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Introductory statement with Q&A

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Athens, Greece, 8 May 2008

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 here in Athens. I would like to thank Governor Garganas for his kind hospitality and to express our special gratitude to his staff for the excellent organisation of the meeting of the Governing Council.

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. Inflation rates have risen significantly since the autumn, owing mainly to increases in energy and food prices. As we have said on previous occasions, inflation rates are expected to remain high for a rather protracted period of time, before gradually declining again. The latest information confirms our assessment that upside risks to price stability prevail over the medium term, in a context of continuing very vigorous money and credit growth. At the same time, the economic fundamentals of the euro area are sound, and incoming macroeconomic data continue to point to moderate but ongoing real GDP growth. However, the level of uncertainty resulting from the turmoil in financial markets remains unusually high and tensions still persist. Against this background, we emphasise that maintaining price stability in the medium term is our primary objective in accordance with our mandate. The firm anchoring of medium to longer-term inflation expectations is of the highest priority. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We believe that the current monetary policy stance will contribute to achieving our objective. We will continue to monitor very closely all developments over the coming weeks.

Allow me to explain our assessment in greater detail, starting with the economic analysis.

The latest data and survey information on economic activity confirm previous expectations of moderate but ongoing growth in the first half of 2008. In particular, industrial production data for the first months of the year showed resilience, while economic sentiment generally continued to soften. Overall, the euro area economy has sound fundamentals and does not suffer from major imbalances.

In line with available forecasts, both domestic and foreign demand are expected to support ongoing real GDP growth in the euro area in 2008, albeit to a lesser extent than during 2007. While moderating, growth in the world economy is expected to remain resilient, benefiting in particular from strong growth in emerging economies. This should continue to support euro area external demand. Meanwhile, investment growth in the euro area should provide ongoing support to economic activity, as capacity utilisation remains solid and profitability in the non-financial corporate sector has been sustained. At the same time, employment and labour force participation have increased significantly and unemployment rates have fallen to levels not seen for 25 years. This supports real disposable income and thus consumption growth, although purchasing power is being dampened by the impact of higher energy and food prices.

The uncertainty surrounding this outlook for economic growth remains high, and downside risks prevail. In particular, risks relate to the potential for the financial market turbulence to have a more negative impact on the real economy than previously anticipated. Moreover, downside risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices. Risks also arise from protectionist pressures and the possibility of disorderly developments owing to global imbalances.

With regard to price developments, annual HICP inflation has remained above 3% for the past six months. According to Eurostat’s flash estimate, it was 3.3% in April 2008. This outturn confirms the ongoing strong short-term upward pressure on inflation, resulting largely from sharp increases in energy and food prices at the global level in recent months.

Looking ahead, on the basis of current futures prices for these commodities, the annual HICP inflation rate is likely to remain significantly above 2% in the coming months, moderating only gradually over the course of 2008. Accordingly, we are currently experiencing a rather protracted period of high annual rates of inflation. In order to ensure that current high inflation rates remain temporary, it is imperative that they do not become entrenched in longer-term expectations or lead to broadly based second-round effects in wage and price-setting.

The risks to the outlook for inflation over the medium term remain clearly on the upside. These risks include the possibility of further rises in energy and food prices, as well as of increases in administered prices and indirect taxes beyond those foreseen thus far. Most importantly, there is a risk that price and wage-setting behaviour could add to inflationary pressures. In particular, the pricing power of firms, notably in market segments with low competition, may prove stronger than currently expected. Moreover, higher than expected wage growth may emerge, taking into account high capacity utilisation, tight labour market conditions and the risk of second-round effects owing to the high level of current inflation rates.

Against this background, it is imperative that all the parties concerned, in both the private and the public sector, meet their responsibilities. Wage-setting needs to take into account productivity developments, the still high level of unemployment in many economies, and price competitiveness positions. Moderate labour cost increases are particularly necessary in countries which have lost price competitiveness in recent years. Second-round effects stemming from the impact of higher energy and food prices on price and wage-setting behaviour must be avoided. In this context, the Governing Council is concerned about the existence of schemes in which nominal wages are indexed to consumer prices. Such schemes involve the risk of upward shocks in inflation leading to a wage-price spiral, which would be detrimental to employment and competitiveness in the countries concerned. The Governing Council therefore calls for such schemes to be avoided. The Governing Council is monitoring wage negotiations in the euro area with particular attention. In the view of the Governing Council, continued responsible wage agreements are of key importance in order to preserve price stability in the medium term and thereby the purchasing power of all euro area citizens.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. Annual M3 growth remained very vigorous at 10.3% in March, supported by the continued strong growth of MFI loans to the private sector. At the same time, annual M1 growth continued to moderate in March, reflecting higher short-term interest rates which encouraged further shifts from overnight into time deposits. While the impact of the flat yield curve and other temporary factors suggest that annual M3 growth currently overstates the underlying pace of monetary expansion, nonetheless, even after taking such effects into account, a broad-based assessment of the latest data confirms that the underlying rate of money and credit growth remains strong.

The growth of household borrowing has moderated over recent months, reflecting the impact of higher short-term interest rates and cooling housing markets in several parts of the euro area. However, the growth of loans to non-financial corporations has remained very robust. While some future moderation can be expected in the light of tightening financing conditions and slower economic growth, bank borrowing by euro area non-financial corporations grew at an annual rate of 15.0% in the year to March 2008, and the flow of loans in recent months has been strong.

For the time being, there is little evidence that the financial market turbulence seen since early August 2007 has strongly influenced the development of broad money and loans. Continued strong loan growth to non-financial corporations suggests that the availability of bank credit to euro area firms has not been significantly impaired by the financial turmoil thus far. Further data and analysis will be required in order to obtain a more complete picture of the impact of the financial market developments on banks’ balance sheets, financing conditions and money and credit growth.

To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis clearly confirms the assessment that upside risks to price stability prevail over the medium term, in a context of very vigorous money and credit growth and with no significant signs of supply constraints on bank loans. The economic fundamentals of the euro area are sound, and incoming macroeconomic data continue to point to moderate but ongoing real GDP growth. However, the level of uncertainty resulting from the turmoil in financial markets remains high. Against this background, we emphasise that the firm anchoring of medium to longer-term inflation expectations is of the highest priority to the Governing Council. We believe that the current monetary policy stance will contribute to achieving this objective. The Governing Council remains strongly committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. We will continue to monitor very closely all developments over the coming weeks.

Regarding fiscal policies, the latest forecast by the European Commission points to a rise in the euro area general government deficit ratio in 2008, followed by a further small increase in 2009. This deterioration in part reflects a less favourable economic environment and a likely reversal of windfall revenues accrued in past years. However, it also reflects a standstill in fiscal consolidation and new deficit-increasing measures in a number of countries with fiscal imbalances, including some with high deficits. For several countries, the attainment of the country-specific medium-term objectives by 2010 at the latest, which is the commitment made by euro area governments in Berlin in April 2007, is clearly at risk. In these countries, much more ambitious policies are imperative. For all countries, prudent fiscal policies would also help to counteract current inflationary pressures.

At the current juncture, it is also important to reinforce the structural reform agenda, in particular with a view to fostering market integration and to reducing rigidities in product and labour markets. Policy initiatives aimed at enhancing competition in market segments with low competition, such as services and energy, would allow pricing behaviour to adjust and thus contribute to lower inflation pressures. Furthermore, policies to increase trend productivity growth would contribute to smaller unit labour cost increases and ultimately also to higher employment.

We are now at your disposal for questions.

* * *

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, and Nicholas Garganas, Governor of Bank of Greece

Question: Mr President, I was wondering if the decision today to keep interest rates unchanged was unanimous, if the possibility of a rate hike or rate cut was discussed and if the word “vigilance” is still in the vocabulary of the Governing Council?

And I have a question regarding Greece – can you confirm that you had a meeting today with Bank of Greece employees regarding their problems with the social security fund and the efforts of the government to pass the new resolutions? If yes, what did you discuss and what did you tell them?

Trichet: First of all, let me confirm that, as usual, we examined the situation, which has for a number of months been technically largely multi-dimensional. We were unanimous in taking the decision to maintain interest rates at the present level. As I said on behalf of the Governing Council, and I also said that last time, we believe that the current monetary policy stance will contribute to achieving our objective. I have no reason to say that “vigilance” has disappeared from our potential vocabulary. It is an expression which we can certainly utilise when we judge that it is time to utilise it. I would also say that we are in a state of permanent alertness, and all observers know that, at all times, we will do what we judge appropriate in order to be faithful to our mandate, namely to deliver price stability in the medium term and to be credible in that delivery.

As regards Greece, at this stage I would only say that the Governing Council has made its position public and sent it to the Greek government. We are expecting a response from the Ministry of Finance at this stage. That is what we said.

Question: Markets no longer expect a rate cut this year, and I wonder if you feel comfortable with that view?

Trichet: I have said what I had to say: it is clear that we believe that the present monetary policy stance will contribute to achieving our objective.

Question: Mr President, could you tell us whether the recent downgrade of the growth forecast by the European Commission fits with your outlook on the economy? And also whether this outlook has grown worse since March?

Trichet: We will produce and make public the staff projections next month. We will see what our new staff projections are. At this stage all I would say for the present year is that the average growth which is projected by the international institutions – and I could take a number of them, including the OECD – and by the private sector – would be reasonably close to what our own staff published in the last projections. And this is largely due to the fact that the first quarter appears to be resilient, which, whatever the slowing down of growth in the second semester is, could permit us to have an average rate of growth for 2008 which again is very much, in the view of observers, public and private, in line with what we had said previously. But I do not want to anticipate what our staff will present next time. It is work in progress, and a number of new pieces of information are coming. They are mixed, at a global level as well as at the European level. From time to time we have good news in comparison with expectations; from time to time we have less good news, obviously. And it is true for outside the euro area as well as inside the euro area. You have noticed for instance that the services sector PMI was a little bit better than anticipated in April, that the European Commission’s service confidence indicator was a little bit less flattering than anticipated, and that consumer confidence in March was unchanged. Again, we have a number of indications that are coming; we have to take stock of all those indications in the new staff projections.

Question: I was very impressed by the use of the word “augured” in your last statement a month ago. Would you care to do that for the next 12 months as far as the eurozone being the oasis of stability both in monetary and in GDP terms in the whole world right now? The word was “augured”; it was in your last statement a month ago. It is another word for prophesising.

The second question is: can there be real inflation without an accommodative monetary policy on behalf of the central banking authorities?

Trichet: As regards your first question: I don’t see that I have pronounced the word “augured”. In any case we, at the level of the Governing Council, do not underwrite any particular projections, even the staff projections. We are taking stock of all the information available from our own staff, which is a very important input, and from the public and private sector.

On your second point: our monetary policy is designed to deliver price stability in the medium term. It is our mandate. It is what the Treaty is calling upon us to do. And it is what the people of Europe are asking us to deliver. All the information we have, including surveys, show to what extent our 320 million fellow citizens are very eager to have price stability in the medium term. And again I have to say that it is important because not only is it our mandate, not only is it what the people of Europe are calling upon us to do, but it is also very important in the present turbulence that we are experiencing in the financial markets. A solid anchoring of inflation expectations permits additional volatility in medium and long-term market interest rates to be avoided. And avoiding such volatility in this component of European finance is important in the present circumstances.

Question: You have been talking quite often about inflationary pressures and phrase them as temporary. They clearly seem to have persisted already longer than expected. From where do you take the confidence that we are indeed going to get over the hump? Do you see any signs of easing inflationary pressures even though they are still high?

Secondly, in terms of the financial crisis we are now more or less three-quarters of a year into the present liquidity crisis, what’s your latest verdict on where we are in this crisis? Do you see any easing of the liquidity situation at all? If one looks at the eurozone money market it doesn’t really seem like it.

And thirdly, we are only a few weeks away from an important anniversary, the tenth birthday of the European Central Bank. If you had a birthday wish list, what would be on it for the next ten years?

Trichet: On the last question, the celebration will be a unique occasion to say what has happened over the last ten years and to look at the perspectives. 2 June is a very important date.

As regards the first question, inflation rates are expected to remain high for a rather protracted period of time before gradually declining again.

On the financial turbulence, this process of market correction of great amplitude, with episodes of high levels of volatility, episodes of very high levels of turbulence and elements of overshooting that we see in a number of markets is an ongoing phenomenon. We are observing elements that are in some respects encouraging and seem to show that a number of markets are going progressively back to normal, or closer to what would be normal functioning, but it is not the case for all the markets concerned. And, in a domain which is important for us, namely the tensions which we are observing in the money market that do not originate in the money market but are reflected in it and originate outside of it, as I said on behalf of the Governing Council a moment ago, we continue to see those persistent tensions. And that is one of the illustrations of this ongoing process that we are observing. A number of decisions have been taken, on both sides of the Atlantic, to cope with these persistent tensions. All market participants and institutions know that we are alert in this domain. This is an ongoing correction and I will not qualify the phenomenon that we have in front of us in any other way. One of the main reasons why we have market tensions in our own money market and interbank money market is that a large number of institutions – and not only banks or financial institutions – are expressing a strong preference for liquidity which is atypical in terms of historical observations, and this preference for liquidity is continuing to influence all the markets.

Question: Given the context today in the euro area, would you like to make a comment on economies in the euro area which, for a great number of years, have had a high current payments balance?

And my other question is: what is your forecast for the euro area? Do you feel that we’ve gone through the main damage in the financial markets or do you think that there is worse to come?

Trichet: For the second question, as I have just said, this is an ongoing process of market correction which is complex.

On the economies of the euro area, I would emphasise something I said on behalf of the Governing Council which is important for all economies, including Greece, namely that particular attention should be given to cost competitiveness indicators and to relative competitiveness indicators, particularly in countries or economies where deterioration of the competitive position has been observed over time and where current account deficits of considerable magnitude have also been observed, as you have mentioned, and where we also have a level of employment which is not necessarily satisfactory. These are major criteria: the level of competitiveness, the level of unemployment and the level of the imbalances which stem from the absence of sufficient competitiveness. It is a message for all economies that are members of the euro area that the Governing Council thinks is important to convey. It is also the case here.

Question: Just a few things to follow up if I may: first, you did not answer the question earlier about whether anyone proposed a cut or an increase in interest rates today. If that was not a deliberate slip, I’ll give you a chance to answer that one again, now.

Trichet: We were unanimous in our decision to maintain rates as they are. As always, we examined the situation from all angles, but there was no call for anything but the decision that we took.

Question: I understand you would have had an up-to-date bank lending survey, I wonder if you could give a flavour of that? You seem to have dropped the reference to, or at least one reference to, the fact that there is no sign of the credit crunch restricting the credit available to companies. I wonder if that is still your position?

I also understand you would have had the latest Survey of Professional Forecasters on inflation expectations, and I would ask whether they are still showing that inflation expectations are anchored.

And then, could I just follow up with another question about foreign exchange markets, and whether you would agree that US and European interests are now closer aligned in favour of a stronger dollar?

Trichet: As regards the bank lending survey, we will publish the latest bank lending survey at 10 a.m. tomorrow. We have had a hint at what is likely to be observed in this survey: a continued increase in the net tightening of credit standards for loans in the first quarter. If my memory serves me correctly, we could have a net tightening of 49% in the first quarter of this year instead of 41% in the last quarter of last year. That is to say, a further increase in the net tightening of credit standards confirming the tendency we have observed during the recent period. Also the net tightening for loans to households for house purchase is increasing, i.e. 33% instead of 21%. This indicates clearly that we have a continuous tightening. As I said, it does not fit well with the fact that we see some of the counterparts of the monetary aggregates continuing to be extraordinarily dynamic, for example outstanding loans to the non-financial corporate sector are growing at a pace of 15%, which is more than last month, when they grew at 14.8%. We are not 100% sure that we have captured all the underlying factors, but it is clear that we have a degree of substitution because a number of non-financial corporates have decided not to issue bonds and paper in general, including commercial paper and shorter-term commercial paper, as they used to do. That might explain the dynamism of the loans. There are also drawings on previous lines of credit, standby credit or confirmed credits. These would be no new credit decisions but old decisions, upon which non-financial corporates are drawing. We might have other explanations. But, if all this is true, we should eventually see not only the end of the continuing acceleration in these outstanding loans to non-financial corporates, but the start of a deceleration. Again, it is work in progress, even if we can identify the underlying phenomena a little more clearly.

As regards the exchange rate, you will be aware that we changed the wording during the last meeting at the level of the G7. I signed this communiqué. I was asked myself what it meant and I said that “it speaks for itself”. I also mentioned that I was taking what was said by the US authorities, the President, the Secretary of the Treasury and the Chairman of the Federal Reserve, very seriously. Namely, that a strong dollar was in the interest of the United States. I have said this before, and I will say it again. And, if it is considered by a number of observers as being serious and convincing, I would be very happy.

Question: Let me clarify a bit about your inflation assessment, because this time it seems the wording was changed. A “rather protracted period of time” and “temporarily”: you see that, and in the second reference as well, “temporarily” came afterwards compared with last month’s assessment. So, in essence, did you change your inflation assessment to a more severe one? That is my first question.

And my second question is: the most recent inflation data was a bit milder than the month before. It was 3.3% in the eurozone, and in Germany it was a little bit down as well. What do you make of this decrease? Do you think that this has an implication that your rather protracted area of high inflation will be shortened, or anything else? Do you have anything to make of it?

Trichet: I don’t know why you say that we have a different view of the inflation risk, and inflation as it is materialising, from last time. We are very much in the same mood and we don’t draw particular conclusions from the fact that headline inflation came down from 3.6% to 3.3%. I would say the best description of our attitude as regards this short-term evolution of the CPI would be that we didn’t change our vision today in comparison with the last meeting. We continue to consider that inflation will be high for a protracted period of time, as is seen. Again, I don’t draw a lot of consequences from what we are observing from one month to the other; we have volatility and we have to remain cautious and prudent. It will then gradually decline, and that was our judgement last time as well as this time. I think this answers your two questions.

Question: One question for Mr Trichet. In the statement you refer to the possibility of high inflation rates becoming entrenched in longer-term expectations. There is some discussion now of to what extent that is taking place. Of course, it is difficult to separate what is a higher inflation expectation and what is financial market chaos, and I wondered if you could give us some insight into how you pull these two things apart and conclude presumably that at this point in time you do not see that being entrenched.

And my second question is for Mr Garganas, since this has been an opportunity for those of us based in Frankfurt to acquaint ourselves with the commanding heights of the Greek economy this week. You are coming up on a transition of your own and I wondered if you could comment on what you would like to see from Greece in the coming years. Of course you and Mr Papademos were large participants in the macroeconomic stabilisation of Greece in the last ten to fifteen years. Of course, now the real fun begins, with all sorts of structural reforms that presumably Greece needs to undertake. I wonder if you could give us some insight into what you would like to see happen when you look back five or ten years from now.

Trichet: I will respond to your first question, and also to Mr Atkins’s question, because I didn’t mention that, as regards the Survey of Professional Forecasters, it will be published on 15 May in our Monthly Bulletin. As you know, we are following inflation expectations through a large number of channels and indicators. We have the Survey of Professional Forecasters, we have a number of private sector analyses, appreciations and judgements, and we have the financial markets. What I see in the area of the Survey of Professional Forecasters is that clearly there is an impact of the level of headline inflation that we are observing today and of the fact that this high level of inflation has been observed in the past, for quite a number of months, under all the influences that we know. But at this stage I would say that the medium-long-term inflation expectations that we can extract from surveys are in line with our mandate and our definition of price stability. But we have to remain constantly alert; it is no time for complacency in any respect. Again, we consider that the anchoring of inflation expectations is absolutely fundamental for us to deliver price stability in the medium term. From the financial markets we have also indications that the volatility of the break-even has been quite substantial when you extract for example the five-year break-even, the ten-year break-even and the five-year in five years’ time. In this respect alertness is important. We have indications that are from time to time contradictory – the break-even goes up, it goes down – but in any case we, even when we withdraw from the break-even the embedded insurance premia, see levels that signal absolutely no room for complacency in any respect.

Garganas: I published my Annual Report on 22 April and so my views are clearly expressed there. Nevertheless, because this report is in Greek and I assume that you did not read it, I will give you an outline of what our views are there and my views in particular. I think the challenge for Greece is to maximize the benefits of participation in a monetary union by making further progress along the path of reforms. It is for Greece particularly important to bring down the relatively high inflation rate in order to improve its competitive position. We have persistently had an inflation rate above that of the euro area average since we adopted the euro. And to achieve this objective it is particularly important to continue on a sustainable and credible path of fiscal consolidation and to improve further fiscal performance by reducing further Greece’s high government debt ratio. And of course, and this is another issue on which my views are well known, in this country at any rate, I believe that public finance in this country should have sufficient room for manoeuvre in order to better cope with expected substantial increases in age-related expenditure, because Greece is faced with one of the worst problems of an ageing population, which will have serious consequences for both healthcare and pension system expenditure. And it is important of course both in the public and private sectors to attain moderate labour cost developments. I have been criticised for that because people believe that we suggest a wage freeze or a cut in wages – we do not. We suggest labour moderation; we suggest that labour cost developments should take into account productivity growth, labour market conditions and developments in competitor countries. This is a standard position of the Governing Council, if I may say so Mr President, and of the Bank of Greece all these years. Attention must also focus on other coming structural constraints on economic growth and job creation. There is an issue of fostering labour force participation and the strengthening of competition in product markets. Product markets are not functioning properly in Greece in many sectors, and this will help keep profit margins consistent with price stability. And an improvement in the functioning of labour markets is also very important, particularly in Greece.

Question: Could I follow up with one quick thing regarding inflation expectations, which is: Is there a policy recipe that you would recommend to governments of the euro area which would cushion the blow of higher inflation without contributing to higher inflation in the future in the form of second-round effects? There is talk in your home country of dealing with alleged collusion by food merchants; there are suggestions in Germany that social insurance should be reduced.

And a question to Mr Papademos, are there any persuasive steps that you believe national governments could take to cushion the blow of higher inflation without making your job more difficult?

Trichet: Let me say again that, as far as the Governing Council is concerned, what I said today on behalf of the Governing Council was that it is imperative that all the parties concerned in both the private and public sectors meet their responsibilities. Wage-setting needs to take into account productivity developments, the continued high level of unemployment in many economies, and price competitiveness positions. We are also saying that moderate labour cost increases are particularly necessary in countries which have lost price competitiveness in recent years. That is a very strong message that we are sending to all countries, and of course those recommendations apply more to some than to others, because we are mentioning a number of specific criteria, including these price competitiveness indicators. As regards your implicit question on whether it is appropriate to offset some price increases in oil, in commodities or in other areas by means of operations that will artificially lower some other elements, I would say that no, it’s not the position that we would take. Of course, we advise all parties, including governments, not to create additional problems by increasing indirect taxation or increasing administrative prices, but we are not calling for exceptional offsetting of some of the price increases because in most cases this corresponds to a real transfer, and we have to accept that. You will remember that those who tried, in the first oil shock in 1973 and 1974, to cancel out the impact of the oil shock in their own economies did very poorly afterwards. We can make a clear distinction between those economies which recognised that prices had changed – and that had to be recognised and accepted – and those who thought that they could protect their economies from the real transfer: the second had very poor results in comparison with the first. And the second oil shocks tell exactly the same story. The mass unemployment in Europe started with the inappropriate response of several economies to the first and second oil shock. That is something which has been very well documented. But there was a question for Lucas.

Papademos: I should first say that there have been a number of positive developments over the past few years. Greece has experienced robust economic growth and has made further progress towards fiscal consolidation and structural adjustment. On the negative side, the weak feature of the Greek economy has been the low degree of competitiveness, as measured by a variety of indicators. And the persistence of significant divergences in unit labour cost increases over a number of years has had adverse implications for the inflation increase, as well as for the country’s competitiveness position. The cumulative loss of competitiveness over several years is reflected in the widening of the current account deficit, which has reached very high levels as a percentage of GDP and may not be sustainable. So far, the negative impact on economic activity from the growing external imbalances has been partly or fully offset by the positive influence of various domestic factors that have stimulated economic activity. But the influence of these factors may decline over time, and were this to happen, the adverse effects of the external imbalances on activity and employment would be felt more. So what is important – and what I’m saying is very much in line with what was said earlier on by President Trichet and Governor Garganas – is the pursuit of policies that will strengthen competitiveness, which, as you suggested, first of all involves further structural reforms in order to foster higher productivity growth and strengthen competition in markets. Moderate labour cost increases are also necessary and are particularly important in helping to restore competitiveness over time. A combination of policies in labour and product markets, in order to strengthen competition, foster productivity growth and ensure wage moderation should be pursued so as to increase competitiveness. I think this is the path to take in the years to come.

Question: Are you worried about the future of the banks’ independence, especially now with Prime Minister Berlusconi expected to join Nicholas Sarkozy in asking the ECB to take the government’s view – to be more concerned about the government’s view – and are you going to miss Governor Garganas come next July?

Trichet: We have never been alarmed. We have a Treaty: the Treaty says that we are independent. The Treaty says that we cannot receive instructions, and we cannot even ask for instructions. The Treaty says that no entity, including governments, can even try to influence the ECB, its President, its Vice-President, the members of the Governing Council, the members of the Executive Board. This is clear, and if you look at the market participants, observers, investors, savers the world over, they have absolutely no doubt that we are independent. And that we are fiercely attached to respecting the will of the European democracies, because we did not invent our own independence! We were given a mandate and we were given independence by the European democracies; very solemnly and in a way which has been exemplary in terms of democratic decision-making. Not to mention that the 320 million fellow citizens are extremely attached to us doing our job; the last survey that we carried out – and I already said this publicly – showed that 78% of our fellow citizens answered yes to the question: “Do you consider it important that the ECB is independent from governments in order to deliver price stability?”.

Question:You have said that growth is likely to be ongoing, though moderating. Could you please tell us whether the Council base line scenario is still one of growth close to or just below potential for this year and the next?

And also, the second question is, if higher energy and food costs persist for longer than anticipated, would it be effective for the ECB to tighten policy to target inflation, which is being generated by prices beyond its control?

Trichet: I already responded to those questions, and have nothing to add that would give a different view. We are very clear on what is our mandate, the fact that we believe that the present monetary policy stance will permit us to achieve our objective and, that being said, we are constantly alert, as everybody will understand.

Question: Mr President, allow me to draw you back to monetary policy. I would like to ask you whether you think that European governments and, even more, European citizens are persuaded as to the priorities and the efficiency of your monetary policy, or do you sometimes feel under pressure to ease it?

Trichet: As I said, what we see is that our fellow citizens are not happy with the present level of CPI or headline inflation – understandably so – and that they consider price stability to be of extreme importance. They decided to give us that mandate. That mandate was given to the Governing Council of the ECB by the European democracies. All the surveys we have in the 15 countries of the euro area show that citizens are calling for price stability. So we are faithful to our mandate. We might see a number of judgements on what we are doing here and there. Perhaps, some people are simultaneously asking for more price stability and a more accommodative monetary policy, because they are not called on to be coherent necessarily. But, of course, we in the ECB are called on to be coherent. We trust that the decision we took today will permit us to achieve our objective of price stability in the medium term.

Question: Given the fact that oil prices are expected to remain high, and even rise to USD 150 per barrel, and some analysts say USD 200 per barrel, and the fact that food prices are also on the rise, would you consider raising the threshold of 2% as the acceptable level of inflation just to give you room for manoeuvre to exercise your monetary policy?

Trichet: I have already responded to this question in the past. Of course, this is totally excluded, because I have explained the extent to which the solid anchoring of inflation expectations is of the essence in order for us to live up to our mandate and to what the people of Europe are asking us to do. If we were to follow the line you are implicitly suggesting, we would ourselves unanchor all inflation expectations. I invite you to do the following thought experiment: say we followed this advice and announced another figure for the definition of price stability: immediately, all inflation expectations would be unanchored. Then there would be, on top of the arithmetic augmentation of inflation expectations, additional risk premia: market participants would think that if one changes the definition of price stability once, one could change it again, so there would be no protection against future changes. The addition of the change of definition of price stability and the risk premia would immediately trigger a significant augmentation of medium and long-term market interest rates. So it is certainly not something we can envisage for one second.

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