Willem F. Duisenberg, President of the European Central Bank, Christian Noyer, Vice-President of the European Central Bank, Vienna, 11 October 2001
With a transcript of the questions and answers
Ladies and gentlemen, the Governing Council of the European Central Bank met today for the fourth time outside Frankfurt. Let me first of all thank our host, Governor Liebscher, and the staff of the Oesterreichische Nationalbank, for the invitation to Vienna and for the generous hospitality offered to us.
As usual, the Governing Council conducted its examination of monetary and economic developments and analysis of their implications for the maintenance of price stability in the euro area. Based on its assessment under both the first and second pillar, the Governing Council decided to keep the key ECB interest rates unchanged. The level of the key ECB interest rates at the current juncture is therefore seen as consistent with maintaining price stability over the medium term. Given the high level of uncertainty in the international environment, we will continue to monitor developments very closely and thoroughly, and we will assess new information in the context of our medium-term-oriented monetary policy strategy aimed at delivering price stability in the euro area.
Let me elaborate somewhat on the assessment provided under the two pillars of the monetary policy strategy of the ECB.
Looking at the first pillar, we have seen a strong increase in M3 growth over the past few months. However, a number of temporary factors play an important role in explaining recent monetary developments. Notably the uncertainty in stock markets and the relatively flat yield curve until August have led to portfolio shifts by private investors from longer-term assets to short-term assets included in M3. Furthermore, the growth of credit to the private sector continued to slow down in August. For these reasons, we do not judge that monetary developments signal risks to price stability at this juncture. This notwithstanding, the developments of M3 will have to be monitored carefully in the coming months.
As regards the second pillar, the assessment is currently surrounded by a particularly high degree of uncertainty. This concerns in particular the international environment. Last month's terrorist attacks had a negative impact on economic activity and confidence, which could delay the resumption of higher economic growth. Against this background, it was important that policy-makers in the United States, the euro area and in other countries around the world acted with measures to support confidence. A further positive feature is the recent fall in oil prices, which should be helpful in containing inflationary pressure and supporting the real disposable income of households, thereby sustaining consumption in many countries.
With regard to economic growth in the euro area, it would be premature to offer a firm assessment of the macroeconomic impact of the tragic events in the United States and current activities to combat global terrorism. At present, there are no major imbalances in the euro area which would require a longer-term adjustment process. On account of policies aimed at price stability, fiscal consolidation, wage moderation and structural reform, the euro area fundamentals remain very positive. Financing conditions are favourable and inflation is declining. The mere existence of the euro has sheltered the countries of the euro area from adverse intra-European exchange rate tensions, which had typically plagued many countries when external shocks occurred in the past. Taken together, all these elements should provide a much better base than in the past for a recovery in the course of next year once the initial shock has been absorbed. However, notwithstanding all these positive aspects, we will continue to monitor downside risks to the current situation.
Against this background, we are confident that inflation in the euro area will continue to decline to a level consistent with price stability. Receding external price pressures, combined with the expected continuation of wage moderation, underpin this expectation.
For the time being, we thus see a confirmation of our earlier assessment, which led us to reduce the key ECB interest rates by 50 basis points on 17 September. In fact, the recent events strengthened tendencies towards lower rates of inflation that were already prevailing before. Given their nature and their expected economic consequences, the terrorist attacks clearly warranted a prompt, flexible and appropriate response by the Governing Council, in the context of the medium-term-oriented monetary policy strategy of the ECB.
Regarding fiscal policies, there have been very encouraging signs of firm fiscal consolidation in a significant number of euro area Member States over past years, whereas, in a few other countries, progress towards balanced fiscal positions has been slower. It is natural for an economic slowdown to have adverse effects on member countries' budget positions, and there is no need for immediate countervailing actions. However, a short-lived slowdown should not drastically change the scope for reaching the targets set in the countries' stability programmes. For countries with a budget position still not close to balance or in surplus it is important to adhere to their medium-term consolidation plans.
Turning to the long-term prospects, in order to raise the rate of potential economic growth in the euro area, structural reforms in the size and composition of public revenue and expenditure, as well as in product and labour markets, have to continue. Advances have been made in times of high real GDP growth, although in many areas, including in labour markets, more could have been achieved. As adjustment needs are likely to become more visible in periods of less vigorous economic growth, policy-makers must now intensify the acceleration of reforms rather than allow efforts to abate. Moving forward the reform agenda decisively will enable the euro area economy to respond flexibly in future and thereby underpin our confidence that external shocks can be more easily absorbed than in the past.
Transcript of the questions asked and the answers given by Dr. Willem F. Duisenberg, President of the ECB Christian Noyer, Vice-President of the European Central Bank and Klaus Liebscher, Governor of the Oesterreichische Nationalbank
Question: Mr. Duisenberg, what can European policy makers actually do to help the European economy? Governments cannot really stand more, it seems, because of the Stability Pact, and as your action showed today, the ECB does not feel like it is in a position to cut interest rates. The other question I have is: On 17 September the ECB was praised for quick action, and I would like to know what you say to critics who will now probably point to the fact that since 17 September the Bank of England and the Fed have moved again but the ECB has not?
Duisenberg: As to the first question, I think governments have responded and I think it is exaggerated also to say that governments cannot respond. As I said in my introductory statement, we fully accept that it is natural that adverse economic development or slower economic growth will not fail to have an impact on budgetary positions. And then you expect the automatic stabilisers to take care of that. Well, that can be done, but it is crucial that the structural budgetary policies remain in place and remain geared to achieving, over the medium term, the goals set by the countries themselves in their stabilisation programmes in accordance with the Stability and Growth Pact. But in as far as budgetary positions develop, actually for purely cyclical reasons, to develop or to produce results which lead to deficits which are somewhat higher than is in conformity with the medium-term goals, that is acceptable. But it is true that those countries which have already used the periods of high economic growth to achieve the intended position of having their budget in balance or surplus have more room to let the automatic stabilisers work than those countries which have failed to reach those targets in an adequate tempo, let me call it that. As far as the 17 September decision is concerned, let me first point out that that decision to lower rates by 50 basis points in concert with the Federal Reserve System on 17 September came only about two weeks after we had already lowered rates by 25 basis points. In all, we have lowered rates by 100 basis points over the recent period and it is now thought that, barring new events or new information, we have reached a monetary policy stance which is consistent with maintaining price stability over the medium term. In addition, I would like to say that the most crucial challenge that faces the authorities, all authorities, over the near future is to restore confidence amongst consumers and investors in their future. And the big question to answer is what contribution monetary policy can deliver to restore that confidence. And in our opinion a move so soon after the previous move, which was a clear, prompt and appropriate reaction to the terrible events that had happened, would fail to do the trick of restoring confidence at short notice. We believe that creating an environment of stable prices through a stability-oriented monetary policy in a forward-looking manner is the best contribution we can make not only to the growth of output and employment but also to the restoration of confidence within the public at large.
Question: Mr. Duisenberg. There was a lot of speculation, of course, prior to this meeting that you might cut interest rates. Speculation is sure to increase with each successive meeting in which you do not move. It would also appear that, based on your assessment that inflationary risks are going to recede over the coming time, short-term rates may come down further. A question of timing perhaps. You said today that it is premature to give an assessment of the impact of the terrorist attacks on the euro zone economy. My question is: what data will you be looking at specifically for the euro zone in order to gain a better assessment? What are the key data that you are now going to look at?
Duisenberg: It is the whole range of data which will be coming in in the course of the next few months on the development of prices, output and employment, of the balance of payments, i.e. the whole range of data which we usually look at. And they will lead us to reassess the prospects for reaching price stability; currently those prospects are fairly benign. I have to remind you that we expect to reach a situation of price stability early next year. So that, on average, we expect inflation next year to be at the satisfactory average level of just below 2%. With that we are satisfied.
Question: Mr. Duisenberg, apart from the insecure political situation at the moment, you sound rather optimistic with regard to economic growth next year. I would like to know if this optimism was shared by everybody at this meeting in Vienna.
Duisenberg: What I just read out to you was the considered opinion of the Governing Council. So, you can assume that the relative optimism was shared, but then one side remark: we do believe that growth, which has clearly slowed down in the course of this year and will continue to be very slow for the remainder of this year, will resume in the course of next year and maybe already in the early part of next year. But resumption of growth is not the same as enjoying high growth, though it will be relatively modest. But under the conditions that we deliver, namely price stability.
Question: Mr. Duisenberg, what do you say to criticism that the ECB is a central bank that is behind the curve, so to say, and too slow to respond to a worldwide crisis to which other central banks have reacted a bit more promptly, and that today's decision not to lower interest rates was influenced very much by tactical considerations having to do with the circumstances under which the last decision was taken, and an attempt by the ECB to demonstrate that it will not allow itself to be pressured into taking interest rate decisions, as could be seen by the bidding at the last refinancing tender.
Duisenberg: Well, the decision taken on 17 September 2001 certainly does not bear witness to your claim that we are slow in reacting and resistant to change. I thought it was a very prompt and appropriate decision taken on 17 September 2001. To be seen to take effectively what was maybe an exceptional decision in exceptional circumstances, in bringing forward a rate cut that we had already contemplated before, applying it earlier than had been foreseen and making it larger – within a matter of two hours, I might say – and also earlier than anticipated, this in response to the assessment that the horrible events in the United States might have a negative impact on economic growth and thereby also cause the inflation rate to come down more strongly and sooner than earlier anticipated.
Question (translation): Mr. Duisenberg, was this non-decision meant to avoid giving the impression that there is a crisis? You were talking a lot about the confidence of investors and consumers, which you want to regain. As I say, maybe 25 points would have helped confidence more than not doing anything?
Duisenberg: Well, I would take issue with the expression "not doing anything". Don't forget, but it seems that everybody has forgotten that we lowered interest rates on 30 August 2001 and then again on 17 September 2001, and we do believe that with that level we have for the time being, barring new information on events yet to happen, new information to come in, that we have reached a level of interest rates which is consistent in the context of our monetary policy strategy with our declared aim of preserving price stability. And I think we have explained that strategy and that aim so thoroughly to the European public and the world that reacting to very short-term, be it tragic, events in a continuously panicky way would, to my mind, do more to undermine confidence than to strengthen it.
Question (translation): Mr. Solbes, the European Commissioner for Economic and Monetary Affairs, said in an interview on Tuesday that the euro area was already on the verge of recession. He took part in discussions. Can you tell me how they went on this point? Do you share this fear? My second question is on the money supply M3. A large increase in M3 has been recorded on account of money being "parked" in short-term liquid assets instead of being invested in stock markets. If this parking of money lasts for a long time, is there not an inflationary risk from this part of M3 because that money might then be used for consumption, since long-term investment opportunities are uncertain?
Duisenberg: We do not have the feeling that Europe is in, or on the verge of, a recession. Growth is slow, admittedly: slower than we had anticipated earlier, but of a recession we do not speak. Witness, although this refers to only one part of the European Union, the figures published for France for example yesterday, which point to an average annual growth rate of GDP of 2.0% in 2001. We do not regard that as a recession. Neither do we regard quarter-on-quarter developments in the euro area as a whole as pointing to a recession. Now, we believe that the fact that investors have temporarily shifted their portfolio investment into more liquid assets, which are part of M3, is a temporary phenomenon – while your question implies that it will be a long-term phenomenon – and that people would rather spend on consumer goods, I suppose, than start investing in portfolio assets anew. We believe that this is the most likely event and, therefore, we do not consider this course of the growth rate of M3 as a source of future inflationary pressures.
Question (translation): President Duisenberg, you pointed out how large the responsibility of fiscal policy-makers is. In this light, how do you view the decision by the German Federal Government to increase taxes? I would say that this is psychologically not a good decision. It reduces purchasing power, increases inflation and makes wage negotiations difficult. Do you not think that the ECB President should offer a word of criticism here?
Duisenberg: If I were to offer a word of criticism, I would do it directly to the authorities in question. But I do not comment or take questions on developments in individual euro area countries.
Question: In recent days we have heard the finance ministers of Belgium and France, amongst others, make the suggestion that, because they are showing responsibility in fiscal policy, this offers, and I quote, "room for manoeuvre" on the monetary policy side. Do you think that the ECB does have room for manoeuvre?
Duisenberg: If we do have room for manoeuvre, there is very little. And events are still rapidly developing and we have to be very careful in using any room which there might be. So you might say that, in view of the very high uncertainties confronting us, also in the immediate future, we prefer to "keep our powder dry".
Question: I have two questions. The first is: what is your view of moves by a number of European governments to help their national airlines with loans or loan guarantees? And the second question is: in view of the very high uncertainty you were talking about, do you think it would be unwise to have a change of leadership at the European Central Bank during the next twelve months?
Duisenberg: Concerning the aid to national airlines, I would suggest that you direct that question at the European Commission. And to change the leadership of the European Central Bank in the next twelve months, I think, would be an unwise decision.
Question: Mr. President, you mentioned that the European Central Bank had already considered a rate cut before the attacks, but you were very careful not to send any signals that would indicate so-called bias, i.e. a rate bias, when you were addressing your audience before. The question is: given the current situation, are you prepared to give us any kind of lead on where – if at all – you would move, in which direction the next move would be?
Duisenberg: No, I am not prepared to do so at this stage. I explained that the decision we took today is a forward-looking decision based on all the information we have available to us over the medium term. And that is about it.
Question (translation): Mr. President, you were saying that because of the events on 11 September you took your decision a little earlier than you thought you would have to. Could you tell us what you had thought earlier on? Would you maybe not have taken that decision if the events of that day had not occurred? And as for the future, would you say that similar events could also lead you to maybe speed up your decisions in future as well? And could you also comment on the possible leeway that you might have as far as concertation with American monetary authorities is concerned. Are you willing to go for more concerted measures with the Fed and monetary authorities there?
Duisenberg: This is a hypothetical question. However, had we not taken that decision on 17 September, I regard it as highly likely that we would have taken the decision, be it on a smaller scale, about ten days later at the regular meeting of the Governing Council. But as I said before, these were exceptional decisions in exceptional circumstances, but still totally in line with our medium-term-oriented monetary policy strategy. Now the question becomes even more hypothetical: if the events were to repeat themselves, which, of course, nobody hopes, would you take similar take action? We would naturally be in close contact – as we have been over the past weeks and both before and after 11 September – with our colleagues on the other side of the Atlantic. And we will continue to do so and we will decide what to do as developments occur and as events materialise.
Question: Mr. Duisenberg, we are living in exceptional times. 11 September was perhaps an exceptional one-off, perhaps not. God forbid that we see that kind of exception again. But have you built into your strategy some kind of flexibility to move rates again in the event of another exceptional one-off that would not tip your medium-term price stability strategy on its head?
Duisenberg: I can literally say that we will cross that bridge when we get to it. And I hope that we will never get to that bridge.
Question: Mr. Duisenberg, I would like to come back to the question of confidence. Confidence in Europe has dropped considerably since 11 September. How can you explain the fact that – as you said – by not reducing interest rates you are going to increase confidence?
Duisenberg: I did not say that, but I said that it is doubtful whether a range of rate changes coming quickly one after the other would by themselves enhance confidence rather than maybe even undermine confidence. The public has to have confidence in its central bank, in its pursuit of price stability over the medium term, in applying its declared strategy and delivering what it has promised to the public to deliver, namely price stability. And I do think following that strategy – and if the public recognises that we do what we say and we deliver what we promise – is the best contribution that we can make to restoring confidence among consumers and investors.