Introductory statement Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Frankfurt am Main, 1 February 2001
With a transcript of the questions and answers
Ladies and gentlemen, let me welcome you to our first press conference of 2001. The Vice-President and I are here to report, as we have done for more than two years now, on the outcome of today's meeting of the Governing Council of the ECB, which was also attended by the Eurogroup President, Minister Reynders, as well as by Commissioner Solbes. Let me also take this opportunity to again welcome Greece as the twelfth country to join the euro area. Mr. Papademos, the Governor of the Bank of Greece, has been participating in our meetings as a member of the Governing Council since 1 January 2001.
The Governing Council conducted its regular examination of monetary and economic developments and their implications for the maintenance of price stability in the euro area. The decision to keep interest rates unchanged reflects the Governing Council's assessment that the risks to price stability in the medium term now appear more balanced than at the end of last year. Factors which might pose upward risks to price stability in the medium term are still present and as such will be subject to ongoing close monitoring.
Let me elaborate on this assessment. Starting with the first pillar of the monetary policy strategy of the ECB, monetary data for December 2000 confirmed the gradual moderation of the growth of monetary aggregates which has been observed since the spring of last year. According to the latest data, the three-month average of the annual growth rates of M3 in the months from October to December 2000 stood at 5.0%, which was slightly lower than the average of 5.1% recorded for the period from September to November 2000. Therefore, after the recent slowdown in monetary growth, the risks to price stability from the monetary side have become increasingly balanced. Caution still needs to be exercised, however, given the continued dynamics in credit growth to the private sector and the upward deviation of M3 from the reference value in the past.
Turning to the examination under the second pillar, broadly similar indications are emerging, as inflationary impulses resulting from previous developments in oil prices and the external value of the euro are gradually diminishing.
As regards economic activity, uncertainty concerning the external environment for the euro area has increased, mainly related to signals that the slowdown in growth in the United States may be more significant than earlier expected. This is likely to result, directly and via a spillover to other regions, in some deceleration of growth in the world economy. World real GDP growth, which in 2000 posted its strongest performance for many years, may therefore moderate in 2001 but will still remain at an acceptable level.
This deceleration will clearly have some dampening effects on euro area net exports. The euro area is a large economy where exports of goods and services amount to around 17% of GDP only. Economic activity in the euro area is therefore determined mainly by domestic factors. Overall, the fundamentals of the euro area remain broadly favourable. While, as recently published data show, real GDP growth slowed somewhat in the second half of last year, the level of business and household confidence has remained high, supported by, inter alia, high degrees of capacity utilisation and ongoing unemployment declines. Moreover, real income in the private sector will benefit from lower oil prices and from the reductions in direct taxes in 2001. Hence, while downside risks to real GDP growth exist, growth is very likely to continue at a reasonably robust pace.
Developments in the euro area bond markets are in line with this outlook for economic activity. Moreover, inflationary expectations implied by bond yields confirm that the financial markets expect current levels of consumer price inflation to be temporary, and price stability to be maintained in the medium term. This assessment may also have been reinforced by the recent moderation in oil prices and the movement of the euro exchange rate in the period since the end of October 2000.
Lower oil prices and the appreciation of the euro have already produced some effects on price developments. In December 2000 the annual rate of increase in the Harmonised Index of Consumer Prices (HICP) declined to 2.6%, from 2.9% in November. A confirmation of recent developments in oil prices and the euro exchange rate would contribute to a further downward adjustment of overall HICP inflation in the period ahead. Over the near term, this process may be slowed down by the delayed impact of past import price increases and possibly also by some transitory further food price rises caused by the current health issues associated with beef consumption. It may therefore take some time for HICP inflation to move back below 2%.
Notwithstanding the assessment that the risks to price stability are now more balanced, there are still factors posing upside risks which therefore require continued attention. These are mainly related to potential second-round effects on wages of the past increases in import prices, as well as to bottlenecks and shortages in labour markets. For the medium term, it remains paramount that wage developments remain moderate.
In addition, it is crucial that structural adjustments continue. This requires sustained labour market reforms, continuing liberalisation of product markets and further integration in the financial services sector, all of which will expand economic activity and increase employment. It is equally important that further progress be achieved in the area of fiscal policy reform, with continuing progress in fiscal consolidation through limits in public spending growth, allowing both a reduction in remaining budget deficits and an alleviation of the fiscal burden on corporations and households without threatening or slowing the progress in fiscal consolidation.
Overall, the existence of the euro and the single monetary policy has provided the euro area with an institutional setting which leaves it significantly less exposed to external influences. Within the euro area the maintenance of price stability over the medium term, together with further progress on structural reforms, will provide an important contribution to the achievement of sustained non-inflationary economic growth and will thereby also support a further solid and sustainable expansion of the world economy.
Let me now give the floor to the Vice-President, who will inform you about other issues decided by the Governing Council.
The Governing Council has adopted a set of standards, recently endorsed by the G10 Governors, as the minimum standards of the Eurosystem's common oversight policy on payment systems. The Eurosystem will assess all systemically important payment systems in the euro area against these "Core Principles" and will make the results of its assessments available to the public.
Concerning issues relating to euro banknotes and coins, I should also like to provide you with the following information.
First, the Governing Council adopted an ECB Guideline on the 2002 cash changeover. Owing to the crucial importance of this matter, and given the responsibility of the Eurosystem as a whole in achieving a smooth cash changeover, a legal framework has been established. The Guideline will enable all those involved to become familiar with the basic rules to be followed in preparing for the introduction of the euro banknotes and coins. This ECB Guideline will be published today on the ECB's website and shortly in the Official Journal of the European Communities.
Second, yesterday evening the members of the Governing Council were given a presentation by Publicis, the communication agency selected to assist in conducting the Eurosystem's Euro 2002 Information Campaign, on the current status of the campaign. This focused in particular on the creative concept of the mass media campaign, which will start in September 2001. A website dedicated to the Euro 2002 Information Campaign has now been launched in all 11 official languages of the European Community (www.euro.ecb.int). The website currently contains a section on the euro banknotes and coins. Further sections will be added over the next two weeks to help specialist groups and the general public to prepare for the introduction of the euro banknotes and coins. These sections will be updated throughout the year.
We are now at your disposal for questions.
Transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB and Christian Noyer, Vice-President of the ECB
Question: President Duisenberg, do you expect to maintain your monetary stance for the foreseeable future or do things these days just look too uncertain to say something like that. The other question I have is about your inflation and growth projections. Mr. Issing has already said that the projections released in December were outdated and that, if they were done again today, they would both be a bit lower. My question is: how much lower and what does "reasonably robust growth" mean in numbers?
Duisenberg: For the foreseeable future, I cannot answer. We need more information about actual developments on which to base future decisions. For the time being, in the words used by the IMF in its final statement of the day before yesterday, which will be published shortly, we are well advised to adopt an attitude of "wait and see". The forecasts we published in December were based on so-called exogenous data, dating back to October and further. In the meantime, the environment has changed: the exchange rate has appreciated, oil prices have dropped. This, of course, will lead us to reassess the outlook for the future. In as far as we already have results of such reassessments available internally at the ECB, we expect that the period of robust economic growth - i.e. growth in excess of what we would call long-term potential economic growth - will remain on the cards, so to speak. We still expect a rate of growth within the range published, i.e. - to be more precise - close to a level of 3% both in 2001 and in 2002.
Question: May I ask you to give us your assessment of the current fiscal stance in the euro area. You have been very critical of the easing that has been taking place. A lot of people say that it has actually become very fortunate that fiscal policy is helping growth a little bit. And, on the other hand, there is this discussion about fiscal easing in countries where inflation is already very high.
Duisenberg: Well, we have not addressed this question very specifically at our meeting today. But, in general, what we are looking at, of course, is not so much the cyclical developments which may influence decisions on budgets as primarily the structural developments which are desired. The structural development desired is to adhere to the Stability and Growth Pact. And that is the solemn oath: achieving a situation of budgetary balance or even a small surplus over the medium term in all euro area countries. In that respect, everything is not equal for all countries, but we continue to insist that political endeavour to achieve that situation should remain intact and we believe that that is not the case in all the countries we are observing.
Question: The President of the European Commission said last week that, as the guardians of the euro, the Commission had to reprimand Ireland because of its most recent budget. The Irish Minister of Finance disagrees and he said that many people outside the euro area would be amazed and amused that the most successful economy in the euro area should be the first to receive such a reprimand. What do you think?
Duisenberg: I am not part of the decision-making body which issued this recommendation to the Irish Government. I believe that, although it is true - as you say - that Ireland is without doubt the most, or at least one of the most successful economies in the euro area, the budgetary plans of the Irish Government were clearly out of line with the broad guidelines they had agreed to earlier. And so I do have - if may I say so - full understanding for the judgement that has been reached and formulated, be it in very difficult circumstances.
Question: Also on Ireland. Why does it matter that Ireland behaves responsibly? Why does it matter for the euro zone? Indeed, a lot of people want to know why such a small part of the euro zone is raising so many questions in people's minds. And the other issue connected with Ireland and why it matters: is there a danger that, if Ireland is allowed to do what it wants, then that might set a precedent for other countries in the euro zone in future. If Ireland does not fall into line, other countries might then decide they can do what they want as well?
Duisenberg: I think that with your second question you have really answered your first question.
Question: I noticed that you said you would like to see a confirmation of recent developments in oil prices and the euro exchange rate. Can we take it from that that, if there was a more decisive move of the euro towards parity with the US dollar, then this would make it easier for you all to make your minds up at the moment.
Duisenberg: It was not that difficult today to make our minds up at all. And I do want to reiterate that we do not have an exchange rate target. We only have one target, and that is to maintain internal price stability.
Question: President Duisenberg, the Irish Finance Minister has made it clear that he will not change his budget in response to the recommendation from the European Commission last week. Is a change in the budgetary strategy which you understand, as you yourself described, something that you would like to see?
Duisenberg: I have no competence to make judgements on the Irish budget specifically. That is for the Council of Ministers and I am not going to comment on individual countries.
Question: There seems to have been a very careful dilution of the tone of your statement that introduced the meeting here today. Can we assess from that that you are more neutral in your stance towards the monetary conditions in the euro zone at the moment? And could you tell us if the decision on rates today was a unanimous one?
Duisenberg: If the tone of my statement today is perceived by you as you describe (as being more neutral) then apparently we have managed to strike the right tone. And you know that we never disclose the voting behaviour in the Governing Council. I can only say that it was not necessary to take a vote.
Question: Mr. President, in what way do you think that the Fed's decision to lower interest rates will affect the European economy, and do you perceive it as the right move at the right time, that is, these two very quick and very large steps that the Fed has now taken?
Duisenberg: The second question first. I do not comment on the decisions made by other central banks. Now, as far as this central bank is concerned, I do want to emphasise, or rather re-emphasise, that we base our monetary policy decisions on an analysis of both monetary and other economic developments inside and outside the euro area. I also want to re-emphasise - as I said in my introductory statement - that the impact of events outside the euro area is of a rather limited significance to the euro area, the euro area being much more of a closed economy than its constituent parts used to be in the past. So the impact of developments outside the euro area is thereby, by definition, already rather limited. Thus I would now like to rephrase the first part of my answer, adding that our analysis is purely based on the development of internal monetary aggregates and a wide range of data relating to both inside and outside the euro area. In other words: we make our own decisions.
Question: Please bear with me while I ask another question about the Irish economy. The criticism of the Irish economy has, of course, been that the measures taken in the last budget were pro-cyclical. How can the Irish Government avoid that, considering it is the only country within the euro zone that does most of its trade outside the euro zone? What would you recommend and what would you like to see the Irish Government doing?
Duisenberg: To take measures less pro-cyclical than the measures that had been taken.
Question: Could you elaborate on that?
Question: I would have two questions concerning the international aspect. I am quite sure that you were discussing with Mr. Reynders how you would act in Palermo in two weeks where both of you are going to make a presentation. What is the result of this analysis? At the last G7 meeting in Prague, there was an exchange rate statement which talked more or less about a misalignment. What is the situation for the euro and its exchange rate today and are you happy to say that you are speaking with one voice as far as the euro is concerned, one voice being both the ECB Governing Council members and the members of the Eurogroup?
Duisenberg: We are speaking with a single voice, that is true. This applies both to the members of the Governing Council and, in particular, to the members of the Eurogroup, the Ministers of Finance, and we will make every effort to continue to do that in the future. And, as far as the statement of the G7 to be issued in Palermo later this month is concerned, I cannot say at this moment what that statement will include. It will have to be a statement that has been agreed by the participating members of the G7, which - in this case - will include the European Central Bank and the President of the Eurogroup. But you can be sure that we will have a press conference in Palermo, Mr. Reynders, Mr. Solbes and myself together.
Question: President Duisenberg, I wanted to come back to the euro, if I may. I wanted to ask you first of all: interventions in the foreign exchange market - were you present as the European Central Bank in the foreign exchange markets in recent months? Will you be present in the near future or do you exclude it? That is my first question.
Duisenberg: My answer is the same as in the past: on interventions, I will take no questions. If they occur, we will tell you afterwards.
Question: So you do not exclude interventions? Can I come to my second question concerning the level of the euro exchange rate? The Governing Council of the European Central Bank and you yourself said a little while ago that the euro is undervalued. In the meantime of course, the value of the euro has increased. Do you think that the valuation of the exchange rate is fair, or fairer than it was? And the second question: the euro of course dropped - do you think that parity of 1:1 vis-à-vis the dollar is a sort of target for you? Do you want to reach that level or is that irrelevant for you?
Duisenberg: I have to repeat that the exchange rate is not a target for us in our policy decisions. Therefore, the exchange rate - as the German Minister of Finance said today - is the outcome of market forces. In the past, last year of course, it was true that we had come to the judgement that the movement of the exchange rate had clearly gone too far out of line with the fundamentals to be tolerated much longer. That was reason for us in October and subsequently to intervene in the markets. That also happened to have been - as we can see now - the turning-point in the movement of the exchange rate.
Question: Since November, we have had falling consumer price inflation in the euro zone. We have had a rise in the euro's exchange rate. This would appear to have, de facto, tightened monetary conditions in the last couple of months. So, by not changing interest rates you appear to have allowed conditions to get tighter at a time when there is actually a mild slowdown in the pace of growth. This might strike some people as being ultra cautious. How do you interpret things?
Duisenberg: Well I would point out that, first of all, we take a forward look at the likely development of inflation. We do know that inflation, be it temporarily, is still well above the value we defined as the maximum permissible level. We are seeing that monetary developments are gradually moderating, but that does not point to tight monetary conditions. May I say that, month after month, the growth of credit to the private sector is in the neighbourhood of 10%, so we do still regard monetary conditions as quite adequate for the present state of the economy. So I do not share the judgement that, over time, we have permitted a tightening of monetary conditions to become apparent.
Question: Mr. President. Many private forecasters have cut their growth forecasts for this year to around 2.5%. Is your 3%, let's say, "weak" or is it somewhere between 2.5% and 3%?
Duisenberg: I said in an answer to a previous question close to 3%. And that means I expect it to be closer to 3% than to the 2.5% you mentioned.
Question (translation): Did the ECB Governing Council talk about the German proposal to have an overall financial supervisory authority established, that is to say, to take banking supervisory authority away from the Bundesbank and to create an independent institution that would be in charge of overall oversight? What is the consensus of the Governing Council on this matter? And how do you view a situation in which banking supervision is less within the realms of monetary policy than it has been so far?
Duisenberg: During our meeting of today? Of course, the plans as unveiled last week by the German Minister of Finance are only plans. There is no draft law yet available. To the extent, however, that the authority for supervision would be taken further away from the national central banks - this is one aspect of the plans - if true, this would be of the greatest possible concern to all central banks, including the European Central Bank. Let me say why this is true for the European Central Bank. As you know, we have in the Treaty a rather limited mandate in the field of banking supervision, namely, our mandate says that we have to promote the proper functioning of banking supervision. It goes without saying that, to fulfil that mandate and also the mandate to guarantee financial stability in the system in practice, it is much easier if the ties between supervision and the central bank - and here I mean the national central banks, which are our natural channel of communication to the markets - are as close as possible. There can be various models for that, for example by having supervision totally integrated within the central bank, as is the case in some countries in the euro area, or by having a close symbiosis between supervisory tasks and the central bank, as for example is the case in France, where the "Commission bancaire", which is the supervisory agency, is chaired by the governor of the central bank and the staff of the supervisory agency are on the wage bill of the central bank. That is a model that at least I - I believe I can say "we" - would greatly prefer over the model that is now being suggested in this country - if it is all true - of severing the ties between supervision and central banking. But I also understand that the latest news about this issue is that ties apparently will not be totally severed. Yet it is a matter of gravest concern to all central bankers present in today's meeting, including this one.
Question (translation): Greece is the youngest member of European Monetary Union. Can you already make an initial assessment of its entry? And what do you think the Greek Government would have to do in future to make sure that the position of Greece within Monetary Union can be further strengthened?
Duisenberg: Like any country, they have to see to it that the achievement of the convergence criteria, in which they have been successful and which has led to their admission into the euro area, continues on a sustainable basis. Or as you would say in German, the developments have to be "nachhaltig".