Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Dublin, 21 June 2001
With a transcript of the questions and answers
Ladies and gentlemen,
Today, the Governing Council met for the third time outside Frankfurt. Therefore, let me first of all thank our host, Governor O'Connell, for inviting us to meet in Dublin and for the generous hospitality offered to us. Our meeting was also attended by Mr. Solbes from the European Commission.
As usual, we conducted our regular examination of monetary and economic developments and analysed their implications for the maintenance of price stability in the euro area. The Governing Council decided to keep the ECB key interest rates unchanged. We also exchanged views on the issue of the convergence and divergence of economic developments within the euro area.
Let me very briefly report on our regular examination and assessment of the information provided under the two pillars of the ECB's monetary policy strategy. Against the background of available information, the current level of ECB key interest rates remains appropriate to ensure that the euro area economy will be able to maintain price stability in the medium term. As regards the first pillar, no new data on monetary developments have become available since 7 June, so that our previous assessment remains unchanged. Concerning the second pillar, recently published data on real GDP growth in the first quarter of 2001 as well as on industrial production in April 2001 pointed to a moderation of economic activity in the euro area, and the latest information on global economic developments continues to suggest significant uncertainty. In addition, as I already indicated two weeks ago, HICP inflation rose further, to 3.4% in May. Price developments continued to reflect mainly temporary upward pressure from energy and food prices, which was taken into account in our previous decisions.
Overall, the latest information did not change our assessment of the outlook for price stability over the medium term. We continue to expect the currently high rates of inflation to remain a transitory phenomenon and, in the absence of further unfavourable price shocks, inflation rates should fall below 2% in 2002. These developments are expected to take place in an environment of weaker economic growth, which should, however, remain broadly in line with trend potential growth of the euro area. We will continue to remain vigilant as regards future developments affecting the balance of risks to price stability, including - in particular - monetary developments, real GDP growth, price setting behaviour and wage developments. At this juncture, at which price developments are affected mainly by transitory factors, it is crucial that the current upward movement of prices does not become more lasting, and it is therefore important that wage moderation is continued.
I should like to take the opportunity offered by this special meeting to make a few remarks on what is often referred to as a "one size fits all" monetary policy. In this connection, I will address a few issues related to the ongoing discussions about the degree of convergence in the euro area. Itis indeed not surprising that many academics and market analysts devote much of their research to one of the most interesting questions in contemporary economics, namely the conduct of monetary and economic policies in a currency area extending from Finland to Portugal and from Greece to Ireland and encompassing one decision-making body for monetary policy and many more actors for other fields of responsibility.
Concerning monetary policy, it is obvious that the Governing Council of the ECB can only pursue one objective - the maintenance of price stability in the euro area as a whole. In doing so, it needs to adopt an area-wide perspective in its assessment of economic conditions and the outlook for price stability. Such an area-wide perspective, of course, applies to all central banks in the world which are responsible for conducting monetary policy.
The Governing Council has defined price stability with a focus on the euro area, namely as "year-on-year increases in the HICP for the euro area of below 2%". This definition applies to the medium term. The Governing Council's monetary policy decisions are based on an area-wide analytical framework, its now well-known two-pillar strategy. The first pillar assigns a prominent role to monetary developments in the euro area and the second pillar encompasses a wide range of other economic and financial variables - again exclusively with a euro area-wide perspective. Underpinned by this two-pillar analysis, the Governing Council then arrives at an overall assessment and sets the ECB key interest rates with a view to maintaining price stability for the euro area in the medium term. These are the basics of our approach to conducting the single monetary policy for the euro area as a whole.
Evidently, a single monetary policy for a group of 12 countries does not imply the same economic developments in the same year in all countries alike, nor does it imply identical developments in individual regions or sectors within a country. Rather, real GDP growth may differ, and there may be differences in unemployment rates or other important economic variables, i.e. there may be regional differences, as is the case in all large economic and monetary areas of the world. Such differences are unavoidable and have existed, within countries, since way back. In many respects, they reflect differences in the quality and in the success of the economic policies of individual countries comprising the euro area. Successful policies enlarge a country's production potential by means of structural reform, ensure a flexible functioning of the economy to fully exploit this potential and ultimately increase per capita income, enhance employment growth and reduce unemployment. As a consequence, successful countries also achieve sound fiscal positions in combination with diminishing taxation. As we are well aware, there are examples among the euro area countries where such highly positive developments have taken place in the recent past. These examples clearly demonstrate that there is ample room for competition in the field of best practices. The most successful countries will eventually provide a benchmark against which other countries will be measured.
However, there are types of divergence that can be a matter of concern. Here I would refer, in particular, to a situation marked by high rates of national inflation as a result of excessive wage increases, an unsustainable expansion of profit margins and/or an expansionary stance in fiscal policy. If such developments were to become entrenched in the economy, this would lead to a loss in competitiveness and, eventually, to a loss in output and employment growth.
While there is no way for the single monetary policy to take responsibility for such national developments, just as there is no possibility for national authorities to adjust nominal exchange rates within the euro area after having adopted the single currency, national economic policies must contribute to avoiding a situation which would subsequently require painful adjustment. For this purpose, a wide range of national economic policies is available - such as fiscal adjustment, appropriate wage setting, structural reforms and competition policy. Making use of them is not only in the interest of the euro area, but also to the benefit of the individual country itself.
To sum up, a single monetary policy for a group of 12 countries can function smoothly. Looking back over the first two and half years since the start of the single monetary policy, there can be no doubt that macroeconomic developments in the euro area have been very favourable. Divergences within the euro area are likely also to exist in future. For the euro area to function smoothly, however, well-balanced national economic policies should complement the single monetary policy with its primary objective of maintaining price stability in the euro area as a whole.
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 and Maurice O'Connell, Governor, Central Bank of Ireland
Question: Mr. Duisenberg, I was just wondering: you have been predicting for some time that inflation rates will start to come down. We had inflation figures out of Germany today that show - at least the first state reporting out of Germany - that the year-on-year inflation rate is lower than last month. Would you say that it is possible or likely that inflation peaked in May in the euro zone?
Duisenberg: We regard it as not unlikely.
Question: I also have a question about inflation. Consumer spending growth at the moment in the euro zone is, I think, just less than 1%. And wage developments, as you pointed out, are running at a bit less than 3%. And I was wondering: given that, can you explain why the 0% to 2% is still appropriate? Why not 2.5% for inflation? There is obviously not too much demand pull in the economy and yet inflation is way outside your target zone. So perhaps your target zone is too low?
Duisenberg: Well, I would not say that. We chose our definition for price stability on well-founded grounds as an inflation rate of no more than 2% two-and-a-half years ago now. It is true that for, I believe, 40% of the period for which we have been working, inflation has been in excess of that figure. But all the excesses have been due to what we call "transitory factors", like energy prices, like the food crises, like the depreciation of the euro exchange rate in the last year. And we are, as I say, very confident that we will be below 2% in the course of 2002. We feel no need to revise our own intentions or targets.
Question: Mr. Duisenberg, could I ask you something specifically in relation to the issues that you raised about divergent economic policies and best practices, some of which would be a concern? Specifically, are you concerned that Ireland's economic strategy, Ireland's expansionary budgetary policy, Ireland's inflation rate fit into the category that you have just described? And are you concerned about Irish economic management at the moment?
Duisenberg: I will not comment on specific Irish economic management. But when I singled out some countries in the euro area which had demonstrated remarkably successful performance, you can be sure that in my mind I included Ireland in that.
Question: In relation to expansionary budgetary policies, would you include Ireland in that?
Duisenberg: Well, as for the expansionary budgetary policy, we do look at that with some degree of concern in an economy which shows signs of overheating. So, we concur with warnings that have been issued against that policy.
Question: Our recent Nice Treaty vote was important in terms of considerations in the EU regarding working with 27 countries at Commissioner level and so on. The European Central Bank - if the EU is enlarged - may have 27 central bank governors sitting around its table. Does the Irish Nice Treaty vote cause you any concern in relation to your plans to organise some changes in respect of the way the ECB works in the future, or could work in the phase of enlargement?
Duisenberg: The Nice Treaty included a so-called enabling clause saying that if the number of countries belonging to the European Union were to exceed a certain number, there could be an abbreviated procedure to change the decision-making process also at the ECB. And we are already considering how that decision-making process could function if the decision-making bodies reach a rather unwieldy magnitude. We will come with suggestions in that respect, as soon as the Nice Treaty has been ratified by all the parliaments, including of course the Irish Parliament, and we hope that at some time that will happen. At least that is my personal hope.
Question: Mr. Duisenberg, you did not mention the currency in your opening statement and I wonder if you could tell us whether you are worried that the longer the euro stays weak, the greater the threat is that it will be inflationary as regards imported inflation.
Duisenberg: The longer the euro stays stable, the less that threat will be. So it is not a threat that preoccupies us very much at the moment.
Question: If you believe that inflation will fall below the 2% mark next year and if central banks are supposed to look forward, why not cut interest rates now?
Duisenberg: We cut interest rates some weeks ago and we did so also in view of the medium-term perspective. Today we came again to the conclusion that our monetary policy stance is appropriate for the medium-term inflation perspective.
Question: Just on the question of British entry into the euro zone, I was wondering, Mr. Duisenberg, how you interpreted the recent comments by Mr. Blair and Mr. Brown on the issue. Do they make you more hopeful that Britain will soon join? And do you think that would be a good thing for the euro currency, which has been performing poorly of late.
Duisenberg: The British entry is a purely political issue to be decided upon by the British people itself, and I will not meddle in their affairs. I do hope that we will one day achieve the goal of having a single currency for as large an area as possible, certainly encompassing all members of the European Union.
Question: Mr. Duisenberg, I just wanted to ask, do you think that the objective of focusing on inflation alone is too restrictive? And would you not perhaps - given the way the economy is going - now favour the US model whereby you have to support growth as well as keeping an eye on inflation?
Duisenberg: Was that not the same question I had earlier? Whether our objective is too restrictive? To that I answered "no".
Question: A personal question then: Do you plan to resign next year once the euro is up and running as you said back in May 1998? Do you plan to resign as President of the ECB next year as you indicated back in 1998 when you took office?
Duisenberg: As soon as I have decided to resign you will, after the competent authorities, be the first to be informed of the fact. But I will only decide that when the time is ripe.
Question: There were speculations this morning in one of the German newspapers about your future as President. And Mr. Waigel and the current Minister of Finance said that you would not resign. There was an opinion out there that you would only serve four years and that then you would go.
Duisenberg: Well, I have decided on many occasions - and I have stuck to that decision ever since - that I will not comment any further on this issue.
Question: Mr. Duisenberg, would you define your present position on monetary policy as "wait and see"?
Duisenberg: I would describe it as appropriate.
Question: Mr. Duisenberg, Mr. Reynders today made some comments to the effect that he would like you to personally attend the future meetings of the Eurogroup in Brussels, or wherever they may be meeting between now and the end of the year, the implication being that the ECB is in some way not well represented if you are not there. What is your reaction to that and will you be assuring him that you intend to be present at the coming meetings?
Duisenberg: The ECB is led - in a narrow sense - by an Executive Board. And the Governing Council is chaired by a President and a Vice-President. As Executive Board, we are a collegiate decision-making body. And every single member of the Executive Board is in a position to adequately represent the ECB and to express views as the views of the ECB, and that should be enough. And I have made this position known to Mr. Reynders in a letter which I recently sent him.
Question: Mr. Duisenberg, how great is the risk of a recession in the world and especially in the United States? Is this fear now greater or has it diminished? The second question is: what is the analysis of the first pillar, M3, with the real price gap, the money gap. Are these also signals that your monetary policy is not appropriate or a little bit too restrictive, as some analysts have said? If you take M3 and the real money gap, the monetary policy looks very tight.
Duisenberg: First of all, regarding the chances of recession, I said that we live in a global environment of very great uncertainty. For the euro area we do not expect recessionary developments. We think that this year and next year the actual growth rate of GDP will be broadly in line with the trend potential rate of growth.
And now your second question, which was on M3: We see the M3 development moving or staying at a level close to our reference value - especially when corrected for the well-known distortions by taking out non-euro area residents' holdings of money market funds units/shares. And so we are satisfied that, on the monetary side, we see no threat to price stability at the moment. And that, for the first pillar of our strategy, is enough.
Question: You told us inflation will fall below 2% in the course of next year, 2002. What does that mean: in the first quarter or at the end of the year 2002?
Duisenberg: We are not so very certain about the precise time path. I already indicated earlier that I regard it as not unlikely that now, in May, we have reached the peak from which inflation could come down. But as for the time at which it will come down, that could be rather volatile. That has mainly to do with the fact that, when the figures come out, then month after month for the annual figures the month 12 months ago falls out. This so-called "base effect" plays a role. And those "base effects" have been very volatile in the course of 2000. So we are not in a position to predict precisely when we will reach the magic 2%.
Question: Mr. Duisenberg, how much of your discussion today was centred around the slowdown in the German economy? Was the Governing Council at all worried about that and did the "R"-word of "recession" in Germany come up at all today?
Duisenberg: The word "recession" in the German context did not come up. Of course, we discussed the developments in the various countries. We also noted that the developments in Germany are being influenced in particular by the developments in the construction sector. And we would not say that they are temporary, by themselves, but they have a significant impact on the overall performance of the German economy.
Question: I would like to ask if you have moved any closer to a compromise with the German Government on the issue of regulation and supervision of financial markets? As you know, legislation proposed by the German Government is on the table right now and on the face of it, it would seem to be at odds with the ECB's position, and indeed the Deutsche Bundesbank's. I wondered if there were any discussions going on to try to bring the two positions closer?
Duisenberg: No, we could not, Mr. Barber, because the German Government has now finalised its draft law on the Deutsche Bundesbank, on the structure of the Bundesbank itself, but has postponed for a few months bringing the draft law on banking supervision or "Allfinanz" supervision to the Cabinet - and subsequently to the Parliament, after having received advice on that from the ECB.