Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 5 July 2007

Jump to the transcript of the questions and answers

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today’s press conference. Let me report on the outcome of our meeting, which was also attended by Commissioner Almunia.

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. The information that has become available since our previous meeting has further underpinned the reasoning behind our decision to increase interest rates in June. It has also confirmed that the medium-term outlook for price stability remains subject to upside risks. Given the positive economic environment in the euro area, our monetary policy is still on the accommodative side, with overall financing conditions favourable, money and credit growth vigorous, and liquidity in the euro area ample. Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term remains warranted. The Governing Council will continue to monitor closely all developments to ensure that risks to price stability over the medium term do not materialise and medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability. Such anchoring is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area.

Allow me to explain our assessment in greater detail, starting with the economic analysis. The latest data and survey releases have remained broadly positive, supporting the view that economic activity in the euro area in the second quarter of 2007 continued to expand at solid rates in line with our baseline scenario.

Looking ahead, the medium-term outlook for economic activity remains favourable. The conditions are in place for the euro area economy to continue to grow at a sustained rate. As regards the external environment, global economic growth has become more balanced across regions and, while moderating somewhat, remains robust. External conditions thus continue to provide support for euro area exports. Domestic demand in the euro area is also expected to maintain its relatively strong momentum. Investment should remain dynamic, benefiting from overall financing conditions which remain favourable, accumulated and ongoing strong corporate earnings, balance sheet restructuring as well as business efficiency gains achieved over an extended period. Meanwhile, consumption should be supported by developments in real disposable income, as labour market conditions continue to improve.

The risks surrounding this favourable outlook for economic growth are broadly balanced over the shorter term. At medium to longer horizons, the balance of risks remains on the downside, owing mainly to external factors. These relate in particular to fears of a rise in protectionist pressures, the possibility of further increases in oil prices, concerns about possible disorderly developments owing to global imbalances and potential shifts in financial market sentiment.

As regards price developments, as reflected in Eurostat’s flash estimate, annual HICP inflation was 1.9% in June 2007, unchanged from previous months. Looking ahead, the short-term profile of annual inflation rates continues to be determined largely by current and past energy price developments, as last year’s volatility in energy prices leads to significant base effects. On the basis of the current level of oil prices and oil price futures, which show an upward slope, annual inflation rates are likely to fall only slightly in the months ahead before rising again significantly towards the end of the year.

At the policy-relevant medium-term horizon, risks to the outlook for price stability remain on the upside. These risks relate notably to the domestic side. In particular, as capacity utilisation in the euro area economy is high and labour markets continue to improve, constraints are emerging which could lead in particular to stronger than expected wage developments. In addition, pricing power in market segments with low competition may increase in such an environment. Such developments would pose significant upward risks to price stability. It is therefore crucial that all parties concerned meet their responsibilities. Wage agreements in particular should be sufficiently differentiated to take into account price competitiveness positions, the still high level of unemployment in many economies and sector-specific productivity developments. The Governing Council stresses the importance of avoiding wage developments that would eventually lead to inflationary pressures and harm the purchasing power of all euro area citizens. In addition, upside risks to price stability arise from increases in administered prices and indirect taxes beyond those anticipated thus far, and the potentially procyclical stance of fiscal policy in some countries. Finally, on the external side, upside risks stem from the possibility of further unexpected oil price rises.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer horizons. The underlying rate of monetary expansion remains strong, in a context of already ample liquidity. The ongoing strength of monetary expansion is reflected in the continued rapid growth of M3, which increased at an annual rate of 10.7% in May, as well as the still high level of credit growth. The strong rate of monetary and credit expansion reflects, in part, favourable financing conditions and solid economic growth.

When identifying and assessing the policy-relevant underlying trends in monetary and credit expansion, it is important to look through shorter-term volatility and the effects of changes in the slope of the yield curve and external factors that are likely to prove temporary. Taking this perspective, there are several indications that higher short-term interest rates are now influencing monetary dynamics, although they have not, as yet, significantly dampened the overall strength of the underlying rate of monetary and credit expansion. For example, increases in short-term rates have contributed to a more moderate expansion of the narrow aggregate, M1, in recent quarters. Equally, the annual growth rate of loans to the private sector has shown some signs of stabilising since mid-2006, albeit at double-digit levels. The stabilisation of loan growth is now becoming more broad-based, and is apparent in borrowing by both non-financial corporations and households. In the latter case, the stabilisation of loan growth also reflects some moderation in house price dynamics, although house price growth nonetheless remains at high levels on average in the euro area.

Given the continued vigour of money and credit expansion, there are clear indications of upside risks to price stability at medium to longer-term horizons. Following several years of robust monetary growth, the liquidity situation in the euro area remains ample. In this environment, monetary developments continue to require very careful monitoring, particularly against the background of the expansion in economic activity and still strong property market developments.

To sum up, in assessing price trends it is important to look beyond any short-term volatility in inflation rates. The relevant horizon for monetary policy is the medium term. Risks to the medium-term outlook for price stability remain on the upside, relating in particular to the domestic side. As capacity utilisation is high and labour markets continue to improve, constraints are emerging which could lead in particular to stronger than expected wage and profit margin developments. Given the vigorous 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 to longer term. Accordingly, the Governing Council will monitor closely all developments in order to ensure that risks to price stability over the medium term do not materialise and medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability. Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term remains warranted.

As regards fiscal policy, the Governing Council notes with concern the pressures emerging in a number of countries to relax previous fiscal consolidation targets. In the current overall benign economic environment, it is imperative that all governments comply with the provisions of the Stability and Growth Pact on fiscal consolidation in economic “good times” and that all the countries concerned honour the commitments they made at the Eurogroup meeting in Berlin on 20 April 2007. As agreed in Berlin, taking advantage of the favourable cyclical conditions would enable most euro area countries to achieve their medium-term objectives in 2008 or 2009, and all of them should aim for 2010 at the latest. These pledges should be reflected in the 2008 budget plans so as to avoid repeating governments’ past failure to adjust fiscal balances in economic “good times”. At the same time, the Governing Council welcomes the emphasis placed by the ECOFIN Council on measures to improve the quality and efficiency of public finances.

As regards structural reforms, the Governing Council fully supports all measures that improve the functioning of product, labour and financial markets. In the context of the Integrated Guidelines for Growth and Jobs, the EU Member States noted that a well-functioning Internal Market remains at the heart of the Lisbon agenda and that its four freedoms will reinforce the European Union’s competitiveness. The completion of the Single Market is therefore a priority for Member States, in particular as regards further financial market integration, the pursuit of effective competition in the energy market and the implementation of the Services Directive. Increased market competition and a reduction of cross-border barriers are beneficial for consumers since they lead to lower prices and a greater choice of products. For firms, they lead to higher efficiency, greater dynamism and an enhanced capacity to cope with economic shocks and to face the challenges and opportunities posed by globalisation. Following the principle of “an open market economy with free competition” is pivotal to fostering long-term economic growth and job creation, increasing the resilience of the euro area to economic shocks and facilitating the maintenance of price stability in the euro area. This was confirmed at the last European Council meeting, when the EU leaders agreed to annex a new protocol to the Treaties, in the context of the Intergovernmental Conference. This protocol underlines the fact that an Internal Market which includes a system ensuring that competition is not distorted is indeed indispensable for the good functioning of the EU economies.

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 noticed that you used the language that you will be monitoring price risks closely, that was very similar language to that which you had in the previous month. If I am correct, you have not used this phrase “closely” back to back during this tightening cycle. Is it then fair to expect that we might have a slightly longer period before we have the next rate hike? Would October be a reasonable expectation, as many in the markets expected if you used this wording? And lastly, can we keep our holiday plans and go away on holiday in August?

Trichet: I already said – because it is not the first time that I have been asked such questions – that there was absolutely no case for over-interpreting if I say, on behalf of the Governing Council, “close monitoring” or “very close monitoring”. So there is nothing there that you should add to the interpretation of what we are saying. It is true that this is exactly the same wording as last time. It does not mean that the intention is to change in any respect the present expectations that the market has for, say September and October. No change in the present market expectations is called for in the message of the Governing Council. In any case as you know we never pre-commit to a decision that we will take – again no pre-commitment and no intention to change, in any respect, the present expectations of the market.

Question: Can I just ask you, if you have no intention to change market expectations of a September move, one could imagine that you would move to the word “vigilant” in August; how would you choose to communicate that, either at a press conference or in the monthly report, or do you have any speeches scheduled where you may want to share this?

Trichet: We will have a further meeting in July and a teleconference in August. We have no plans not to have a teleconference in August. If I have a message on behalf of the Governing Council to convey to you at the beginning of August, I will do so without any difficulty. So I confirm that we are constantly alert, I am available any time and there is no problem at all with that.

Question: Just two short questions. You mentioned the potentially pro-cyclical fiscal policy in a number of countries in the euro area. Could you be a bit more specific as to which countries we are talking about? We just had the budget in this country, Germany. Would that be one of the countries? And of course, there is also the discussion about France. Second, the IMF: Commissioner Almunia has said that he is in favour of a European following Mr Rodrigo de Rato, who is going to step down. Do you support that call?

Trichet: On your first point, as you know, there will be a Eurogroup meeting. I have been invited by Jean-Claude Juncker to participate in the Eurogroup meeting and I do not want to predict what will be said there. Our message applies to absolutely all countries, but in particular to those countries where we think that there might be a risk of the commitments undertaken not being respected; in particular the Berlin commitment, which I mentioned in the introductory remarks, and the full implementation of the Stability and Growth Pact with a number of provisions that we will certainly insist on. This was the case in Berlin with the 0.5% reduction in the structural deficit year after year and with the commitment to reach the MTOs – the medium-term objectives – as soon as possible, in any case by 2010 at the latest.

As regards the IMF, I take this opportunity to pay homage to Mr Rodrigo de Rato and the fantastic job that he has been doing over the years: the medium-term strategy of the IMF and the way he has coped with the modernisation and optimisation of the IMF. Regarding the appointment of the new Managing Director, I will only say that it is not the responsibility of the ECB to participate in the decision-making process. I have observed that the long-standing tradition that has existed since World War II has been followed very recently in the case of its sister institution. I have also noted that all European voices have suggested sticking to this long-standing tradition. At the moment, I cannot say anything else. The Governing Council of the ECB has no position on this matter.

Question: Mr Trichet, you seem a little worried about fiscal policy, and I am a little worried about Mr Sarkozy. What do you think about his suggestion to soften the Stability and Growth Pact in France, Germany, Italy and the United Kingdom by not calculating their expenditure for defence into the 3% deficit criterion? That is what he said on Monday. That is my first question about Mr Sarkozy. He is no longer a candidate. We have to take him seriously now, I am afraid. And my second question is: should the Governing Council not be afraid of what Mr Sarkozy announces with respect to the euro? Obviously, he does not want the euro to be just one indicator that you consider in monetary policy. He thinks the euro is overvalued and wants to do something about it.

Trichet: As regards your first question, this issue of eliminating certain public spending from the computation of the Maastricht criteria has already been examined. This suggestion has already been made in the past and it was examined during the discussions about revising the Stability and Growth Pact in 2004. As I remember, this suggestion was rejected almost unanimously at that time by members of the Eurogroup and of the ECOFIN Council, because the Stability and Growth Pact is an ECOFIN instrument.

As regards your question on the euro exchange rate, I will say again that this is a very important domain where those who have a major responsibility, such as the President of the Eurogroup – because he represents all the executive branches of the 13 countries today and the 15 tomorrow – and myself as the representative of the ECB and the Governing Council, have to be very responsible. The position of this institution, as agreed upon by the Governing Council, and that of our major partners at the level of the G7, is that we consider excess volatility and disorderly movements in exchange rates to be undesirable for economic growth. We all agree – I signed those communiqués along with Jean-Claude Juncker, as well as a number of ministers and central bank colleagues – that in emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that the necessary adjustment will occur. This is the message that we together have on China. We have signed this message and China, as well as the other emerging economies in Asia, knows that. After appropriate discussion in Essen and in Washington, I myself noted that our Japanese colleagues, both the Minister of Finance and the Governor, said they believe that the Japanese economy is on a sustainable recovery path and that the exchange rates should reflect these economic fundamentals. Exchange markets should be aware of the fact that there are two-way risks in any bet. This has been said by the responsible Japanese authorities and repeated recently. I say myself that it is important that they said that. And it is important that the market gets that message. As regards the US Dollar, I have also noted with others that the US authorities have said that a strong dollar was in the interests of the US economy. I will stop there and I warn in advance that all those who would like to hear more comments will be a little bit disappointed, because I will stick to what I have just said, which is crystal clear and reflects our current position!

Question: I have three questions: are you also concerned, like the Commission, about Italy’s plan to slow the pace of its deficit cuts? Another question is, are you happy with plans in Italy à propos structural reforms to lower the pension entrance to 58 years from the planned 60 years foreseen in the law, starting on 1 January 2008? And the third question is, do you have new evidence that the potential growth for Europe, which is today at 2% to 2.25%, may have risen in this last year?

Trichet: To your first question: any indications that could be given in respect of a possible weakening of the fiscal consolidation would be against, I repeat, against the decisions that have been taken by the various governments themselves, against the recommendations and decisions that have been taken within the framework of the Stability and Growth Pact upon the proposal of the Commission and against the Berlin Agreement I referred to in the introductory remarks. It is clear, and this is true for all countries concerned, including of course France and Italy and others, if such signs are given. That being said, I do not want to anticipate the meeting which will take place next Monday at the level of the Eurogroup.

To your second question on the structural reforms, again, we are totally backing structural reforms. We know that it is not easy, we know that it calls for courage from the executive branches and from the parliaments and from the social partners, but we are absolutely convinced that it would permit an increase in growth and job creation and in the growth potential of Europe. Anything that would weaken the path of structural reforms is in our opinion not to be recommended at all. That would certainly be the case of the example you gave. We back structural reforms and we stand ready to explain why they are necessary. We encourage and fully support the governments that are embarking on those reforms.

To your third question on the growth potential of the euro area, I fully confirm, at this stage, that the position of the Governing Council is that we have not substantiated any conclusion that would permit an increase in the present level of the growth potential that we have in mind, which is around 2.25%. So I confirm the 2.25%; that was our previous assessment. Let me repeat that we are cautious. We are prudent as this concept can be approached through different methodologies, but for the present situation we confirm the 2.25%.

Question: I have three questions as well. The first is if market expectations of another 0.25% interest rate increase in September are fulfilled, would the Governing Council continue to describe rates as still on the accommodative side? Secondly, you have mentioned that there has been an impact of higher interest rates on the monetary data, I wonder whether you could comment as to whether you are seeing any impact of higher interest rates on economic growth, in the economic data you are taking a look at? And third, you mentioned this month and last month that medium-term price risks to growth remain on the downside, particularly due to external factors, including fears of a rise in protectionist pressures. Has anything happened in the past week or two weeks to intensify your fears in those directions?

Trichet: As usual, with regard to what we will say in future press conferences and after future meetings of the Governing Council, I will tell you what our judgement is at the next press conference and after the next meeting of the Governing Council. At this stage, I said already all what I had to say on the future.

As regards growth and the impact on growth, it is an occasion to repeat what you already know very well, namely that we are absolutely convinced, as are all our colleagues, that when we ensure price stability, we permit sustainable growth and sustainable job creation. And that on the basis of all that we have seen since our decision in December 2005 to increase rates to counter the inflationary risks that we were noticing at that time, we have been, at least until now, fully vindicated in the sentiment that we were helping sustainable growth and job creation. To the extent that we had been criticised from time to time for the fact that we were playing and arbitraging price stability against job creation, the figures are: more than 12 million jobs were created during the eight years since the setting-up of the euro until the end of last year. And before the euro was set up, in the equivalent period of eight years, less than three million had been created. I could of course also embark on national data in various countries. Again, I draw your attention to the fact that there is a global consensus to consider that the prerequisite for sustainable growth and job creation is that we ensure price stability and that we are credible in ensuring price stability over time, because it does not suffice to ensure price stability today, we are reasoning over the medium term. That is the reason why the solid anchoring of inflationary expectations through our own credibility is so important.

As regards protectionism, I have to say quite sadly, that I have the sentiment that things have not improved in this respect. We are listing this risk as one of the important risks that would weigh down on the global economy. I have nothing to report that I would consider positive in this respect at the global level, and I say that sadly, because we are absolutely convinced that it is the openness of the global economy which is one of the crucial factors for global growth. We are all sharing in this global prosperity, all of us, whether industrialised countries, emerging countries and economies and even the poorest.

Question: A couple of fairly quick questions. Firstly, when you say you will be meeting by teleconference in August, I presume that means no press conference either, afterwards?

Trichet: I said if I have something to say on behalf of the Governing Council, I will find out a nice way to say it and I do not exclude at all a press briefing or a press conference or whatever, I exclude nothing.

Question: And you also warn against over-interpreting differences between “monitoring very closely” and “monitoring closely”. Does that mean perhaps that markets should get used to maybe not having so many code words in future? You were quite specific about not wanting to do anything to upset market expectations “as regards September and October”, you said if I understood it correctly, people who watch the ECB closely, the economists, so to speak, are much more fixed on September and what is priced into the market gives a little more weight to October. Could you be more specific, or could you give some clue?

Trichet: I refer to the probability that one would extract, oneself, with very sophisticated tools from the present market, and nothing else.

Question: And the third question, just to come back to fiscal policy. Would it not be reasonable for a government that intended to embark on an ambitious programme of structural reform to say, maybe we should put the brakes slightly on fiscal consolidation for a little bit to allow us to push through the structural reforms, which you yourself acknowledge can be very difficult to do politically? Would you also refer to my first question please?

Trichet: On your first question, let me repeat that the over-interpretation of “very closely” and the “closely” without the “very” was an over-interpretation that did not correspond in any respect to a precise message that the Governing Council would wish to ship. I understand that there is a permanent scrutiny of all that we say. But at the same time I draw your attention to looking at what we say, to looking at the full exposition of our diagnosis. That being said there is a particular word that really means something in our own mind: it is “strong vigilance”. It means something, but it does not mean that we are pre-committed. We do whatever is necessary and we are never pre-committed, but I would validate the present interpretation by observers and markets of what it means exactly in terms of anticipation, expectation, when we say it. I understand that there is a lot of meditation on all that we say, but what is important is really what we say and not an over-interpretation of expressions, the place of an adjective, the presence of an adverb or not and so forth. I would like to draw your attention to that. And since we are, in a way, communicating on communication, beware also of the anonymous declarations. There is absolutely no way, no channel of communication of the Governing Council which would be anonymous. All that you read as being anonymous, you have to know that it is not the way the Governing Council communicates. The Governing Council communicates publicly, on the record, and when we have things to say, including on monetary policy and future monetary policy, we will say it.

As regards your third question on structural reforms, again, I do not anticipate the next meeting and meetings of the Eurogroup. There are rules and commitments that have been taken within the framework of the Stability and Growth Pact. We back the structural reforms as well as the commitments undertaken under the framework of the Stability and Growth Pact. You know how great the responsibility of the Commission is in this respect, and I am particularly referring to recent decisions, the Berlin decisions, taken under the chairmanship of Peer Steinbrück by all the members, all the executive branches represented by their ministers of finance.

Question: What is your opinion on the new reformed treaty of the European Union? Is there an impact for the ECB? And the second question: on Monday in the Eurogroup finance ministers’ meeting, the French President Sarkozy will join this meeting, will this change the dialogue between the finance ministers and the ECB, and will you join the Eurogroup on Monday?

Trichet: As regards your first question: the Governing Council has today adopted an opinion on the opening of an intergovernmental conference (IGC). We understand that, pursuant to the IGC’s detailed mandate, which has been approved by the European Council, the changes to be introduced by the IGC to the current treaties in our domains will cover, and will be limited to, all the innovations that had been agreed at the 2004 IGC. On that basis, we welcome the opening of the IGC and we stand ready to contribute to it at any time during its work and to provide our sentiment on matters within the fields of competence of the ECB. We welcome what has been done and we have observed that we adhere exactly and strictly to what had been approved and accepted on the occasion of the 2004 IGC. We will publish our opinion in the Official Journal of the European Union.

Regarding your second point, I do not see how President Sarkozy’s attendance at the meeting could change the dialogue between the ECB and the finance ministers. It is the composition of one delegation which will be different from usual. Let us not forget that Mr Jean-Claude Juncker is himself both a member of the ECOFIN and the European Council. But it would be better to ask this question directly to Mr Juncker – as I am myself invited in the same way as Mr Juncker and Commissioner Almunia are invited to attend the Governing Council. I am not a member of the Eurogroup. I am an invitee to the Eurogroup.

Question: What do you think that the authorities in Cyprus and Malta must do in the three or four months before attaining the euro? And what do you think will be the political consequences of implementing the euro on a divided island?

Trichet: First let me mention the importance of this decision in principle for Cyprus and Malta to enter the euro area. The decision has been taken at the level of the Heads of State or Government. We will have the ECOFIN decision next Tuesday on a number of points and I do not wish to speak ahead of that meeting. All I will say is that we started with 11 members, very soon we were 12, a few years later we were 13, now next January we will be 15. It is very impressive in terms of historical evolution. And, having been involved in negotiating the Maastricht Treaty myself, I am absolutely impressed by the fact that when we negotiated the Treaty we had in mind that we would number perhaps seven or eight, or perhaps less. I remember it was said during the course of the negotiation that even if there would be only two countries the euro would have to start in order for the first crystallisation of the single currency to begin. Being 15 next year is very impressive as regards the pace of history. When you enter a single currency area you share a destiny in common. And I can never repeat that often enough because it seems to me that this is the main message. It is a very solemn commitment to be in a single currency area. You have to take into account that all that you do and all the decisions you take must be fully consistent with the fact that you are a member of a single currency area. And whether those decisions are in the realm of fiscal policy, in the realm of structural reforms, or in the realm of wages and salary formation and unit labour costs, all national parameters have to be checked and understood within the framework of membership of the single currency area. We cannot and I cannot say that frequently enough and with sufficient force. Cyprus and Malta will share a destiny in common with the partner countries.

On Cyprus, I will only mention that we ourselves said in our convergence report that the issue of reunification was an open issue and our intention was not to advise against the entry of Cyprus to the euro area, but to note in advance that, if and when the time comes, the negotiation of this reunification on the economic, financial and monetary matters should itself be fully compatible with membership of the euro area, with the fact that we hare a destiny in common.

Question: Mr Trichet, you mentioned that you have seen the first effects of rate hikes on the money market, on the short end of the market, on credit growth, etc. Could you give us an indication of how many of the rate hikes have hit the market so far, and, considering that probably quite a few of them are still in the pipeline before they hit the real economy, what gives you the “confidence” that eventually you might not be too restrictive in monetary policy?

Trichet: I confirm that what we see in the dynamics of the various components and counterparts of the monetary aggregates reflects the fact that we have increased rates, for instance the rate of growth over twelve months of M1 was 7% in March, 6.3% in April and 6.1% in May. In 2005 it was 10.4%. We see clearly that there has been a deceleration of the growth of M1, and the main explanation for that is that we have increased short-term rates. On the contrary, at the level of M3 we see a very high level of dynamism being maintained. The last figure that we have on a 12-month basis is 10.7%. Clearly we have both phenomena operating: on the one hand we have M1 decelerating visibly, and on the other hand we have M3 minus M1 remaining very dynamic, at least until now, in part because of the previous slope of the yield curve. We will see what happens when we have a different slope of the yield curve. I remain cautious because on that point with regard to consumer credit for households, the figures for February, March, April and May are 6.7%, 7.1%, 6.9% and 5.9%. So we see also elements that substantiate some kind of deceleration. All that being said, these are very complex phenomena and we have to remain very alert. Loans to non-financial corporations remain very dynamic and we are at the level of 12.6% of growth over the last twelve months. As you see, we are observing structural transformations. The fact that we have increased rates is visible and it triggers structural transformation. Everything taken into account, when we extract all the information from these data we see that in the medium to longer term the inflationary risks are on the upside, and this is what I said on behalf of the Governing Council.

Question: Mr Trichet, I have three questions. One concerns exchange rates, but in a very fundamental point of view. There are politicians in the euro area arguing that the ECB or the euro area should use exchange rates – the euro rate – as some kind of weapon to further growth and employment. And the other point of view might be that until now we always had a floating exchange rate. What is your point of view on that? Should the ECB use exchange rate policies as some kind of weapon to further growth? The second question I have is when you were talking about protectionism, there is a huge discussion coming up in Germany, and this is already the case in France, about protecting strategic industries from foreign investment – building up some kind of fences for telecoms or things like that, or the banking sector. Would you see that as a risk of protectionism or is this some kind of legitimate concern you would say perhaps? And the third question is just a clarification. Last time when I was looking at the future rates, the expectations of the markets for the ECB were for a rate hike in September and then you say you do not want to change these expectations, do you mean the expectations which I have seen on the Bloomberg screens?

Trichet: To your first question there is a very strong global consensus – and we share this global consensus – among the industrialised world economies that central banks should have a primary mandate of price stability. Price stability is not contradictory at all with sustainable growth and job creation. On the contrary, there is a very simple logical relationship, whereby price stability is a prerequisite for sustainable growth and sustainable job creation. When you take your decision on how to ensure price stability, you take all parameters on board – all the information that you have, both domestic and international. The exchange rates are one of the data amongst many others that you take into account when you take your decision to ensure price stability. There has been a consensus since the collapse of the Bretton Woods system that we would live in a floating exchange rate system. And there is also a consensus that when we have messages to convey to observers, market participants, investors and savers the world over, we convey them through the appropriate means, which are the informal meetings of the G7. These are the rules upon which we base the functioning of the present global economy. I refer here to the principles agreed between the partners in the industrialised world, and what I mentioned earlier regarding exchange rates is precisely the implementation of those principles.

As regards your second question on protectionism, the Governing Council of the ECB is very profoundly committed to the completion of the Single Market. The Single Market – or common market as the names were changed to emphasise that we are really speaking of an achieved Single Market – was the visionary idea of the founding fathers, and we are doing nothing more than follow in the very straight tracks that were imagined by the founding fathers and that have worked so well up to now. We support the full-fledged achievement of the single market in all domains because we believe that it is a prerequisite for continued prosperity, growth and job creation in Europe. In addition, we advocate proceeding in the best fashion possible against protectionism at a global level, and that is because we think that protectionism at a global level could be a major risk to global growth and global job creation.

On your last point, I do not want to give a stamp of approval to any particular computation made by any particular firm. I would only say that, taking all that I have seen published it is not my intention to ship messages aiming at changing anything in what has been computed. And I mentioned both September and October because, according to all that I have seen, there are certain probabilities that are attached to September and other probabilities that are attached to October, and, on behalf of the Governing Council, I do not want to change in any respect what you saw this morning in the various computations.

Question: I understand you cannot anticipate what will be discussed at the Eurogroup meeting on Monday. However, I wanted to know whether pressure would be put on countries that would not honour their commitments made in Berlin. Are some sanctions possible? And my second question: In France the possible increase of indirect tax was evoked two or three weeks ago to finance the expenses of the State. What is your assessment? If this project is made for price stability in Europe would they risk the same as Germany did one year ago? And my last question: I noticed that there were a lot of questions today about fiscal policy. I wanted to know if it was representative of the Governing Council today this morning. Did you also talk a lot about fiscal policy this morning?

Trichet: As regards your last question we did talk about fiscal policy this morning, and I already mentioned, on behalf of the Governing Council, our position as regards fiscal policy while presenting the Introductory Statement. We are very attached to the respect of all the rules and the commitments that have been taken. As regards what will be said at the next meeting of the Eurogroup, I do not want to anticipate; it is a meeting of the Eurogroup and it will depend very much on what will be said by the various delegations – not by only one, but by the various delegations that will present their own situations and intentions. These will be the reflections and the decisions of the Eurogroup, amongst the executive branches, on the basis of the proposal and analysis of the Commission. I do not want to anticipate the conclusion which will be drawn following the proposal of the Commission by Jean-Claude Juncker as Chairman of the Eurogroup.

As regards VAT, you could see yourself what has happened with the VAT decision in Germany. It undoubtedly has an impact on inflation and Germany represents approximately 30% or more of euro area GDP. France has a GDP which is a little more modest. And then you can make the computation to see the impact.

Question: I have two questions. How concerned are you about the high level of indebtedness – household and corporate indebtedness – in some eurozone countries? In some cases they are even unprecedented. Has the ECB perhaps detected a more acute danger that it could raise borrowing costs too much, perhaps not even realising so at the time, and that this could pose a resulting threat to financial stability and economic growth? That is the first question, and the second one is not unrelated. How does the ECB assess the relationship between the ongoing strong expansion of credit to the private sector in the eurozone and current developments in asset prices?

Trichet: It is clear that we are looking closely at everything that happens in the area of indebtedness and we see a tendency in particular for households to be more and more indebted. We also note that there are big differences from country to country and economy to economy; some are catching up with others and there is an extraordinarily rapid expansion. Others are at a more moderate pace and it is important to have an overall view because the Governing Council’s decisions are taken for the euro area as a whole.

As regards the interaction between the dynamism of credit and the dynamism of asset prices in the real estate market in particular, though not only in the real estate market, it is absolutely clear that there is a link. I have already noted here that we could simultaneously see the slowing down of the pace of price increases and the slowing down of the growth of outstanding credit in a number of economies that had observed a great level of buoyancy in the real estate market. It is one of the areas where we also see that what we have been doing over the last year and a half has an impact – a very welcome impact. One of our challenges in this domain is, again, to take decisions at the level of the euro area as a whole in an area where you have great differences from country to country. These differences will probably diminish over time. But at a time when Germany was totally depressed and a small number of economies were totally booming in terms of real estate, the synthesis was a challenging one. We can now see a pick-up in Germany and a slowing down in a number of countries: I remember I could say that in Ireland when we had the outside Governing Council meeting in Dublin and we could say that also for Spain, so we see something like a progressive “rapprochement”.

Question: On the euro and economic governance again: the G7 partners, the United States, Japan and the United Kingdom all give authority for setting foreign exchange policy to their finance ministries. The central banks act as agents in implementing those decisions. Why not follow that best practice of other G7 members in the eurozone as France is suggesting might be a good idea? And secondly a quick question on Slovakia. It wants to join the eurozone in 2009. An ECB staff memo noted that technically it looks like it could indeed meet the inflation target set by the Maastricht Treaty this year, but technically meeting the target does not mean that it would be sustainable and that it therefore might not qualify to join the eurozone. What is your view on that?

Trichet: On the first point let me say that the present responsibilities are very clear in Europe. I would not qualify the responsibilities in the rest of the world, but in Europe they are very clear according to the Treaty. There is nothing new. It is exactly the same kind of concept which has existed in this country, Germany, for 50 years, exactly the same kind of concept which has existed, to my knowledge, in most European countries that are members of the euro area since the independence of the central bank. It is the responsibility which has existed in my own country since January 1994. As regards the cooperation between major global partners, we know how it functions in practice and it has functioned well. The messages of the G7 must be the same on both sides of the Atlantic and on both sides of Pacific to be effective. All those messages are signed by both the executive branches and by the central banks. And it was the case before the euro was set up; it has been the case since the euro was set up – nothing has changed. The only big change since the euro was set up is that in addition to the previous members you have the presence of the President of the Eurogroup and you have the presence of the President of the European Central Bank. But the communiqué is signed by my central bank colleague of the United States, my colleague of the United Kingdom, my colleague of Japan, the colleague of Canada. And the communiqué says “ministers and governors”. I draw your attention to that. What counts in practice is that the message or messages are underwritten by both the different global partners and the different authorities in each major economy: monetary authorities and executive branches. In exceptional circumstances this message can be strong. That is the way the world functions at the moment. This does not mean that we do not have challenges. This does not mean that we do not have a lot of issues. But it is the methodology that we have been applying since we have been in this universe of the floating exchange system since the beginning of the 1970s. And in Europe the arrangement we have is an arrangement anchored in the Treaty, and it is fully in line with the European tradition.

As regards Slovakia, we do not have a position of the Governing Council on Slovakia and I do not want to comment on question marks that one might have, which are fully legitimate. At this stage we do not have a Governing Council position on Slovakia and I strongly encourage Slovakia to embark resolutely on a convergence programme that would be as active and responsible as possible.

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