely to reduce unproductive government expenditure and reduce taxes together. But once you have done that – and in a sense I hinted at this before – you also have to ask yourself why these countries were not competitive. Why did they have to rely for growth in the good times, or “fairyland” times, on the protected sectors that were shielded from international competition? And then you ask yourself what should these countries change to become more competitive? And then what adjustments are needed in order to achieve this objective? The encouraging thing is that we see that most countries, if not all of them, are in this process, which of course is very painful, and I don’t think I miss one opportunity to make sure that you all know how aware of this we all are in the ECB.


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