Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 3 March 2005

Jump to the transcript of the questions and answers

Ladies and gentlemen, it is our pleasure to welcome you to this press conference. 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 Prime Minister Juncker and Commissioner Almunia.

On the whole, we continue to see no significant evidence of underlying domestic inflationary pressures building up in the euro area. Accordingly, we have left the key ECB interest rates unchanged. These interest rates are at historically low levels and are making an important contribution to the economic recovery. At the same time, upside risks to price stability over the medium term exist. These require continued vigilance on the part of the Governing Council.

I shall now explain our assessment in more detail, turning first to the economic analysis. According to Eurostat’s flash estimate, real GDP in the euro area grew at a quarter-on-quarter rate of 0.2% in the fourth quarter of 2004. In addition, third-quarter real GDP growth was revised down to 0.2%. This overall outcome for the second half of last year was disappointing. However, the composition of demand growth in the fourth quarter also offered some positive signs with regard to the underlying trend. The strengthening of domestic demand and, in particular, consumption may point to the recovery in economic activity in the euro area regaining some momentum.

There are a number of reasons why the weaker real GDP growth in the second half of 2004 could be a transitory phenomenon. On the external side, growth in the world economy remains strong, supporting euro area exports. On the domestic side, investment is expected to continue to benefit from very favourable financing conditions, robust earnings and greater business efficiency. Consumption growth should benefit from anticipated developments in real disposable income.

Accordingly, we expect continued economic growth in 2005 and 2006. This assessment is also reflected in the new ECB staff projections, which will be published today. Euro area real GDP growth is projected by the ECB’s staff to be, on average, between 1.2% and 2.0% in 2005 and between 1.6% and 2.6% in 2006. These projections are lower than those published in December 2004, reflecting the weaker economic developments in late 2004. Available forecasts from international and private sector organisations convey a broadly similar outlook.

The picture emerging from the projections contains a number of risks. On the external side, high and volatile oil prices and persistent global imbalances pose downside risks to growth. As regards exchange rates, we confirm our position – expressed when the euro rose sharply – that such moves are unwelcome and undesirable for economic growth. On the domestic side, there are uncertainties surrounding the evolution of consumption, while the very favourable financing conditions and the recovery in corporate earnings could lead to higher investment growth than currently projected.

Turning to consumer prices, annual HICP inflation declined quite substantially in January 2005, falling to 1.9% from 2.4% in December 2004. This was largely a result of base effects from developments in indirect taxes and administered prices in some countries. In February, according to Eurostat´s flash estimate, annual HICP inflation was 2.0%.

In the coming months, annual inflation rates are likely to fluctuate around 2%. Looking further ahead, there is no evidence that stronger underlying domestic inflationary pressures are building up in the euro area. Over recent quarters, wage increases have remained moderate. In the context of moderate economic growth, this trend should continue.

These views are also embodied in the ECB staff projections. Average annual HICP inflation is projected by the staff to lie between 1.6% and 2.2% in 2005 and between 1.0% and 2.2% in 2006. These projections are broadly unchanged from the Eurosystem staff projections published in December 2004 and consistent with forecasts recently released by international and private sector organisations.

Several upside risks to these projections need to be taken into account, notably future oil price developments. Developments in indirect taxes and administered prices may also again surprise on the upside. Furthermore, continued vigilance is required regarding the potential risk of past price increases leading to second-round effects in wage and price-setting throughout the economy. In this respect, developments in longer-term inflation expectations need to be monitored closely.

Further insight into the outlook for price developments at medium to longer-term horizons is provided by the monetary analysis. The latest monetary data confirm the strengthening of M3 growth observed since mid-2004. This increasingly reflects the stimulative effect of the historically very low level of interest rates in the euro area. As a result of the persistently strong growth in M3 over the past few years, substantially more liquidity in the euro area exists than is needed to finance non-inflationary economic growth. This could pose risks to price stability over the medium term and warrants vigilance.

The exceptionally low level of real interest rates is also further stimulating private sector demand for credit. Growth in loans to non-financial corporations has continued to pick up in recent months. Moreover, demand for loans for house purchase has continued to be robust, contributing to strong house price dynamics in some regions of the euro area.

To sum up, the economic analysis confirms that underlying domestic inflationary pressures remain contained, while medium-term upside risks to price stability exist and will be monitored closely. Cross-checking with the monetary analysis supports the case for continued vigilance with regard to the materialisation of risks to price stability over the medium term.

Turning to fiscal policies, the Governing Council notes that, while some progress with fiscal consolidation and the correction of excessive deficits is envisaged in euro area countries’ updated stability programmes, further consolidation in a number of countries is needed. In particular, several countries do not plan to pursue an appropriately ambitious adjustment path and are not targeting close-to-balance or in-surplus budgetary positions by the end of the programme horizon. In addition, in some cases, fiscal targets are based on rather favourable growth assumptions and on insufficiently specified measures.

With respect to the Stability and Growth Pact, discussions now need to be brought to a convincing conclusion with an outcome that safeguards fiscal discipline. The credibility of the excessive deficit procedure needs to be fully preserved. This is not only fundamental for macroeconomic stability and cohesion in the euro area but also for confidence and growth prospects in all Member States.

In this regard, the Governing Council welcomes the decision by the ECOFIN Council, based on a recommendation by the European Commission, to move, for the first time, to the next procedural step in the excessive deficit procedure and to give notice, in accordance with Treaty Article 104(9), to Greece. The Governing Council also takes the view that the extension of the deadline, from 2005 to 2006, for correcting the excessive deficit pushes the room for interpretation of the rules and procedures to the limit. It is now indispensable for Greece to take effective action to correct its severe fiscal imbalances.

As regards structural developments, the euro area has seen relatively low trend productivity growth since the mid-1990s. An analysis of the determinants of productivity shows that lower productivity growth in the euro area has been partly related to higher employment due to greater participation of lower-skilled labour. Sustained wage moderation and some progress in labour market reforms aimed at increasing labour market participation appear to have partially shifted production towards a more intensive use of labour.

There are also indications that the slower pace of productivity growth observed in the euro area since the mid-1990s reflects an insufficient use of new productivity-enhancing technologies. While productivity growth has increased in sectors that produce information and communication technologies or provide related services, it has declined in many other areas of the economy. This points to structural rigidities in the euro area that prevent or hinder the fast and effective dissemination of new technologies and improved production processes across the economy.

Against this background, structural reforms that stimulate innovation, investment and productivity, and promote the use of new productivity-enhancing technologies are crucial. Stimulating product market competition, facilitating restructuring and improving human capital through adequate educational systems and “on-the-job” training are likely to speed up productivity gains from the use of new technologies.

We are now at your disposal for questions.

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Transcript of the questions asked and the answers given by Jean-Claude Trichet, President of the ECB, and Lucas Papademos, Vice-President of the ECB

Question: I would like to know if you could clarify, in greater detail than we have already been privy to, the ECB’s view on the recent changes in the composition of the Monetary Council in the Hungarian central bank in the context of Governor Járai’s allegations of government tampering with the independence of the central bank. And do you believe that these changes were in the spirit of the Maastricht Treaty? What actions would the ECB take as a result?

Trichet: I note that this is not at all what we discussed this morning. This is not to say that I will not respond to your question; I only note that we did not discuss it this morning. Our position has been made public. We gave advice on the proposed changes in the law of the central bank. We said very clearly that we were very much opposed to a first idea, which was to eliminate from the Monetary Council the two Vice-Governors. That had been said from the very beginning and it drove the government and the parliament to change the draft law and to maintain the two Vice-Governors as members of the Monetary Council. We also said in writing, at the moment of the change and the introduction of a number of new members, that we advised staggering the introduction of the new members in order to be fully in line with the spirit of independence of the central bank and not to modify in one shot a large part of the membership of the Monetary Council. That was our position. I have nothing to add. It is a written position that was taken by the Governing Council of the ECB. And it was transmitted to the government.

Question: Mr President, you expect private consumption to pick up in line with real disposable income. I wonder if you could give us some more detail on what you expect for growth of real disposable income in the euro area and maybe also how this has developed in the past relative to consumption?

Trichet: Well, this is a very, very important question, and I will say that we are very pragmatic. We look at facts, figures and data. What we have observed, if I take private consumption growth in the euro area, and – again – depending on a very cautious checking of the figures, is that we had quite robust growth of private consumption at the very beginning of last year. In the first quarter we had +0.8%. Then in the second and third quarters we had a very low level of growth of private consumption, namely 0 and +0.1%. And then in the last quarter we saw a pick-up, which was not negligible, because we jumped to 0.5%. There are reasons to think that this is the sign that private consumption could in the future be more robust than we observed in the second and third quarters of last year. Again, I remain very cautious. In the Governing Council we look at facts and figures. We look at our staff projections, which are made under the responsibility of the staff. We are not “underwriting” these projections. We look at a number of other projections that are made by the international institutions and private sector institutions, and we make our judgement. So we will see what happens. But it is absolutely clear that private consumption and domestic demand in general play a very important role in the growth of the euro area. And if I may only add one element: we are there to deliver price stability. When we observe the level of private consumption over the past period of time we see that it is insufficiently dynamic. And it is a problem for the euro area. Part of this relative absence of dynamism comes from consumer confidence being lower than we would hope. A small part perhaps, or a bigger part – it has to be checked, it is very delicate – of this insufficient level of consumer confidence can come from the fear of inflation in the future. When you ask people all over Europe, they still have this idea that perhaps price stability will not be delivered. We are there to tell them: “We will deliver price stability. And if this fear is affecting your consumer attitude – change, be more positive. You should have more confidence. We are there to guarantee to you that we will protect your purchasing power”. Again, we will see what happens. We are very pragmatic and wait for facts and figures. But the profile I have just mentioned is clearly indicating that, despite the overall disappointing growth in the fourth quarter of last year, private consumption is more dynamic than in the previous quarters.

Question: In recent times there has been a lot of concern about rising housing prices. Is there anything the ECB can do to prevent a price bubble in this area?

Trichet: A moment ago I mentioned the fact that we have observed very strong credit dynamics in some regions of the euro area, and we feel that part of these outstanding credits are financing the price increases. This is one of the reasons why we must remain vigilant. This message has also been conveyed by the various national central banks concerned, which are in very different situations. Germany is not in the same situation as other countries, for example Spain. We are in various universes and thus it is also the responsibility of both the surveillance authority of the banking sector and national central banks to communicate messages. At the level of the Governing Council, we have identified that such a phenomenon exists in some regions of the euro area. As I have already said, we do not feel that it is alarming at the level of the euro area as a whole, but we have identified it as a phenomenon that calls for vigilance.

Question: I have two questions. First question: growth in the fourth quarter of 2004 in Germany was non-existent. It contracted by 0.2%, but grew 0.8% in France. I know that such differentials are possible within one economic block, but are such big gaps between these areas making your job as people who set monetary policy much harder? Second question: you talked about the importance of consumption in the outlook for growth, but what about investments? They grew 0.6% in the fourth quarter in the euro area. And it looks like it was a much higher number in the United States by comparison. Do you see this as a critical element for the outlook for growth?

Trichet: In reply to the first question, I will certainly repeat what I have said on a number of occasions, namely that, in a vast continental economy, it is not abnormal to observe different figures on growth, inflation or unit labour cost across different regions and countries. In all continental economies, including the United States, it is possible for some states to be booming while others have a much lower level of growth. My second observation, and I will not expand too much on this, is that, as you know, in the case of Germany, a correction is made for the number of working days, which perhaps plays an important role. I say this with great caution, but without that 0.6% correction, you would be in positive territory, and the differential with the average of the EMU would be very different. We will see whether this is an explanation quite soon when we receive the figures for the first quarter of this year, because they should offset the abnormal level of growth in the fourth quarter. But, again, I make the point, and it must be fully understood that, in a vast economy of 306 million fellow citizens, it is normal to observe some differences. In order to explain why Germany is still in a phase of lower growth, it is necessary to take into account the catching-up process in terms of cost competitiveness. This might explain why Germany, whilst making a lot of progress in its cost competitiveness position, is still registering unsatisfactory domestic demand. At the level of the Governing Council of the ECB, we look at the situation of the euro area as a whole, taking the full body of the euro area economy into account. Each economy is playing its role at its own level. We will continue to look at it from this angle as required by the Treaty. As you know, each national central bank governor does not defend a national position, but operates at the level of Monetary Union as a whole. In answer to your second question regarding growth in fixed capital investment, this element deserves to be underlined and you are right to ask the question. According to available figures, and we have to remain cautious and prudent, we have seen growth in capital investment which is not negligible for three quarters: 0.5% in the second quarter of 2004, 0.6% in the third and 0.6% in the fourth. It can be seen therefore that we are in positive territory and this element must be noted. We expect, but again we are cautious, that this phenomenon will continue and perhaps accelerate in line with what I have said and, in particular, with the earnings, improved earnings, and improved profitability of a number of private institutions in the private sector.

Question: Mr Trichet, I have a question. I am broadly trying to understand the reasons for your optimism for 2005 in the face of the experience of 200,4 because the euro zone recovery showed very strong signs early in 2004 before weakening toward the end of the year. Now you look out on 2005 with considerable optimism, saying there are signs why the dip of later in the year is … there are still reasons for optimism this year. What makes you more confident in anticipating a strengthening of the recovery this year, as opposed to last year? And a second question, if I could: you spoke the last time around, at the last press conference that you did not want to ring any alarm bells, but we spoke of the issue of a bubble on the bond market. I wanted to ask if you at the ECB, and the staff, if you feel that you have a full understanding of the dynamics of what is going on. You spoke in the past about how much inflation expectations can be derived from inflation-indexed bonds and so forth. And yet, the case can be made that, in many circumstances, inflation expectations are simply not properly reflected in much of the bond market. Do you feel that you adequately understand this phenomenon right now? Or are you still waiting and, if so, what are you trying to understand?

Trichet: On your first question: things have to be very clear – I am not an optimist and I am not a pessimist. I am, and I am speaking on behalf of the Governing Council as “porte-parole”, I am a realist. We have to be pragmatic: we have facts and we have figures. It is a little paradoxical to say that we are very optimistic when I have just explained that, in 2005, the understanding of our staff is that real GDP growth will be between 1.2% and 2%. You can call this what you like, but I would say that these are projections that are revised downwards. It is true – and this has to be taken into account – that these projections are explained to a large extent by the carry-over of the disappointing growth of the second half of last year, and – in particular – the fourth quarter of last year, to the full year of 2005. So, there is an arithmetic carry-over that may explain perhaps two-thirds of the disappointing outcome of the new projections in comparison with that of the December projections. So, let me say it again: we are neither optimists nor pessimists, we are realists. And we are pragmatic and keep as close to the facts and figures as possible. It is to the best of their understanding, that the staff of the ECB makes those projections. And, again, the projections are very much in line with what we are observing both from the private sector and from the public institutions. As to the extent that we ourselves have an influence on these growth projections, I would say that it lies in delivering, and continuing to deliver, the very low level of nominal and real interest rates that we are delivering thanks to our credibility and thanks to the fact that we are credible as regards inflation expectations. I will go back to that. And, as I have also said, we tell consumers directly that they can have confidence, and we trust that confidence is really of the essence in the euro area today. We are an anchor of confidence; we are a sanctuary of confidence. As regards your second question, we are looking very carefully at all indications we have of inflationary expectations. As you know, we have surveys – we have private surveys that are carried out totally independently from us, we have our own surveys and we have the inflationary expectations extracted from indexed bonds. All these indications are converging in that they tell us that we have to remain vigilant because we had observed a tendency towards increased inflation expectations in past years. And that was one of the reasons why we said that we have to be vigilant – one of the reasons, but not the only reason. I have to mention – but I don’t want to be too optimistic in this respect – that, since mid-2004, we have seen a tendency of these inflationary expectations decreasing a little bit, in particular on the basis of what we can extract from indexed bonds. But you know that behind all this stands a theory quite sophisticated, because you have the inflationary expectations themselves, and then you have risk premia for the possible inflation volatility, and also liquidity risk premia. But overall, if I make a synthesis, I would say that I am more satisfied with the observations we make today, including those derived from indexed bonds, than I was six months ago. But vigilance remains of the essence.

Question: In December after the publication of the last forecasts, you volunteered to give us a flavour of the meeting. You said that you did not talk about a rate cut, but you weighed the pros and cons of a rate increase, although there was a large consensus to stay steady. Could you do the same for us today please?

Trichet: I would say that we had a very profound discussion, weighing the situation, weighing the economic analysis very thoroughly, weighing also the monetary analysis which calls for vigilance because we have observed that there is more liquidity in the euro area economy than is required for non-inflationary growth. All things taken together, we all concluded that we currently have, with this decision to maintain rates as they are and to continue to be vigilant, exactly the right posture.

Question: So you did not talk about raising interest rates?

Trichet: It is clear I think, for the full body of observers, and from what we are all observing on the markets, that everybody knows that at a time we will have to increase rates. That is anticipated by all observers, by all market literature and by all market futures observations, and observers seem to me in line with the reality of our own posture. So it is clear that we are looking at what is happening and taking into account the facts and figures and data to the extent that they are available and reassessing the situation along the lines that I have just said.

Question: Two questions as well. First, just going back to the point on divergencies between the member states that make up the euro zone. Professor Issing made a very interesting speech, which was posted on your website yesterday I think, in which he said that actually the divergencies had proved to be rather larger than he had expected. Do you agree with that statement?

Trichet: Divergencies between…?

Question: …euro zone economies. You talked earlier about the growth differences between euro zone economies, but it is interesting also that you made a point of emphasising the differences in the housing markets as well. Mr Issing seemed to be suggesting that actually the divergencies had proved rather larger than you had expected. My second question refers back to the comments you made last time on Citigroup and its bond trading last August. You stressed how important it was to have a fair and efficient market. Do you think that case, which is now subject to investigation by various regulators, has strengthened the case for Europe-wide regulation of the banking sector, that is, integrated centralised European regulation?

Trichet: On the first point, I have already said what I think about what is observed in a vast continental economy with differences. I take for likely, I do not recall exactly, that it was a comment on the last observations of the last quarter of last year and there, again, we have to remain a little bit cautious on how to interpret what has been observed, in particular in Germany. I remain very cautious. We will see exactly what might happen. In a number of domains, I have the sentiment that since the creation of the euro the dispersion of some important indicators has not been increasing, for instance as regards inflation. If I take the overall constellation of observations, I do not see elements that would substantiate divergencies. So we have to be again cautious, look at the various data, know that it is normal to have and to observe differences. Of course we can be surprised and everybody was surprised by the figures that were produced in the last quarter of last year. Again, we will see exactly how to judge it. I said already that it will depend very much on the observations of the first quarter of this year. As regards Citigroup, I have nothing else to say. There are inquiries and we will see what the results of these inquiries are. I fully respect the procedures which have started in a number of countries in the euro area in particular. As regards the advances towards a single market – a real single market – for financial services, we are as you know very much in favour of advancing in that direction as far as possible. We trust that there is a source of additional growth in the euro area and in the European Union as a whole associated with a real single market in services in general and in financial services in particular. That being said, we are not calling for changes in the overall framework that exists today, and where the Treaty gives responsibility to national authorities, what we do is to call on those national authorities to engage in as close and intimate cooperation and coordination as possible. We trust that this is the appropriate way in the present circumstances to make progress.

Question: I have an additional question. Did you also discuss rate cuts?

Trichet: No, we did not. But I already said that.

Question: Did President Juncker follow your advice that the excessive deficit procedure must be fully complied with? What is your opinion about the advice to install Eurostat as a neutral institution? My impression is that Eurostat has not had much credibility in recent years.

Trichet: First of all, our position as regards the Stability and Growth Pact is very well known and I don’t want to repeat it here because it has already been done very clearly. We accept improvements in the preventive arm of the Pact and we are advising not to change the corrective arm of the Pact, to maintain the nominal anchor of the 3% and the integrity of the excessive deficit procedure. We will see exactly what goes on in the important meetings that Prime Minister Juncker is chairing and we will see the results of this discussion. But our position is very well known. Each institution has to take its responsibility. We take our responsibility. We said, what was our position, more than a year ago. The Commission has enormous responsibility and we consider the Commission as the guardian of the Treaty. It has enormous responsibility in this respect. The final decision belongs to the Council and we will see again what the Council is deciding and when the Council has taken a decision we will say exactly how we assess that decision. As regards the question – which is an important one – on figures, data and data collection and reliability of figures and data, we already said very clearly that we were strongly in favour of a system which would be more credible both at the level of Europe and at the level of the various countries concerned, all member countries of the European Union. We call for more independent institutions at the level of each country and we call at the level of Europe for, say, in the sphere of the Commission, an independent, strong institution having the capacity to control what is prepared at national level by investigations of files and going on the spot if necessary. There has been some reflection on this issue, both in the Commission and in the Council. We believe that it is extremely important not to engage in permanent battles on figures. We must have a referee which will be totally reliable and which could say “These are the figures”. What I see across the Atlantic is very much a system where there is no dispute on figures, but a dispute on the fundamentals, I mean on the policies themselves and on the decisions, but not on the figures themselves.

Question: The Italian Parliament yesterday voted that the powers of the Banca d’Italia will remain unchanged, and did not change the life-long mandate of the Italian central bank Governor or transfer the anti-trust powers from the Banca d’Italia to the anti-trust authority. I would like to know if you discussed this topic at the meeting this morning and what your opinion is on this.

Trichet: No, we did not discuss that matter this morning. And I will not comment on the decision taken today by the Parliament in Rome. I have no particular comment on that.

Question: May I ask a second question? Coming to public deficits, a couple of days ago Italy said that its deficit was 3% in 2004. Do you have any comments on that?

Trichet: I will certainly say that the Stability and Growth Pact has to be respected. That is my comment.

Question: There is a spectre haunting Europe again at the moment, which we saw raise its ugly head about four months ago. In fact it is haunting the world, and is “high oil prices”. You say here that you are concerned about downside risks. Could you qualify or quantify in any way where those risks are at the moment, given that we are seeing sustainably high oil prices at the moment of around USD 50 a barrel. OPEC has even said: let’s get the world ready, get them used to the idea of this level staying where it is. You also talk about volatile oil prices. Do they even need to be volatile? At this level, is this not already enough to raise the question: can you qualify or quantify the size of this downside risk to growth which you describe?

Trichet: It is a good question of course, because it is absolutely clear that the price of oil is an important element, both at the level of the euro area and at the level of the global economy as a whole. It is also true that we have observed a level of volatility that has been considerable over time. We have some explanation for the tensions that are observed now, in particular the weather and the accumulation of additional consumption which is associated with what we observe in the weather. I only mention that in the staff projections, the assumption for the annual average oil price for 2005 was USD 44.7 per barrel and for 2006 USD 42.2. And of course these are what they had extracted, at the moment of the computation of the projections, from their observations at the time and from futures, because these assumptions are based on information enshrined in a futures market. I do not want to embark on arithmetic computation. There are risks if the price of oil is above what I just said. There we of course have a downside risk as regards growth, and this is something which is important to consider, i.e. that we are in a risk environment and of course there are also risks as regards headline inflation. Any increase in the price of oil has this immediate consequence on both areas. Let me add that I myself have signed the G7 communiqué where we call for a better functioning of the oil market, we call for much more transparency, we back the initiative to have a much better functioning of the oil market, and we call for responsibility in this domain, too, from all parties concerned.

Question: According to Handelsblatt estimations, the final result of ECB was not positive in 2004. Does the ECB need to increase its own capital provisions or reserves this year?

Trichet: For a very simple reason, which is associated with the evolution of the euro and the dollar, we certainly will produce accounts that will incorporate an important element of unrealised losses, because it is the way that our own accounts are computed. We will produce the figures when we have gone through the exercise.

Question: Are you happy with the nomination of Mr Breton at the French finance ministry and are you worried by the high frequency of finance ministers in France? Will that be helpful for structural reforms?

Trichet: I have no comment.

Question: I was thinking, as you talked a little bit about the uncertainty for growth over the next year, given the lag time for monetary policy to take effect, would you ever consider raising interest rates before there are clear signs of a recovery being under way? And secondly, I was wondering whether any central banks have given an indication that they might be diversifying their reserve holding into euros and what is your reaction to that?

Trichet: On the first point, I have already said what I had to say. We are looking at the situation, we are incorporating new data and new figures and when it appears necessary to guarantee – which is our mandate, and which is the needle of our compass – price stability in the medium and long run, then, we will do what is necessary. As regards that second point, as you know, I will only say that we are looking at what is happening everywhere. Since the setting-up of the euro we had a neutral position as regards the international use of the euro. We did not encourage the international use of the euro; we did not discourage the international use of the euro. We considered that we had to be neutral and to let market participants, observers, savers, do what they would judge appropriate. We call in any case for an evolution that would be as smooth as possible. And it is the working assumption that we are making that we would observe a smooth evolution in the context of long-term, global growth, which would call for additional reserve instruments or additional monetary and financial instruments.

Question: You stressed that Germany has made a lot of progress in increasing its cost competitiveness and to me it seems the idea behind this is that, by increasing cost competitiveness, at some point you increase investment, you increase hiring, and finally consumption. Now this process of increasing cost competitiveness has continued for quite some time and investment did not pick up and consumption did not pick up either. Is that perhaps the wrong strategy or are you still confident that at some point the usual mechanisms work in the economy?

Trichet: Again, as I said, we are looking at the euro area as a whole. We are looking at the 306 million inhabitants of the euro area and we are not looking at any particular region as our focus of interest. Because questions have been asked on Germany and because figures on Germany have been raising some legitimate questions, let me reiterate what I said: on the occasion of the reunification we had an increase in a number of costs that was very well explained at that time by the buoyancy of that particular economy. You might also have the reverse phenomenon: The phenomenon where you are accumulating a very low level of unit labour cost and then after a long period of accumulation, of “over-competitiveness” you are losing this “over-competitiveness”. I here quoted Germany, but I could quote the Netherlands as offering an opposite example, over the last few years, where you had a period of great success as regards cost competitiveness, then buoyancy in the economy and then increasing unit labour costs that were eroding this very remarkable “over-competitiveness”. So, these are phenomena that are normal in a vast continental economy. It is clear, when you look at the unit labour costs that the situation of some economies, and it is true not only for Germany, has improved considerably in comparison with the average for the euro area. Situation today is much better than six years ago and you can see with the behaviour of German exports that it is paying off. Still, we are not observing, as you said, the spillover to domestic demand. We will see. Again, I am prudent myself. I do not want to embark on any particular projections, but it would be wrong to look at any particular country looking only at the liabilities associated with that country. There are also assets in the case of this particular country. There are both difficulties which are obvious and also elements which are perhaps more encouraging. In any case, we look at the full body of the euro area. It is our responsibility and we have to guarantee price stability to the area over time, which we do.

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