Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Frankfurt am Main, 5 July 2001
With a transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I are here to report on the outcome of today's meeting of the Governing Council of the ECB, which was also attended by Mr. Reynders, President of the EU Council, and 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 key ECB interest rates unchanged. It considers that the current monetary policy stance remains appropriate and should bring inflation back in line with price stability in the medium term. Maintaining a favourable perspective for price stability is the best contribution monetary policy can make to fostering economic growth over the long run.
Let me elaborate somewhat on our assessment of the information provided under the two pillars of the ECB's monetary policy strategy.
Regarding the first pillar, the three-month average of the annual growth rates of M3 (adjusted for non-residents' holdings of money market fund shares/units) stood at 4.9% in the period from March to May 2001. As indicated previously, there is some evidence that M3 is currently distorted upwards by holdings of money market paper and short-term debt securities of non-euro area residents. Taking this into account, the three-month moving average of M3 in the period from March to May 2001 was broadly in line with the reference value of 4 1/2%. In addition, over recent months, the annual growth rate of credit to the private sector in the euro area has continued to moderate.
Concerning the second pillar, given the circumstances, it seems particularly important to recall the forward-looking nature of our assessment. At the current juncture economic developments appear to be particularly influenced by special factors. HICP inflation is still high at present, mainly reflecting past trends in energy and food prices. However, given the nature of these shocks and taking into account the present monetary policy stance, we expect them to have only a temporary effect on inflation rates. If no further unfavourable shocks occur, it is likely that annual rates of inflation will start to fall and reach rates of below 2% in 2002 - although the decrease from current levels over the months to come may be subject to some volatility. The main risk related to this outlook concerns second-round effects having an impact on wage negotiations this year and early next. As has been said on previous occasions, when looking back, the wage developments seen so far have been satisfactory, while, when looking to the future, there is ongoing concern.
As has now been confirmed, overall economic growth in the euro area moderated substantially in early 2001 and both survey and confidence indicators suggest a pattern of continued growth moderation for the second quarter of the year. These developments appear to be related to the less favourable external environment as well as to the weak growth of domestic demand. The latter reflects the adverse effects on income and consumption from past increases in energy and food prices and the slowdown in investment. However, in the course of the year, domestic demand should gradually recover from adverse price effects, given the sound economic fundamentals of the euro area, previous and ongoing tax reforms and favourable financing conditions. Average real GDP growth in the euro area is therefore expected to remain broadly in line with trend potential growth in 2001 and 2002.
Overall, our current policy stance should ensure price stability in the medium term. Of course, we shall continue to monitor closely future developments affecting the balance of risks to price stability, including - in particular - monetary developments, real GDP growth, price-setting behaviour and wage developments.
As I said earlier, at a point in time when economic developments are being affected by a number of special factors, the Governing Council would like to stress its medium-term and forward-looking perspective. Monetary policy will ensure a stance consistent with price stability over the medium term. Keeping firmly to this commitment has favourable effects on the economy as a whole. Since the start of Monetary Union, monetary policy has been successful in maintaining low inflationary expectations over the medium term. As a consequence, the euro area enjoys low long-term interest rates which are conducive to both economic growth and employment creation. A factor facilitating the maintenance of price stability will be continued wage moderation. Such moderation will help employment growth and thereby foster consumer confidence and domestic demand in the period ahead.
In addition, the prospects for non-inflationary economic growth can be significantly enhanced by decisive structural reform. Delays in introducing such reforms on the basis of cyclical considerations would be at the expense of medium-term growth opportunities.
A medium-term perspective is also most warranted for the conduct of fiscal policies in the euro area member countries. For all euro area countries, it is of crucial importance to fulfil in a credible manner the commitments made under the Stability and Growth Pact and those laid down in the context of the stability programmes.
Let me now give the floor to the Vice-President, who will inform you about some other issues.
Let me first refer to the current discussion on the potential impact on prices of the euro cash changeover. In general, price transparency and market competition are likely to limit inflationary pressures from the cash changeover. As regards administered prices, the finance ministers forming the Eurogroup have pledged that "overall, the conversion into euro of all prices, charges and fees administered by their governments will be price neutral or smoothed in favour of the consumer". The Governing Council calls on governments at other levels and enterprises to follow this example set by central governments. Moreover, the ECB calls upon the public's vigilance in monitoring prices and price changes, encouraging consumer and other organisations to actively engage in this task.
Second, I should like to inform you that the Governing Council has decided that euro area national central banks may frontload euro banknotes to central banks outside the euro area as from 1 December 2001. This measure is aimed at contributing to a smooth cash changeover in 2002. You will find further information relating to this decision in a separate press release to be issued this afternoon.
Third, as you are aware, the Governing Council paid particular attention to the specific needs of the blind and partially sighted when agreeing on the design of euro banknotes. To that end, several features have been incorporated into both the banknotes and the coins. In order to further assist visually handicapped citizens in recognising the euro banknotes and coins, and to help them to distinguish between the various denominations, the Governing Council decided to allocate about EUR 1 million to the production of 400,000 specially designed cash-testing devices. These will be made available via the network of the European Blind Union.
Finally, the Governing Council has adopted a Decision amending the Decision on the adoption of the Conditions of Employment for Staff of the European Central Bank. This Decision will be published in the Official Journal of the European Communities.
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 (translation): Two questions, if you will allow. During the last quarter of 2000 and the first quarter of 2001 you underestimated the slowdown in the United States and its impact on the euro zone, just as the governments did. Now, today, you seem to be very optimistic. You talk of a growth potential which will be fulfilled in 2001 and 2002. What facts and what data allow you to be so optimistic about this? After all, in the United States there are more and more alarm signals. That is my first question. Second question. The Ifo Institut published a rather interesting study analysing the reasons for the euro's weakness and it explained that if the euro is weak it is because Deutsche Mark are being sold in great quantities in eastern European countries and in Russia before the changeover to the euro. Their being sold is of course strengthening the dollar. Do you agree with this analysis?
Duisenberg: It may have struck you that I used the same language today as I used at the last press conference, namely that output growth is expected to be broadly in line with the trend potential growth. That is the best estimate that we have. And it is true that we already had to lower our expectations or forecasts some time ago, as is also reflected in the projections that were published in our last Monthly Bulletin. I recognise that the selling of Deutsche Mark circulating in particular in central and eastern Europe and in Russia may partly have an impact on the exchange rate. However, our estimates are that the sale of these Deutsche Mark to a very large extent takes the form of converting cash into bank deposits, and these can be euro area-denominated deposits. An additional factor is that we are seeing, in particular, a drastic decline in the circulation of large-denomination Deutsche Mark (and Guilder) banknotes coming possibly from the black economy. And we do not know, by definition of course, where they are. But we note that the circulation of these large-denomination notes is taking place. What we do not know is what that money is used for. Is it used to buy other currencies? Is it used to buy real estate? Is it used to buy other types of assets? That, by definition, we do not know. But then I would like to point out that the monetary impact of all this is very limited indeed. If you realise that notes in circulation represent about 6% - and no more - of the M3 figure, then you will also realise that part of that 6%, and really only a small part of those banknotes in circulation, are circulating outside the euro area. And again, part of that small part may then be converted into other assets, which makes the conclusion justified that the monetary impact of these moves in the run-up to the cash changeover is very limited indeed, if not negligible. We cannot deny that it may have some impact on the exchange rate as well.
Question (translation): Mr. Duisenberg, I wanted to ask how you would explain the weakness of the euro on the exchange rate market? Second question. Are you going to be present at the Eurogroup meeting on Monday in Brussels? And third question. Do you consider the ECB to be an institution which is ready to have a prime minister, or maybe an ex-prime minister, as its president?
Duisenberg: I cannot explain fully, as I have said on many occasions, the level of the euro at any particular moment. The tendency to stay in the neighbourhood of 84, 85, 86 cent against the dollar has already lasted three to four months. And all the factors that we have mentioned in the past explaining the depreciation of the euro now seem to have reversed. Yet this has not as yet had an impact on the exchange rate of the euro. But we remain convinced that the euro - and this is not an empty slogan - does indeed have a strong potential to appreciate. That is the considered conviction of the Governing Council.
As to the second question, I will be present at the Eurogroup meeting.
As for your last question I can only answer that the ECB is ready to have a former minister, namely a former finance minister, as its president, who is sitting right here, right now.
Question: Mr. President, are you worried that the various inflation rates within the EU Member States are drifting apart rather than getting closer together? The range now lies, if I am correctly informed, between 2.5% in France and up to 5.4% in the Netherlands. Is that range still acceptable to the ECB or is this some sort of warning sign?
Duisenberg: Well, the range as such is not that important. The fact that there are inflation differentials between the various regions in the euro area is - as we have explained many times, and, I am almost inclined to say - normal. These differentials will disappear and re-emerge in the future owing to different stages of development in the various countries. The fact that in the Netherlands, and fortunately to a lesser extent in Ireland, inflation has reached the figures they have, is in itself a cause for concern, particularly for the Dutch and the Irish authorities; and, to the extent that they could have spillover effects on other countries, it could also be a concern for us and the Governing Council. That is one reason why we put so much emphasis, even today, on the absolute need for moderate wage negotiations or wage moderation in the negotiating period which lies ahead.
Question: In recent months, your communication policy has been criticised by a number of observers and most recently by the OECD which has suggested that there are perhaps too many press conferences and that formal transparency is not effective transparency. Is that a fair criticism? If I could add another related question: you and Mr. Reynders have had a lot of dialogue outside of the formal meetings. Was his presence constructive and have you managed to improve the dialogue between you and the Belgian Minister of Finance?
Duisenberg: Are there too many press conferences? We are faced with the dilemma of, on the one hand, being as open and transparent as possible, and on the other hand, with what we would see were we to have fewer press conferences. I doubt whether we would also see less speculation and guesswork in your circles. We might even see more of this were we to have fewer press conferences. Therefore, next year, it is also our intention to stick to the same schedule of one press conference per month. The presence of the President of the EU Council has certainly helped to improve the dialogue, which we have entered into so often already, and which we again had today. But it is a dialogue, I hasten to add, between the Eurogroup and the Governing Council of the ECB as such, for which I am normally the spokesmen. However, there are occasions when I am not the spokesman, but there are equally qualified colleagues on the Governing Council who can engage in that dialogue in the same way as I do. However, I have noted with satisfaction that the Belgian Minister of Finance, in his capacity as the President of the Eurogroup and now the President of the EU Council, has already attended three out of the first fourteen meetings of the Governing Council, to each of which he has been invited.
Question: Mr Noyer, you mentioned that the Governing Council of the ECB took a decision on the new conditions of employment, but you did not say what it was all about. Could you please tell us?
Noyer: It is on a number of small issues, I mainly wanted to announce that in accordance with our policy of transparency, but there was nothing really that important that I needed to flag. It concerns, for instance, the updating of the internal rules for the prohibition of insider trading, which is normal corporate governance which all central banks and commercial banks in the world have to undertake. Consequently, we have improved the system and everything will be made known and published in detail, but that was the most prominent part of the change.
Question: Mr. Duisenberg, could you tell us how you react when you read reports that American officials urge the ECB to do more to help global growth? And that they would allow - or would want - the dollar to go higher over the longer term? And the second question: do you think there will be any effects on Euroland from the 275 basis points of Fed easing so far to date and, if so, when will we start seeing an effect here?
Duisenberg: Well, I believe that you should address those questions to the American authorities. I do not comment on the American monetary or fiscal policy in the context of global growth, and that means I also do not listen to advice I get from the outside on our monetary policy. Our monetary policy is clearly based on the well-known two-pillar strategy; that is decisive, and it is aimed primarily at maintaining price stability. Indeed, this is our primary aim and, as the Treaty says, only if there is no "prejudice to the objective of price stability", we do take into account the other general aims of the European Community, which are to maximise output growth and employment.
Question: Some countries like Italy and Germany say that they will only reach their budget balance by 2006 and so beyond their nominal targets. Are you worried about this and did you discuss the issue today with Mr. Reynders and Mr. Solbes?
Duisenberg: The issue was mentioned today. We are concerned that the current negative environment might reduce the impetus in various countries to reach the goals to which they have agreed in the context of the Stability and Growth Pact. And we do see some slippage in the determination to reach the goal of a balanced budget or even a small surplus. That is to say, we see some slippage in some countries in the determination to get there. That is a concern we raised and which I will raise again in our dialogue with the Eurogroup.
Question: President Duisenberg, two questions: on balance, how would you say that the risks to price stability balance out? And, second: how do you explain the fact that two days before an ECB meeting you go to the European Parliament and you say very clearly that there are no new data in the past two weeks that would make us change our assessment on interest rates, and still - after you say something like that - a quarter or some 35% of market participants think that there is a good chance you are going to do something at this meeting?
Duisenberg: Well I thought that I could not be clearer than that, but perhaps I should repeat what I said two days ago. I said the same thing as I said at this press conference, namely that our monetary policy stance seems appropriate in the current circumstances. I repeat today that the current monetary policy stance remains appropriate in the judgement of the Governing Council and should bring inflation back in line with price stability in the medium term. And this current monetary policy stance remains appropriate, in the opinion of the Governing Council, for some time to come. I cannot be clearer than that, I believe.
Question: Mr. Duisenberg, in your speech in Strasbourg earlier this week, and again today, you said that you are looking - and you stressed this in particular - at developments in money supply, real GDP growth, price-setting behaviour and wage developments. Now, the current slowdown in economic growth would suggest that there are decreasing risks to price stability in the medium term in all four areas. Why then did you decide today to leave the interest rates unchanged? You claim to have a forward-looking strategy. Now, is this really forward-looking? And secondly, perhaps you will be...
Duisenberg: May I first answer this question? Our forward-looking strategy and our analysis indicates to us that it is likely that inflation will only come down to under 2% - which is our goal - in the course of next year. But then only just. And that makes us say, if we look one year or a year and a half ahead, that this forecast or expectation is based on the current monetary policy stance. So, if we were to change that in the direction in which you suggest, we would in all likelihood not reach that goal. And that is the reason why we did not cut interest rates and it is the reason why we regard our current monetary policy stance as appropriate, as I said to Mr. Sims, for some time to come.
Question: And now a second question. I think you will be celebrating your 66th birthday next week, if that is correct. Now, do you think this will have any impact on your career plans at the ECB?
Duisenberg: No. In particular because I will be celebrating it in the meeting of the Eurogroup.
Question: Mr. Duisenberg, again in your speech two days ago you seemed to have signalled today's decision. At least that is what many market watchers have been saying. Would you say that you have taken the criticism that your 10 May decision met with into account? And can we count in the future on clearer signals from the ECB on future rate decisions?
Duisenberg: Well, we have always maintained that we did not want to surprise markets. But sometimes a surprise is unavoidable. But it is not our policy to surprise markets. And I believe that in my statement of two days ago and in today's statement, which is basically a statement by the Governing Council, I have been as open and transparent and forward-looking as I possibly can be.
Question: Yes, thank you. And a short second question on the Stability Pact. Many countries might not meet the goals contained in the Pact or have been urging that it should be a topic at the next Eurogroup meeting. So how do you see that in your optimism on euro area growth, because you have been pretty optimistic about euro zone growth? Is this not a clear signal that governments are facing difficulties as a result of the global slowdown?
Duisenberg: Well, in so far as the goals are not being met for cyclical reasons - so that, in a way, automatic stabilisers are doing their work - we have no reason to be concerned. But it will be a reason for concern if structural developments, also in public deficits, do not work at the same pace or in the same way towards reaching the goals of the Stability and Growth Pact in a proper manner.
Question (translation): Mr. Duisenberg, on Saturday the G8 Finance Ministers are meeting in Rome. Now, that is a meeting without monetary policy spokespersons, but of course Mr. O'Neill, the US Secretary of the Treasury, "Mr. Dollar", will be there as well. Have you started to make any indirect contact with these G7 Finance Ministers in view of the meeting in Rome so that a consensus could be achieved if there were to be any questions on the euro or on the global economy, since the global economy is supposed to be one of the main topics at that meeting?
Duisenberg: The meeting in Rome, as I understand it, is meant as a preparatory meeting for the summit of the G8 Prime Ministers and Presidents. And for that particular preparatory meeting, no central banker will be present or has been invited, and that also means that I have made no contacts of the kind that you suggest. I have adequate contacts with the central banks of the G7 partners, including Mr. Greenspan.
Question: I still have two questions left. You said, I think, last time, that you agreed with the growth projections of most international institutions. But these projections are based on the assumption that you cut rates by half a percentage point. Do your projections also include this detail? Second, there is an aspect of the data that you did not comment upon, and that is the significant decrease in inflation in Germany and Italy. May inflation come down more quickly?
Duisenberg: In our projections the monetary policy stance or the level of interest rates is a so-called exogenous variable, so we do not assume any change, strictly for - I am almost inclined to say - "scientific reasons". We had a high figure in May. We expect the June figure already to show a decline from that level. But as I have said on various occasions, mainly because of the base effects of the development twelve months ago which, month after month, will fall out of the figures, the road to the level under 2% may be a bumpy one. There may be months in which inflation stabilises or there may even be months in which it shows a further rise. But there will be more months in which it shows a decline. And the decline we expect for the month of June will already be, in our expectation, and according to first indications, not insubstantial, or will be considerable.
Question: The European Commission is discussing plans to regulate the fees that banks levy on transfers within the euro area that are non-domestic. Do you support these plans?
Duisenberg: We take a neutral position on this. We support the aim, namely that over time we hope that the costs of transferring money abroad or domestically will be the same. And we urge banks to work in that direction. Now this process is being strengthened by the current consideration of the Commission to issue a regulation to this effect, thereby forcing the private sector to act in a certain way. We have also considered whether we should do the same, but we think that this would run counter to our mandate to act in a market-oriented way and to let the market do its work freely.