Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB,
Frankfurt am Main, 31 August 2006

Jump to the transcript of the questions and answers

Ladies and gentlemen, let me welcome you to our press conference and report on the outcome of today’s meeting of the ECB’s Governing Council. The meeting was also attended by Commissioner Almunia.

On the basis of our regular economic and monetary analyses, at today’s meeting we decided to leave the key ECB interest rates unchanged. The information that has become available since our last meeting has further underpinned the reasoning behind our decision to increase interest rates earlier this month. It has also confirmed that strong vigilance remains of the essence so as to ensure that upside risks to price stability are contained. With key ECB interest rates at still low levels in both nominal and real terms, money and credit growth dynamic, and liquidity ample by all plausible measures, our monetary policy continues to be accommodative. If our assumptions and baseline scenario continue to be confirmed, a progressive withdrawal of monetary accommodation will remain warranted. Indeed, acting in a timely manner to contain risks to price stability remains essential to ensure that inflation expectations in the euro area are kept solidly anchored at levels consistent with price stability. Such anchoring of inflation expectations is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area.

Turning first to the economic analysis, all the main indicators in the euro area that have recently become available for the first half of the year show a significant improvement in underlying economic activity and indicate that economic growth was stronger than previously projected by official and private forecasters. According to Eurostat’s flash estimate, on a quarter-on-quarter basis, real GDP grew by 0.9% in the euro area in the second quarter of 2006, significantly above the 0.6% growth rate recorded in the previous quarter. In interpreting recent GDP data, due account needs to be taken of the degree of volatility of quarterly growth rates, but they generally confirm our view that economic growth is broadening and becoming more sustained. The information on activity in the third quarter – coming from various confidence surveys and indicator-based estimates – continues to be favourable and supports the assessment of real GDP growing at rates around potential. Looking forward, the conditions remain in place for the euro area economy to continue growing at around the potential rate. Global economic activity remains robust, providing support for euro area exports. Investment is expected to remain strong, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring, accumulated and ongoing strong earnings, and gains in business efficiency. Consumption growth in the euro area should also strengthen further over time, in line with developments in real disposable income, as employment conditions improve further.

This outlook is also reflected in the new ECB staff macroeconomic projections, which for the first time include Slovenia as part of the euro area projections for 2007. The projections foresee average annual real GDP growth in a range between 2.2% and 2.8% in 2006, and between 1.6% and 2.6% in 2007. In comparison with the June Eurosystem staff projections, the ranges projected for real GDP growth in 2006 and 2007 have been revised upwards, mainly reflecting the stronger growth recorded in the first half of this year, along with continued positive signals from a number of other indicators.

It is the Governing Council’s view that risks to these projections for economic growth are broadly balanced over the shorter term. Over the longer term, uncertainty has augmented and downside risks relate mainly to potential further oil price rises, global imbalances and protectionist pressures, especially after the suspension of the Doha round of trade talks.

With respect to price developments, according to Eurostat’s flash estimate, annual HICP inflation was 2.3% in August 2006, compared with 2.4% in the previous month. During the second half of 2006, and on average also in 2007, inflation rates are likely to remain elevated at above 2%, with the precise levels depending mainly on future energy price developments. While in our main scenario the moderate evolution of labour costs in the euro area is expected to continue in the remainder of 2006 and in 2007 – partly reflecting ongoing global competitive pressures, particularly in the manufacturing sector – lagged indirect effects of past oil price increases and already announced increases in indirect taxes are expected to exert a significant upward effect on inflation in the course of next year.

In the new ECB staff projections, annual HICP inflation is projected to lie between 2.3% and 2.5% in 2006, and between 1.9% and 2.9% in 2007. Compared with the June 2006 Eurosystem staff projections, the range for 2006 is within the upper part of the previous range, while that for 2007 has been shifted slightly upwards, largely reflecting the assumption of higher oil prices.

In the view of the Governing Council, risks to this outlook for price developments remain on the upside. They include further increases in oil prices, a stronger pass-through of past oil price rises into consumer prices than currently anticipated, additional increases in administered prices and indirect taxes, and – more fundamentally – stronger than expected wage developments.

Against this background, it is crucial that the social partners continue to meet their responsibilities, also in the context of a more favourable environment for economic activity and employment.

Regarding prospects for inflation over medium to longer horizons, our assessment that upside risks to price stability prevail continues to be confirmed by the monetary analysis. The rates of monetary and credit expansion remain rapid, reflecting the still low level of interest rates in the euro area. In particular, loans to the private sector continue to grow at double-digit rates on an annual basis, with this rapid growth remaining broadly based across the household and corporate sectors. The moderation of annual M3 growth observed in the past two months – to 8.5% in June and 7.8% in July – may possibly reflect the impact of previous increases in interest rates. However, it also needs to be viewed against the high growth rate witnessed in May, which represented one of the highest annual rates of M3 growth seen since the introduction of the euro. More generally, recent monetary developments should be assessed with the appropriate medium-term perspective, and thus against the background of the persistent upward trend in the underlying rate of monetary expansion observed since mid-2004. On this basis, liquidity in the euro area remains ample by all reasonable measures. Continued strong monetary and credit growth in the context of already ample liquidity points to upside risks to price stability over the medium to longer term. Monetary developments therefore require careful monitoring, especially against the background of improved economic conditions and strong property market developments in many parts of the euro area.

To sum up, annual inflation rates are projected to remain elevated in 2006 and 2007, with risks to this outlook continuing to be clearly on the upside. Given the ongoing dynamism of monetary and credit growth in an environment of already ample liquidity, a cross-check of the outcome of the economic analysis with that of the monetary analysis supports the assessment that upside risks to price stability prevail over the medium term. It is essential that inflation expectations remain firmly anchored at levels consistent with price stability. Accordingly, strong vigilance is warranted in order to ensure that risks to price stability are contained. If our assumptions and baseline scenario continue to be confirmed, a progressive withdrawal of monetary accommodation remains warranted. Acting in a timely manner will make an ongoing contribution to sustainable economic growth and job creation.

As regards fiscal policy, in several Member States public finances appear to be on track to meet or even exceed this year’s targets as the favourable economic situation, revenue windfalls and effective consolidation measures exert a positive influence on fiscal balances. However, in other countries, the current fiscal outlook suggests a shortfall in terms of the required structural improvement in public finances. This is worrying in view of the objectives and commitments agreed under the revised Stability and Growth Pact. It is therefore essential that 2006 budgets are executed strictly during the remainder of this year, and that budget plans for 2007 and beyond are sufficiently ambitious. All countries should take advantage of the current economic recovery to consolidate fiscal balances. Especially countries in excessive deficit procedure and with a high debt-to-GDP ratio should use the current economic recovery to bring the public deficit ratio to below 3% within the agreed deadline, and more ambitious fiscal consolidation is essential to achieve the medium-term objectives. It is also crucial that comprehensive reform programmes strengthen economic incentives and enhance the sustainability of social security systems. This is the best contribution that fiscal policies can make towards building confidence in the outlook for growth and stability in the euro area and in the revised Stability and Growth Pact.

As regards structural reforms, the Governing Council stresses the need to raise the potential growth rate of the euro area, to foster incentives to work and to strengthen the euro area’s capacity to absorb shocks. Comprehensive reform measures to ensure a fully operational internal market, a higher degree of wage and price flexibility, and a more favourable business environment would offer new opportunities for firms and workers and promote investment, innovation and job creation. Such structural reforms would not only help to underpin the momentum of the ongoing economic recovery, but would also safeguard the standard of living of euro area citizens in the longer run.

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: The phrase “ongoing withdrawal of monetary accommodation” seems to indicate that we are talking about more than one rate move, but maybe, that is a misinterpretation on my part. The markets, which often get it wrong, have priced in at least another two. Would they be far wrong?

Trichet: I will not comment more on that as it seems to me that we are clear enough. I have underlined the phrase “progressive withdrawal of monetary accommodation”, and what has happened in the past seems to provide all the appropriate keys to understanding how we act. As I have said several times, we are in a posture of strong vigilance today. I also remind you that, as far as the medium term is concerned, we will do what is necessary. We do not pre-commit ex ante, neither to doing nor to not doing something. We are constantly alert. We do what is necessary. It is probably because observers, economists, and market participants understand this so well that we have succeeded until now in anchoring inflationary expectations in line with our definition of price stability.

Question: Could you explain the reasons behind the upgrade in growth particularly for next year? You said it was the first year that included Slovenia, so could you explain how much of that upgrade is due to the faster growth in Slovenia and how much to the current euro area economies? And a second question: given the stronger outlook for both economic growth and inflation that is shown in the staff projections, can you see a point at which the ECB will stop progressively withdrawing accommodation and start tightening credit conditions?

Trichet: On the first point, Slovenia had no significant influence in these projections, taking into account Slovenia’s very small contribution to the overall consolidated GDP. As regards the sentiment surrounding the future medium-term decisions, again, we do not pre-commit ourselves in any respect. Our concept is very simple: we do what - in our opinion - is necessary to counter the inflationary risks that we see, to deliver price stability over the medium term and to be credible in the delivery of price stability. And, everything that we have done over time can be explained by this simple grid. I do not want to qualify in any other manner what we will do in the future, because, once again, we will do what we have to do in order to deliver price stability, be credible in the delivery of price stability over the medium term and continue anchoring inflationary expectations.

Question: Mr Trichet, how do you reconcile the fact that you have just upgraded your growth estimates for this year and next year with signs that European consumers, investors and business people seem to think that growth has actually peaked? A number of sentiment indicators are actually down, have been down in the last couple of weeks, yet inflation expectations are up, so how do you walk that tightrope between withdrawing monetary accommodation without choking growth?

Trichet: First of all – this is very important although it is not new for you,– we contribute to sustainable growth and job creation as it is stated in the Introductory Statement by doing what is necessary to do. We would hamper growth, and not foster growth, if we were to abandon our mandate and if we were less credible in the delivery of price stability. This is clear. Second, as regards the projections, and also as a further response to the previous question, let me first say that it is the ECB staff projections which are being made public today. As you know, we are not ourselves in the Governing Council underwriting these projections. They are made by our ECB staff, with all of their professional excellence and their knowledge. These are the last projections to have been published after a number of other institutions’ projections. If you compare the various projections (IMF, OECD, Commission, our staff), you have to take into account the fact that they were not published at the same time. As far as the Governing Council is concerned, we are extracting all information and we have a sense of what the medium-term trend would be. When we had bad news – you will remember in particular that when the growth rate for the last quarter of last year was published, it was a disappointing figure, it was only 0.3% – I told you that it did not call into question our medium-term trend assessment. All the information which we were extracting and which is processed by the collegial wisdom of the Governing Council, led us to consider that we had to take into account this medium-term trend around potential – and yet we still had bad news. As a matter of fact when we increased rates in December you might remember that we did not have good news, because we had the immediate data relating to the last month of last year, which were not good. Now we have really very good figures for the first semester – that is clear enough – I would say the same. I would say that sometimes it is bad, sometimes it is very good. You have volatility, what I would call quarterly volatility of data, including GDP, which is major information. We extract all the information from that and our feeling is that it fully confirms our overall sentiment, which I have been explaining to you since the middle of last year. As regards growth we have to take into account, of course, the impact of the first semester, and that calls for the substantial arithmetic augmentation that you see in the staff projections. As regards inflation, I would say that the main driver of the upward revision of the inflation projections is oil and commodity prices. Unfortunately, this means that the materialisation of the risks associated with further increases of oil prices that we mentioned earlier is now being observed and this is crystallised in these projections.

Question: Given signs of decelerating US growth, which could affect Asia and so on, are you concerned about a dampening of global demand for euro area exports, and will domestic demand, particularly in Germany, be sufficient to offset that slowdown in global demand? My second question is: you have said for some time that policy remains accommodative. Will we continue to see accommodative policy amid slower growth next year? And finally, I know that it hasbeen decided not to regularly review the three-month M3 reference value, but given the stronger GDP trend growth that we are seeing now, is a review being considered at this point?

Trichet: As regards the international environment, I said myself that uncertainties had augmented, and I would say that we are in a universe which is probably more uncertain than before. But at the present moment we consider that the central scenario, the baseline scenario, is still that we have a favourable overall global environment. The combination of what happens in the various continents will continue to be relatively favourable as regards the global demand, which is addressed to the euro area. That being said, we are in a universe of significant uncertainties, and the possible slowing down of the US economy does of course have an impact on us. But never forget, – and I don’t want to minimise the impact of the US economy on us at a global level, both directly and indirectly – that as regards trade links, the United Kingdom is more important for the euro area than the United States. And that is an observation that one does not necessarily bear in mind. Of course it also means that for the United Kingdom, the euro area is much more important than the United States. But we have a number of other uncertainties. I mentioned the imbalances and the price of oil and other commodities, and I could also mention geopolitical uncertainties. There are a number of elements, but with all things taken into account, with all elements integrated into our own understanding of the environment of the euro area, I would say that our ECB staff projections incorporate a relatively favourable global environment. As regards Germany it is absolutely clear that we are presently observing a very favourable episode. We also know that the first quarter of next year will be much less favourable for the reason that you have in mind – the VAT increases. We consider that afterwards we should go back to some kind of a more normal trend. To sum up integrating all elements including the ECB staff projections our own baseline scenario at the level of the Governing Council is that we see appropriate confirmation of our previous diagnosis.

Question: Firstly, I wonder whether you could give us a sense of the discussion today and whether the discussion was unanimous? And secondly, I wonder whether you could talk a bit about the euro, with the Fed perhaps pausing, the Bank of Japan also perhaps pausing and the euro hitting record highs against the yen? I wonder if you could talk about the flavour of the discussion in terms of the currency?

Trichet: First of all, it was – as always – a very profound and deep discussion. All colleagues intervened, with the assets and liabilities of the situation being weighed up by all of us. I would say that the decision was unanimous. I will not comment on exchange rates, I would only say that each central bank in the world – whether it is in Japan, in the United States, in Sweden or in the United Kingdom and of course here – decides on the basis of its own responsibilities. We all have to deliver price stability and to be credible in the delivery of price stability. We in the Governing Council are very proud of our present level of credibility in the euro area and we will do whatever is necessary to preserve, maintain and enhance this level of credibility, which is essential for us to deliver on our mandate. It is also essential to make the present episode of recovery – and I am speaking of the trend and not of quarterly data – sustainable and durable. To sum up some of the responsibilities that I see presently in Europe, that governments on top of their necessary sound and reasonable fiscal policies - and you know how essential these policies are in the long run for the sake of our children and grandchildren - need to implement structural reforms which would permit the “speed limit” of European growth to be elevated. The speed limit itself has to be elevated and that is why we always mention structural reforms as being of the essence Thanks to our own mandate of price stability and to the extent that we deliver price stability, we have a very important responsibility in permitting growth to be as close as possible to the speed limit and not to be volatile; in avoiding the stops and goes that are associated with inflation.

Question: Mr Trichet, I would like to hear if you maintain the definition of ‘medium term’ in the sense that for 18 months now, we have had inflation above 2% and it seems there is growing inflationary pressure in many aspects of the economy, with growth rates possibly being revised upwards. So do you maintain this definition of the medium term because 18 months seems a long time to me? Secondly, are you seriously concerned about the situation of the public finances in Italy?

Trichet: On the first point, in view of the shocks that we have had to cope with, we can understand – and I said that today also – why for instance a large part of the new projections as regards inflation are explainable by the fact that assumptions on oil prices and commodity prices have changed. So we are permanently coping with this succession of shocks. That being said, only a few months ago we were at the level of 2%. At the moment I am speaking we are at the level of 3% and I said that we were in the posture of strong vigilance. You can see what conclusions we draw from the changes in our own assessment of the risks to price stability.

As regards Italy, I would only say that Italy is one of those economies we have been mentioning that have to be fully in line with the Stability and Growth Pact and with the commitments that are associated with the Pact’s functioning. We consider that this is absolutely essential from all standpoints – from the standpoint of the credibility of the Stability and Growth Pact, from the credibility of the country concerned and from the credibility of the euro area as a whole. Italy is one of the countries which has to do its homework fully in line with its previous commitments.

Question: I wonder if you could help me clarify some of the terms you have been using today and in previous months. When you talk about “progressive withdrawal of monetary accommodation”, progressive to me means something that goes on for quite some time, but in a very gradual way. Would that be the way you use it as well? And secondly, you talk about this “our assumptions and baseline scenario”. Could you just clear up this confusion in my mind: what is the difference between your assumptions and baseline scenario and the staff forecast that you present today? If there is not any great difference between them, would you also accept that the assumptions, including the interest rate assumptions that lie behind your staff forecasts, would also be part of your baseline scenario?

Trichet: I will not embark on long semantic explanations. I would say that “progressive” should be understood in the Anglo-Saxon, i.e. UK and US sense, and not necessarily what it implies when translated into other languages. I know that, for instance in German, or perhaps in Dutch or in other languages, it might mean an augmentation of the size of each decision, but it is not that meaning that we have in mind, it is the regular English meaning. But we have been using this word for quite some time now, and it is the first time this question is asked, so I take it for granted that almost everybody has understood what it means.

As regards the methodological assumption, as you know for exchange rates the Eurosystem staff is photographing the situation of the exchange rate at the given deadline; and then go along the period and that would call for 1.28 in the present assumptions that are underlying the projections. No conclusion has to be drawn from that, it is only the methodological approach of the staff. As regards oil and other commodities, as you know the staff looks at the futures market and draws conclusions from what we see on that market. As regards interest rates, as you know, the methodology was recently changed a little bit. I do not think that it had a significant impact on the projections themselves, market expectations have been taken into account.

As regards your second question what I call our baseline scenario refers to the overall sentiment of the Governing Council. But we do not have any other set of figures that would be different from the Eurosystem staff or from any other private or public projections. As you know, we make our judgement after having looked at all the information available – of course, great attention is given to the staff projections done on the basis of their best professional excellence and knowledge but we also look at all other information available and draw conclusions from this wealth of analysis and information. Our baseline scenario is that we have a trend, which is around potential, and we are reasoning medium term. And again, that scenario as regards growth has in our opinion been fully confirmed until now, taking into account that our environment which was at the beginning very sceptical. As regards inflationary risks, they are on the upside, and this is a sentiment which we also see fully confirmed by the information we have received.

Question: I have a question concerning again the inflation projection for 2007, which has been lifted slightly upwards to 2.9%, due mostly to the assumption of higher energy prices. Can we see a certain tendency of considering the price target of 2% as possibly being a price target without the energy prices?

Trichet: First of all, we do not have a price target, but a definition of price stability, which is below but close to 2%. We are not in the conceptual universe of inflation targeting. We have our own concept, as you know. Second, as you rightly say, most of the explanation we have for the new ranges is associated with the increases in the prices of oil and other commodities, which is very important.

Question: It gives a little bit the feeling that you feel comfortable with the price range projection of 1.9% to 2.9%.

Trichet: If we felt comfortable, I would not say that we are in a posture of strong vigilance. And that progressive alleviation of monetary accommodation would be warranted!

Question: My computation is that you have a mean of 2.4% inflation projection for next year. This is then lower than the assumptions of the market concerning interest rate rises, which is that you will be at approximately 3.5% sometime at the end of this year. If you are not too comfortable with that, would it be wrong to assume that you think that 3.5% is not enough to bring inflation rates down and that there are still major price risks even if you are at 3.5%?

Trichet: I never pre-commit to any kind of level. At the same time I will not prevent you from having in mind some figures, but that is your responsibility. As far as we are concerned, we will do what is necessary to do in our own judgement. I have no other comments on that. The question is very pertinent, but my response is clear: we will do what is necessary to do.

Question: You are forecasting a slowdown of growth for next year, but at the same time you said that there will be a progressive withdrawal of monetary accommodation if your baseline scenario is confirmed. So can we expect that, even if the economy slows down, the ECB could increase rates? And my second question is not related to monetary policy, but to the IMF: are you expecting any discussions with the IMF in Singapore about a better representation of the ECB in the IMF?

Trichet: On the first point we will do what is necessary. In the past - and I have already referred to that- we increased rates in December with the most recent figures that were not very flattering. And it was proved that they were not very flattering when we got the results of the last quarter of last year. We have a needle in our compass which is price stability. And one should never depart from that: I have seen a number of questions implying that we have other needles, or that we have two compasses! No, we have only one. That needle of our own compass, which is our mandate, is extremely important because it permits us to be as close as possible to the speed limit of growth in the medium to long-run perspective and to diminish the volatility of output. That is very easily understood. For an experiment, imagine that we lose our credibility as far as inflationary expectations are concerned and look at what would immediately happen in a number of domains, including medium and long-term market interest rates! So, what we do, by being faithful to our mandate, is to foster sustainable, steady economic growth in the medium and long run and not to hamper it. What I say is not new and there is now very much a global consensus on that. That is why central banks are given the mandate of delivering price stability. It is the mandate of all inflation-targeters we see the world over – they have exactly the same single mandate.

As regards the IMF meetings in Singapore, the Eurosystem and the ECB believe that we must have an appropriate presence which corresponds to our responsibility. We are one of the major institutions in the monetary field in the world. At the last participation I had in the various “Gs” – whether it is the G7, the G10, the G20 – or in the IFMC, we are being progressively given what I would call a more appropriate representation. This is a process which is going in the right direction. We would like that process to be more rapid, but I would not be negative on it, particularly in light of the last meetings I participated in.

Question: Let me come back to your inflation projections to let me understand how you get to these projections a bit more carefully. If you assume that economic growth is going to slow down next year and that the swing comes from the uncertainty about oil prices, may you tell us what your worse case/best case scenario for the oil prices that is the basis for this projection.

Trichet: As regards our overall assumptions and those of our ECB staff, it is what comes out of the future market because that is the only objective way you can look at it. Of course, this has to be considered with a significant element of uncertainty. Therefore I would say that uncertainty in the oil and commodity markets is really something which is absolutely of the essence. The upward move of the ranges is very clearly associated with these dangers and risks. But I would not qualify the probability of realisation; and, to my knowledge, nobody does that, because, if I speak the language of economists and mathematicians, I would say that there is clearly an element of Knightian uncertainty in what can happen to this domain.

Question: What signals would you take from the recent decline in long-term bond yields, which we are observing, especially in the United States? Do you think this is a sign of a slowdown of the economy? And second question, on the concept of speed limit you were mentioning today; you yourself said that you were very critical of potential growth estimates, because of data volatility and other reasons. I am just interested in what role this concept plays in the ECB’s interest rate policy. Do you apply a certain concept of potential growth, or do you see this as a more endogenous variable which you cannot determine before you start to hike rates?

Trichet: As regards potential growth, we have a lot of analyses which are made by the OECD, by the IMF, by private institutions; we ourselves are working on that. We do not underwrite a precise figure, but what we see is that there is clearly an arithmetic understanding of what it means, which is very simple. You have demography on the one hand (ageing population, participation rate) and you have labour productivity growth on the other hand. And the combination of the two gives you some idea of what growth would be in the medium and long run. At least to the extent that you are reasonably sure of the demographic given and of the labour productivity input. And what is unfortunate in our case is that by all ways of understanding what is happening as regards productivity progress, we are at a very disappointing level. To sum up what I have in mind as a synthesis of all information of a large array of analyses, I would say that today I mean over the last five years or even the last ten years – the level of approximately a yearly increase of labour productivity is half the level we had in the euro area in the 1980s and half the level observed since 1996 or 2000 in the United States. So, clearly, if we were back to the labour productivity progress that we had in the 1980s, we would grow much more and growth potential would be superior to the present one by more than 1%. And if we could benefit from the same gross labour productivity progress as is observed in the United States we would have a growth potential again more than 1% higher than the present one. That of course brings me back to the structural reforms, which are absolutely of essence. There is a large consensus amongst economists who consider that the main reasons for these differentials, which are considerable, are associated with the flexibility of a number of economies on the one hand, including the United States, and the absence of flexibility of all markets on this side of the Atlantic. This is not to say that we have only liabilities and difficulties and counter-productive features in Europe and in the euro area, but it is clear that this is our main problem and we have to work a lot on that.

On long-term interest rates, I do not want to pronounce myself on the United States, and the person best qualified to respond to your question as regards the other side of the Atlantic is Ben Bernanke. But I would say that it seems to me that there are a number of economists who are concentrating only on the predictive capacity over the cycle of the slope of the yield curve. And I am not sure that it is exactly appropriate in the present period: first of all we have a number of other indicators that are also supposed to predict future episodes in the cycle and they are not at all giving the same indications. Also as regards the exante levels of savings and investment in the world economy, on top of all that has been said already, on the level of savings in Asia and in the emerging economies in general and also on the behaviour of corporate businesses in the industrialised world – which is perhaps, in terms of investment, at least until now more cautious and prudent than before – we have the oil element; and the oil element not only triggers consequences as regards the inflationary risk but also simultaneously produces a level of additional “forced savings” in a world which is far superior to what we had observed before. And this of course is an element which might make it possible to explain why financial markets are under the influence of this very abundant supply of additional savings. Objectively it will not last necessarily forever, at least the augmentation of this forced saving will not continue forever, we are absolutely sure of that.

Question: You mentioned strong property developments in some of the euro area and Ireland is obviously one of those countries where there is a very buoyant property market. But a lot of people there are very nervous about their investments. How nervous should they be?

Trichet: At the level of the Governing Council we look at the overall situation of the 313 million people and very soon the 315 million people in the euro area because we already have our new friends from Slovenia amongst us. At that level, we see a very dynamic element and a problem - even if in Germany there is no such feature, although it is changing a little bit. As regards various individual countries, there are some where we have an extraordinarily dynamic real estate sector. It is important that all is done at the national level in those countries in the euro area to try to cool down this abnormal sectoral behaviour. Communication and explanation can be of help in this respect. All executive branches and surveillance authorities have to take this into consideration in their own day-to-day exercise of their responsibility. It is a real issue and problem which has to be coped with.

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