Willem F. Duisenberg, President of the European Central Bank, Lucas Papademos, Vice-President of the European Central Bank, Frankfurt, 10 July 2003.
With a transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I will now report on the outcome of today's meeting of the Governing Council of the ECB, which was also attended by the President of the ECOFIN Council, Mr. Tremonti.
Following our regular economic and monetary analysis, we have concluded that the current monetary policy stance is appropriate in view of the favourable outlook for price stability over the medium term. Accordingly, we have decided to leave the key ECB interest rates unchanged. Interest rates in the euro area are low by historical standards, both in nominal and real terms, thus lending support to economic activity and helping to safeguard against downside risks to economic growth. The Governing Council will continue to monitor carefully all factors that might affect this assessment.
Allow me to explain our assessment in detail.
In the context of our economic analysis, the latest data and information continue to suggest that economic growth in the euro area remained subdued in the second quarter of the year, after virtually stagnating in the first quarter. The indicators available broadly point to a stabilisation of activity but there are no signs as yet of an underlying strengthening in production and confidence. At the same time, financial market developments seem to reflect a somewhat more optimistic assessment of the economic outlook both inside and outside the euro area. On the whole, we continue to expect a gradual strengthening of economic activity in the euro area. This should be supported by lower inflation and thus higher real disposable income, the low level of interest rates, and a recovery in external demand for euro area goods and services. This assessment is in line with all available forecasts and projections.
Nevertheless, downside risks to this main scenario are still relevant. While concerns over the SARS virus have faded, there are risks relating in particular to the accumulation of macroeconomic imbalances outside the euro area and to the extent of the adjustment still needed in the euro area corporate sector to enhance productivity and profitability.
Turning to price developments, the outlook over the medium term remains favourable. For the remainder of this year, annual HICP inflation rates are expected to fluctuate around the current level of 2%, the rate recently estimated by Eurostat for June. In early 2004 a significant base effect related to energy prices should lead to a marked fall in annual HICP inflation rates, assuming broadly unchanged oil prices and exchange rates. Subsequently, the exchange rate pass-through and a moderate economic recovery should contain price pressures. In this respect, wage developments in particular are expected to remain consistent with a favourable outlook for price stability. Other price indicators, such as developments in producer prices, tend to support this picture. Moreover, all available forecasts and projections as well as indicators of inflation expectations point in the same direction, namely that price stability in line with our aim of inflation below but close to 2% will be maintained over the medium term.
In the context of our monetary analysis, substantial excess liquidity has accumulated in the euro area as a consequence of the extended period of high M3 growth. This strong growth has continued in recent months, as economic uncertainty and the low level of interest rates across the whole maturity spectrum have increased the attractiveness of holding liquid assets. At the same time, the low level of interest rates has helped support recent growth in loans to the private sector. While the large amount of excess liquidity should be less of a concern in a period of moderate economic activity, monetary developments need to be closely monitored in terms of their implications for price stability over the medium to long term.
To sum up, our economic analysis confirms the expectation that price dynamics will remain moderate in the euro area in the context of a gradual economic recovery and the strengthened euro exchange rate. The monetary analysis indicates that the strong expansion of M3 should, for the time being, not be seen as adversely affecting this outlook. Hence, cross-checking the information from the two pillars leads to the conclusion that the outlook for price stability over the medium term remains favourable.
With medium-term inflation expectations firmly anchored at levels consistent with price stability, and with interest rates at historical lows, monetary policy has made a significant contribution to improving the conditions for a recovery in economic growth. However, other policy-makers also have to assume their responsibilities. Part of the weakness in economic growth in the euro area can be linked to a lack of ambition in the areas of fiscal and structural reform to further improve the conditions for investment and employment.
A strong commitment to the Stability and Growth Pact and adherence to well designed medium-term fiscal consolidation strategies in those countries currently struggling with increasing fiscal imbalances would make a major contribution to improving confidence. In a similar way, progress in structural reforms in the labour and product markets would not only increase the euro area's growth potential and enhance its ability to better withstand external shocks, but it would also eliminate a great deal of the uncertainty currently clouding long-term planning and prospects.
In the current situation, characterised by subdued economic growth and low confidence, structural reform and a steady and reliable course of fiscal policy, in line with the European fiscal framework, are of the highest priority.
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, Dr. Lucas Papademos, Vice-President of the ECB
Question: Could you tell us something more about the topics that were discussed with Mr. Tremonti, please?
Duisenberg: I cannot tell you in substance. Mr. Tremonti gave us an outline of the plans of the Italian presidency for the second half of this year, focusing on their by now already widely known initiative to enhance structural public investment, but financed mainly by private means, helped by the European Investment Bank.
Question: And what was your reaction to this ...
Duisenberg: ... we listened.
Question: Mr. President, you were talking about the downside risks and about the accumulation of macroeconomic imbalances in other countries outside the euro area. Is this the ECB's way of hinting to the United States that their current account deficit and their dollar policy might not be in the best interests of the global economy?
Duisenberg: You could say that. That is one of the major macroeconomic imbalances which persists. But not only in the United States, also in Japan. Basically, you might also include the imbalances that exist in the world on account of the fact that the large and fast growing economies in Asia broadly speaking have an exchange rate policy which links their currency to the US dollar, despite the fact that their economic developments are sometimes very different from those in the United States.
Question: Mr. Duisenberg, I think I did not hear you say that you expect the recovery in the second half of the year...
Duisenberg: Yes, I thought I said it again.
Question: So when do you expect the recovery to take place? Is it still the old prognosis that it will happen in the second half of the year?
Duisenberg: That is still the scenario. But very gradual. And then accelerating slightly in the course of next year, but it remains gradual.
Question: Mr. Duisenberg, your comments today and also to the European Parliament suggest that the last rate cut which we saw in June may have been it. Are you prepared to say that this is it or would you say, at least, that this is it during your term as President?
Duisenberg: No, I am prepared to say that the current monetary policy stance is – given the circumstances and given the outlook – appropriate. And that is what I also said in my Introductory Statement.
Question: Can I ask a follow-up question, please? A brief question. Since you say that you are still expecting a recovery in the second half, France and Germany have announced tax cuts since your last meeting. Do you think that this is an appropriate measure to stimulate growth and are you not worried that these tax cuts may have a negative impact on inflation next year?
Duisenberg: Well, I gave a plea for a responsible policy of fiscal consolidation and then I do not comment on individual countries' announcements. But I do think that in both countries it is not only tax cuts which are on the agenda but also measures on the expenditure side. But a judgement about that will come in the context of our discussions in the Eurogroup, in which we participate. And that is the time and the forum for speaking about that. Not here today.
Question: Mr. Duisenberg, you mentioned financial markets. Now, if you look at bond markets, there have been substantial drops recently. Is that decline justified, given that an economic recovery is in the works? And is there not the risk that rising yields will delay a recovery, given that it makes it more difficult for companies to borrow?
Duisenberg: We do not think so, because the yields have been rising and the differential between US long-term yields and European long-term yields has diminished somewhat in that process. But they are rising from levels which can still be called – and which I do call – historically extremely low.
Question: ... and are these price declines justified given the recovery that you are expecting?
Duisenberg: Well, yes, the market is always right, as you know. And it is purely market-driven. So, therefore, it is justified.
Question: Mr. President, a question linked to the other one: equity markets. You mentioned a more optimistic assessment: do you welcome this more optimistic assessment, or is this a worry for you?
Duisenberg: No, I very much welcome it, if it is indeed the first sign that confidence may be returning. We can only read that in the financial markets and not yet that much in the surveys on consumer and industrial confidence. Although also there, there are first signs – but they are not yet very robust – that we may have reached the low point in confidence and may even already have passed it.
Question: Mr. Duisenberg, I wrote a story about your successor, so I have to ask this first question. You were scheduled to retire yesterday, so can you tell me how much longer you plan on staying in office, first of all? And, second, prior to your successor coming to the ECB, you conducted a review of your monetary policy strategy, the results of which are not really very different from what you are doing now. In other words, there really was no impetus to really do anything about the 2% target. Do you therefore expect that the matter is closed now, or will your successor decide to conduct a new review of your monetary policy strategy?
Duisenberg: The answer to the first question is: I expect to remain in office until my duly appointed successor can take up office. That is the formula I have used before, as you know. As to your second question on the strategy, I would like to point out that the evaluation of the strategy was carried out by the entire Governing Council and was confirmed by the Governing Council, including, in all likelihood, my potential successor.
Question: I do not know if I understood well, did you say that there are first signs of a strengthening of the economy?
Duisenberg: If I refer to the most recent surveys of consumer and industrial confidence, they have at least stopped falling and there are first, albeit very preliminary, signs that we may have reached the bottom and that confidence may be returning, at last.
Question: Mr. Duisenberg, what is your comment today on the ruling of the Court of Justice concerning independent surveys?
Duisenberg: This I will tell you but, taking into account that the judgement was delivered this morning at 9.30 a.m. and that it is 41 pages long, the ECB is not in a position to provide you already today with a detailed assessment of this judgement and its implications for the ECB. This will be done in the coming days and we will deliver a press release in due course. But I would like to make a few first comments. First, it has to be understood that there was never a dispute between the Commission and the ECB on the need to combat fraud and other illegal activities within the Community institutions and bodies and the ECB. Together with the institutions of the European Communities and the Member States, we attach great importance to the protection of the Communities' as well as the ECB's financial interests and to efforts to combat fraud and other illegal activities that might be detrimental to the Communities' as well as to the ECB's financial interests. Now it was in this spirit that the ECB established, by means of its Decision of 7 October 1999, a comprehensive anti-fraud scheme under an independent committee, aimed at the prevention of fraud and other illegal activities detrimental to the financial interests of the ECB. And that ECB Decision, at the time, closely mirrored the regime which had been set up by the European Regulation concerning investigations conducted by the European anti-fraud office, OLAF. And it provided for co-operation between the ECB's anti-fraud committee and OLAF. Therefore, the dispute – which we have now lost – between the Commission and the ECB was about a legal matter and was therefore a more technical question. The question was namely: does the regime, as set up by the European Regulation of 1999, apply to the ECB, or does that regime apply only to the European institutions and bodies that depend on the budget of the Community? As you know, the ECB does not depend on the budget of the Community. Can the ECB establish its own anti-fraud regime in order to better protect its financial interests? Financial interests, which are different and separate from those of the Community institutions. We, at the time, answered that question by saying "yes, we can". The court has now decided "no, you cannot". Now, it follows from today's judgement of the European Court of Justice that the ECB is indeed covered by the regime set up by that European Regulation of 1999, and the protection of its financial interests has to be provided under that European regime and not separately and in parallel. Now, the ECB, like the institutions and the bodies of the Community, is not prevented from establishing an internal system aimed at fighting fraud, but this can only supplement or complement, but not replace the regime of the European Regulation of 1999. So as a consequence of this ruling, the ECB will have to adapt its Decision accordingly, and it will do so in the furtherance of its objective, which is shared by the Commission and the ECB alike: to combat fraud and other illegal activities within the Community institutions and bodies and within the ECB. I think this answers your question completely and it is really too early to take any more questions on this very recent development.
Question: Mr. Duisenberg, did the Council discuss the draft constitution for Europe and particularly the paragraphs concerning the role of the ECB within the EU? And...
Duisenberg: Let me answer that question immediately. We did not discuss it in substance. In fact, the Committee of Permanent Representatives in Brussels, COREPER, decided the day before yesterday that the ECB will be asked to deliver an opinion on the draft constitution and it will be asked to deliver that opinion in good time before the start of the Intergovernmental Conference. Effectively this means that we will deliver that opinion before 1 October, towards the end of September. We have established what we call a "High-Level Task Force" to prepare that opinion for the Governing Council and we hope to adopt the opinion in our second meeting in September. So that is just procedure, but in substance we did not discuss it. We leave that for the time being to the High-Level Task Force. We of course have written, I have written, two letters to the presidency of the Convention, to Monsieur Giscard d'Estaing. These letters have in part been followed in redrafting the Convention, but largely they have not. And so undoubtedly we will in our opinion come back to those main features. The letters can be found on the ECB's website.
Question: Mr. President, despite the ECB's rate cut, commercial banks, for instance in Germany, have not lowered interest rates on loans, so I guess the effect of the ECB's rate cut is reduced. Do you have any comments?
Duisenberg: No. Because rate-setting by commercial banks does not fall under the competence of the central bank.
Question: Mr. Duisenberg, how fair is it to say that you have become more optimistic over the last month about the recovery? And I ask that because you have included the word "appropriate" this time in the statement, but you did not do that last time around. And the other question I have is: how likely is it that interest rates would remain very low for a considerable length of time?
Duisenberg: I did not use the word "appropriate" at the last press conference. I did use it in my testimony to the European Parliament, as you know, and we deliberately included it in today's Introductory Statement. That shows how confident we are that we are on the right track with our monetary policy stance. I can make no forecast about how long we will remain on that track, but I would expect us to be on it for a considerable time to come.
Question: And the optimism about the recovery?
Duisenberg: We still stick to our main scenario. We still think that it is the valid picture, as published in the June Monthly Bulletin, and we have no reason to deviate from it.
Question: Mr. Duisenberg, you did not use the words "deflationary risks", but "downside risks". Would you say that there are still deflationary risks in the euro zone?
Duisenberg: We are of the firm opinion that such risks do not exist in the euro area.
Question: My second question would be: it seems that you said last week to European trade unionists that you would retire on 1 November and would be replaced on this date by Mr. Trichet. Can you confirm this date?
Duisenberg: Well, this may be a good opportunity to say exactly what I said when we met the trade union representatives. I simply explained what the procedure is. The procedure is (and the dates are fixed) that on 15 July, I believe, the Ministers of Finance will formulate the proposal for the presidency of the ECB. Then the Governing Council of the ECB and the European Parliament have to deliver an opinion on that proposal. I think that the Governing Council will do that during the first meeting after the proposal has been received. That means specifically in our meeting of 31 July. The European Parliament has set the date for a hearing of the candidate on 11 September. I might add that deviously they have also set a date for my regular hearing on 10 September. And then, when the Committee of the European Parliament has held its hearing, the opinion of the European Parliament will be adopted in the plenary session – and I know this by heart – on 25 September. After that, the proposal and the two opinions will be handed over to the European Council in the composition of Heads of State or Government and they will make the ultimate decision expected to be taken on 15 October when the European Council meets in Brussels. The date of 1 November derives from that because the decision of 15 October will have to contain a date mentioning when the decision becomes effective. The first feasible date after that decision of mid-October is – and this is simply bureaucracy, you might say – not the day after, but two weeks later on 1 November. Personally I would have preferred a different date, but that is not very relevant.
Question: Mr. Duisenberg, at last month's press conference you said that the ECB had room to lower interest rates, given the interest rate differential with the United States. Now, that differential still exists. Does that mean that the ECB still has room to lower interest rates?
Duisenberg: Last month, I gave a purely technical answer, an answer to the question: is there still room for lowering interest rates further? And the technical answer was: as long as interest rates are not zero, there must be room. So, I can repeat that answer, but you already know it.
Question: First of all, Happy Birthday. I am not sure I heard anyone say that yet. I hope you spent the day well and wisely. That is not a question, you do not have to answer that...
Duisenberg: I spent it wisely...
Question: The strength of the euro and the fact that it has weakened to some extent in recent times – did this factor enter your thinking at all when arriving at the decision you made today to leave rates on hold? The fact that it was seen to be a concern in recent times that the euro was getting to be quite strong? That was certainly the perception of many in the markets. A second question: any comment on the Bank of England's decision to lower rates today, and what can you say about the relations between the euro area and the UK economy?
Duisenberg: No, I will not comment on the Bank of England's decision. I do not comment on measures taken by other monetary institutions. I was aware of it, that such a decision was coming. And the developments of the exchange rate did not enter into our considerations today. Considerations, or a decision, which were not really contested. But I must confess that we saw with some relief that the strong appreciation which had been evident in the months before seems, at least for the time being, to have been interrupted. Let me put it that way.
Question: Mr. Duisenberg, in your final few months at the helm of the Bank, do you think there is any risk that you might be seen or regarded as a "lame duck" President of the ECB?
Duisenberg: I do not see that risk at all. I do not believe that I will, and I do not intend to be a lame duck.
Have a nice summer break and see you all on 4 September 2003.