Introductory statement to the press conference (with Q&A)
Jean-Claude Trichet, President of the ECB,Vítor Constâncio, Vice-President of the ECB,Frankfurt am Main, 3 February 2011Jump to the transcript of the questions and answers
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting.
Based on its regular economic and monetary analyses, the Governing Council confirmed that the current key ECB interest rates still remain appropriate. It therefore decided to leave them unchanged. Taking into account all the new information and analyses which have become available since our meeting on 13 January 2011, we continue to see evidence of short-term upward pressure on overall inflation, mainly owing to energy and commodity prices. This has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon. At the same time, very close monitoring is warranted. Recent economic data confirm the positive underlying momentum of economic activity in the euro area, while uncertainty remains elevated. Our monetary analysis indicates that inflationary pressures over the medium to long term should remain contained. Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term. The continued firm anchoring of inflation expectations is of the essence.
Overall, we expect price stability to be maintained over the medium term, and the current monetary policy stance remains accommodative. The stance, the provision of liquidity and the allotment modes will be adjusted as appropriate, taking into account the fact that all the non-standard measures taken during the period of acute financial market tensions are, by construction, temporary in nature. Accordingly, the Governing Council will continue to monitor all developments over the period ahead very closely.
Let me now explain our assessment in greater detail, starting with the economic analysis. Following the 0.3% quarter-on-quarter increase in euro area real GDP in the third quarter of 2010, recent statistical releases and survey-based evidence for the fourth quarter and the beginning of the year continue to confirm the positive underlying momentum of economic activity in the euro area. Looking ahead, euro area exports should benefit from the ongoing recovery in the world economy. At the same time, taking into account the relatively high level of business confidence in the euro area, private sector domestic demand should increasingly contribute to growth, supported by the accommodative monetary policy stance and the measures adopted to improve the functioning of the financial system. However, the recovery in activity is expected to be dampened by the process of balance sheet adjustment in various sectors.
In the Governing Council’s assessment, the risks to this economic outlook are still slightly tilted to the downside, while uncertainty remains elevated. On the one hand, global trade may continue to grow more rapidly than expected, thereby supporting euro area exports. Moreover, strong business confidence could provide more support to domestic economic activity in the euro area than is currently expected. On the other hand, downside risks relate to the tensions in some segments of the financial markets and their potential spillover to the euro area real economy. Further downside risks relate to renewed increases in oil and other commodity prices, protectionist pressures and the possibility of a disorderly correction of global imbalances.
With regard to price developments, euro area annual HICP inflation was 2.4% in January 2011, according to Eurostat’s flash estimate, after 2.2% in December. This further increase was broadly anticipated and largely reflects higher energy prices. Looking ahead to the next few months, inflation rates could temporarily increase further and are likely to stay slightly above 2% for most of 2011, before moderating again around the turn of the year. Overall, we continue to see evidence of short-term upward pressure on overall inflation, mainly owing to energy and commodity prices. Such pressure is also discernible in the earlier stages of the production process. These developments have not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon. At the same time, very close monitoring is warranted. Inflation expectations over the medium to longer term continue to be firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term.
Risks to the medium-term outlook for price developments are still broadly balanced but, as already indicated in January, could move to the upside. Currently, upside risks relate, in particular, to developments in energy and non-energy commodity prices. Furthermore, increases in indirect taxes and administered prices may be greater than currently expected, owing to the need for fiscal consolidation in the coming years, and price pressures in the production chain could rise further. On the downside, risks relate mainly to the impact on inflation of potentially lower growth, given the prevailing uncertainties.
Turning to the monetary analysis, the annual growth rate of M3 declined to 1.7% in December 2010, from 2.1% in November. The annual growth rate of loans to the private sector also declined, albeit marginally, to 1.9% in December, after 2.0% in November. These declines partly reflect the reversal of special factors that operated in November and do not indicate a general weakening of monetary dynamics. Overall, however, broad money and loan growth is still low, confirming the assessment that the underlying pace of monetary expansion is moderate and that inflationary pressures over the medium to long term should remain contained.
Looking at M3 components, annual M1 growth moderated further to stand at 4.4% in December 2010, reflecting the prevailing low remuneration of overnight deposits. At the same time, the yield curve has steepened somewhat further, implying that the attractiveness of short-term instruments included in M3 continues to decline compared with more highly remunerated longer-term instruments outside M3.
On the counterpart side, the annual growth rate of bank loans to the private sector continued to conceal differences in the magnitude of growth across sectors. The growth of loans to non-financial corporations stood at -0.2% in December, after -0.1% in the previous month, while the growth of loans to households strengthened to 3.0% in December, after 2.8% in November. Taking into account the effect of derecognition of loans from bank balance sheets and looking through short-term volatility, the latest data confirm a continued gradual strengthening in the annual growth of lending to the non-financial private sector.
At the same time, the latest data point to the overall size of bank balance sheets having contracted again after expanding for most of 2010, mainly on account of a reduction in lending between banks. It is important that banks continue to expand the provision of credit to the private sector, in an environment of increasing demand. To address this challenge, where necessary, it is essential for banks to retain earnings, to turn to the market to strengthen further their capital bases or to take full advantage of government support measures for recapitalisation.
To sum up, the current key ECB interest rates still remain appropriate. We therefore decided to leave them unchanged. Taking into account all the new information and analyses which have become available since our meeting on 13 January 2011, we continue to see evidence of short-term upward pressure on overall inflation, mainly owing to energy and commodity prices. This has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon. At the same time, very close monitoring is warranted. Recent economic data confirm the positive underlying momentum of economic activity in the euro area, while uncertainty remains elevated. A cross-check of the outcome of our economic analysis with that of the monetary analysis indicates that inflationary pressures over the medium to long term should remain contained. Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term. The continued firm anchoring of inflation expectations is of the essence.
Turning to fiscal policies, it is now essential that all governments fully implement their fiscal consolidation plans in 2011. Where necessary, additional corrective measures must be implemented swiftly to ensure progress in achieving fiscal sustainability. Beyond 2011, countries need to specify concrete policy measures in their multi-year adjustment programmes so as to underpin the credibility of their fiscal consolidation targets. Experience shows that expenditure restraint is an important step towards achieving and maintaining fiscal soundness, notably when enshrined in binding domestic policy rules. Such a commitment helps to strengthen confidence in the sustainability of public finances, reduces interest rate risk premia and improves the conditions for sound and sustainable growth. The implementation of credible policies is crucial in view of ongoing financial market pressures.
Substantial and far-reaching structural reforms, complementing fiscal adjustment, should be urgently implemented to improve the prospects for higher sustainable growth and employment. Major reforms are particularly necessary in those countries that have experienced a loss of competitiveness in the past or that are suffering from high fiscal and external deficits. Increased product market competition and labour market flexibility would further support the necessary adjustment processes in the economy. All these structural reforms should be supported by the necessary improvements in the structure of the banking sector. Sound balance sheets, effective risk management and transparent, robust business models remain key to strengthening banks’ resilience to shocks and to ensuring adequate access to finance, thereby laying the foundations for sustainable growth and financial stability.
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 Vítor Constâncio, Vice-President of the ECB
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Question: Monsieur Trichet, from the statements that you have just made regarding inflation, I have the feeling that, maybe, you are a little bit more cautious – I do not want to use the word “alert” – about inflation than you were last month because you are saying that by the end of the year, you should come back to the target zone. Is that perhaps an over-interpretation? Do you see that inflation is gaining more hold maybe also vis-à-vis the crisis we have on the oil front in the Middle East?
And secondly, on a completely different topic: we are ahead of another European banking stress test. The last one did not seem to have been such a great success as a lot of the banks that passed with flying colours, afterwards sort of sank without flying colours. Is there any advice you would put towards the supervisors and politicians that you might share with us? What might have to be changed in terms of the new banking stress test?
Trichet: I would say – to characterise the sentiment in the Governing Council – that we are very much in the same line, in accord with the assessment, that we had last month. It was only three weeks ago. We continue to see evidence that there are short-term upward pressures on overall inflation, mainly on the account of energy and commodity prices. And everything that we have seen over the last three weeks confirms that. As I have said on behalf of the Governing Council, these developments have not so far affected our assessment that price development will remain in line with price stability over the policy-relevant horizon. That been said, we have to remain alert. The continued firm anchoring of inflation expectation is of the essence. And, as you know, we have the reputation of always doing what is necessary to deliver price stability without being constrained by any pre-commitment.
On your second question, I would only say that these new stress tests are being prepared in the best fashion possible by the appropriate bodies, and we are following that very very carefully – to the extent that we at the ECB are concerned.
Question: Mr Trichet, can we anticipate from what you have said today that you will revise upwards the inflation forecast next month?
And then, on the matter of second-round effects: we have seen in Germany pay demands of up to 7%. Do you see that as being a clear second-round-effect risk and how would you plan on countering that?
Trichet: As regards your first question we will see what the staff says in its projections and I would refer you to our next monetary policy meeting where you will have at your disposal both the new projections and the assessment of the Governing Council that takes those new findings into account. What counts, as you know, is not immediate inflation, but inflation over the medium term. We have a definition of price stability over the medium term, which is the policy-relevant horizon. I would say that this is really what is extremely important in the present circumstances. But again, to characterise the judgement reached by the Governing Council today, we have come to the same judgement as a few weeks ago.
Question: As a follow-up question on this issue could you say what the Survey of Professional Forecasters may have said? Could you give us an idea of what may be coming there?
Trichet: We will publish the Survey of Professional Forecasters within a few days. We see clearly that we still have a continued anchoring of inflation expectations over the medium term, the medium to long term. I expect that, over the shorter term, we will have the impact of oil and commodity prices that we can already see now.
As regards your question on the second-round effects of this phenomenon, what comes after the immediate increase in the prices of oil and commodities, we regard it as decisive, absolutely essential that there are no second-round effects. We have no way of correcting the immediate increases in oil and commodity prices ourselves, but we have the responsibility of avoiding second-round effects. As you know, we look at the euro area as a whole, so I do not want to comment on a country. But when the prices of oil and commodities are going up, there are always new threats of second-round effects that would be counter-productive, and this is the reason why we remain permanently alert.
Question: First of all, did you discuss any options today other than leaving interest rates on hold and were you unanimous in your decision?
Second, the ECB did not buy any bonds last week and European governments are discussing the option of using the EFSF to buy bonds. Is that something you would like to see happen? And how keen are you to get this monkey off your back?
Trichet: In answer to your first question our decision on interest rates was unanimous.
In answer to your second question, our Securities Market Programme is ongoing. We did not intervene in the markets during the period of five working days that were settled last Monday but the Programme is ongoing. As regards the decision that will be taken by governments in respect of the EFSF and, tomorrow, the permanent fund, we call for the utilisation of the EFSF to be as flexible as possible, and as effective as possible in terms of magnitude.
Question: You mentioned in the Introductory Statement that the medium-term outlook for price developments is still broadly balanced. You list several upside risks, but the only thing you list is as a downside risk is potentially lower growth, even though the economy has been recovering for about a year and a half. Can you describe in a little bit more detail why lower growth is enough of a downside risk to offset those upside risks to price stability?
My second question is on inflation expectations, which you describe as firmly anchored. Some consumer-based measures of inflation expectations from the European Commission are going up. Could you tell people who watch these things as well, what measures you focus on the most when you are talking about inflation expectations?
Trichet: In answer to your first question it is certainly not out of the question that the balance of risks might be different. At the moment, we consider it to be broadly balanced. It is clear that when we address the issue of the remaining uncertainty regarding the real economy, we are thinking of a possible global phenomenon that would be counterproductive in terms of real activity. We also consider the possibility of adverse developments in the European financial system stemming from the tensions that we are currently observing. This is a risk that we believe needs to be mentioned in the overall balance of risks for inflation.
With regard to your second question, inflation expectations are a complex concept. We look at them from many perspectives, for example we look at what professional forecasters think, we look at what households think and we extract information from the markets. At the moment, we consider inflation expectations to be firmly anchored, but of course we have to be cautious and prudent. This anchoring of inflation expectations is also linked entirely to our credibility and willingness to take the appropriate decision on interest rates at any time. I do not want to comment on slight changes that we might observe when we extract information from markets as it is not really pertinent. But we have to remain permanently alert in this respect – something which is essential not only to delivering price stability, which is our primary mandate, but also to preserving an environment that is favourable to sustainable growth and sustainable job creation. Any un-anchoring of inflation expectations would immediately create an environment that would be less favourable to growth and job creation. It would immediately create an environment that would incorporate the unanchored inflation expectations into the market medium and long-term interest rates, which would in turn create a less favourable financial environment.
Question: We have had some quite interesting developments in overnight money market interest rates recently, including the EONIA going above 1%. We have seen a continuing fall in the amount of excess liquidity. This situation prompts two questions actually on this point. Firstly, do you think markets are correctly pricing in when it comes to interest rate expectations? Secondly, do you think the normalisation of markets has proceeded to an extent to which the ECB would now be ready for the next step in its exit strategy, maybe after next month’s meeting?
And my second question is just on the Securities Market Programme. There have been a lot of suggestions that the 76 billion euro worth of bonds that the ECB has bought so far could be sold to either the Greek government or to one of the EU rescue funds. You have always said they will be held until maturity, but would I be correct in thinking – would the market be correct in thinking – that there is a price at which you would be prepared to sell them, I mean assuming that would be a price that involved no losses for you on the amount you paid? Could you clarify what your position is on whether the ECB would sell its bonds?
Trichet: On your first question, I would say the money market seems to be showing signs of better functioning. We have observed – it is not the first time I have said that - that the EONIA trading volume has been rising. So, from that standpoint, what we have observed in the most recent period has been a fluctuation of interest rates which was due to the fact that there is a better functioning market. But we also had some consequences of the requests for liquidity from the commercial banks. As you know, we are supplying one-week, one-month and three-month liquidity on a full allotment basis and we could see some technical factors recently explaining why the overnight interest rates were going quite high. The maintenance period was particularly short, which has played a role, and there was also the liquidity need towards the end of the maintenance period. So, this might explain what we have observed. But taking everything into account, I would say yes, we are seeing markets showing signs of a better functioning. That being said, it is also clear that we have a number of markets that are not functioning normally. That explains why we are maintaining our non-standard measures.
I will not say anything on the decision we could take in the weeks to come, and in particular next time. We will examine the situation from all angles. Let me only repeat something which is very important for a good understanding of our monetary policy concept. We have the standard measures, as I explained at length last time, which are designed to permit us to deliver price stability; these are the interest rates decisions, the standard measures. The non-standard measures are designed to be commensurate with the abnormal functioning of some market segments. They are helping us to restore a more normal transmission of the standard measures. There is a separation principle between the standard and non-standard measures. To understand what we are likely to decide in the time to come, let me say that we will judge what is necessary as regards the standard measures independently of the non-standard measures. We will observe how the markets are functioning and whether our monetary policy transmission mechanism is functioning correctly and, if necessary, whether we should or not continue to help restore a more normal functioning. But again, it would be exactly commensurate with what we will observe at that moment.
As regards your second questions on the Securities Market Programme, we have had no discussions with anybody and have absolutely no comment on the idea that you have floated.
Question: As you know, an election has been called in Ireland. Some of the opposition parties have been saying that they believe they would be able to renegotiate the terms of Ireland’s rescue package. In your opinion, is that realistic? And is it reasonable for voters to expect that those parties would be able to do that?
Trichet: I usually do not comment on the functioning of our democracies. We have 27 exemplary democracies in Europe and 17 exemplary democracies in the euro area. Let me only say that Ireland has a medium-term plan approved by the international community, namely the IMF, and by the European Union, with the positive judgement of the Commission in liaison with the ECB. The implementation of the plan is absolutely essential, in the opinion of the ECB, for the credibility of the country.
Question: How would you view it if parties coming into government in Ireland said that they were going to breach the terms of the deal?
Trichet: No comment on that.
Question: Two questions please: First, my impression was that the language on the necessity for fiscal consolidation and structural reforms was a bit tougher than in the previous statement, so, I was wondering, do you expect the crisis in the peripheral countries of the euro zone to increase, or are there any other signs of worries that might have led you to toughen the language?
And secondly, you said that for most of 2011 inflation will remain above 2%, which implies that the ECB is going to miss its inflation target in a way. Wouldn’t you find this regrettable just in the year when you will leave the ECB’s home to your successor?
Trichet: On your first point, we always have a very strong message for all countries in Europe, without any exception, on the necessity to be absolutely credible in fiscal consolidation. We consider that fiscal consolidation is not at variance with the consolidation of the recovery, with growth and job creation on a sustainable medium-term basis, because fiscal consolidation brings about confidence, and confidence is the ingredient which is lacking the most in a number of economies. Very bold reforms – structural reforms – are also absolutely of the essence. As you know, we are calling for a “quantum leap” in the governance of the European economies, particularly of the 17 economies that are members of the euro area. This is absolutely of the essence and this is our strong position. From that standpoint we are not changing our language. We have the same language – we have only one language – which we have repeated very strongly, not only since the start of the crisis, but since the setting-up of the euro. And at times we have had to fight for maintaining, for preserving this soundness of our governance, particularly as regards fiscal consolidation, but also in other domains.
As regards your second question the so-called “target”: as you know, within our own concept of monetary policy we have a definition of price stability rather than a target, which is: below, but close to, 2% over the policy-relevant horizon, which is the medium-term. We might have, from time to time, higher levels of inflation. We might have, at other moments, very low levels of inflation. We have observed that in the past. What counts is that we deliver in the medium-term below, but close to, 2%. That is our definition of price stability. And we will continue to do that with great determination, as we have done in the past, taking our decisions on interest rates without pre-commitment, without being tied by any pre-commitment.
Question: I am just trying to understand your previous answer about the standard and non-standard measures. Does your answer imply that if the non-standard measures were no longer needed, it would be easier to implement a standard measure? In other words, if the non-standard measures are there to help transmit the policy, it seems that if they were no longer needed, normal policy would function more easily?
Trichet: No, what I tried to say was exactly the contrary: that they were totally separated, and that we were able to do whatever was necessary in terms of standard measures, even if we had a different situation as regards the functioning of the monetary policy transmission. So, we take the appropriate decision on the interest rates; then we look at what is or is not necessary to help restore the monetary policy transmission mechanism as correctly as possible. It is a separation principle.
Question: Monsieur Trichet, recent events in North Africa and the Middle East have raised fears that energy prices might move up permanently and therefore also fuel inflation in the mid-term. How concerned are you about these developments, and would you go for the same assessment? Thank you very much.
Trichet: As you know, we have observed these tensions in the prices of oil and commodities before the events that you mentioned. We are following the present geopolitical tensions with extreme attention: it is our duty; there are possible repercussions, and we remain permanently alert to the extent that it has an impact on our primary mandate and an impact on the functioning of our monetary policy transmission. At this stage I cannot say more, but we are looking at the unfolding of events with great attention.
Question: The financial stability report in December stressed that a small number of institutions are excessively dependent on liquidity provided by the ECB. Would you say that this is still the case? Or has there been a normalisation?
Trichet: No, I would say that it is certainly an issue which still exists. And we are looking at it very carefully with the strong view that, taking into account all the different circumstances across the euro area, this addiction should be progressively eliminated. It is an ongoing issue.
Question: The Irish central bank has a large Emergency Liquidity Assistance programme for banks, with an estimated volume of €50 billion. Are you worried that this programme could disturb the ECB’s future exit from non-standard measures?
Trichet: As you know, this Emergency Liquidity Assistance was decided by the central bank concerned. As far as the ECB’s Governing Council is concerned, we are looking at it to the extent that it has an impact on the overall functioning of our own monetary policy. The initial decision is not made by ourselves. The central bank concerned makes the initial decision. We look at its impact. As I said earlier, we are extremely clear that Ireland must apply the plan. The plan comprises a number of measures that directly concern fiscal policy as well as the measures on the Irish economy. It also comprises the reshaping of the banking sector. So, again, our message is: apply the plan!
Question: I have another brief question on Ireland. As we are going into the election, some of our politicians are saying that if they get into power, they will inflict losses on senior bond holders. If they were to do that or if they were to breach the terms of our bailout deal, would that have any impact on the ECB’s support of the Irish banking system?
Trichet: We fully respect the functioning of our democracies. I do not want to comment on our democracies’ procedures. I would only say that there is a plan. This plan has been approved by the IMF, by the international community and by the Commission in liaison with the ECB. Let’s apply the plan! That is my message.
Question: Political leaders have recently insisted that there has been a turn around in the euro crisis. Would you agree with this assessment? And if so, what do you think would have caused that change in confidence?
And secondly, I will have to go back to inflation again. You said your assessment has not changed since last month. I am wondering if that is the case, why did you change the Introductory Statement and for the first time you also mentioned that price pressures are discernable in the early stages of the production process in the euro zone? Is that not a sign of a slight rise in concern?
Trichet: As regards your first question you mentioned the euro crisis. Again we have to be very precise. There is no crisis of the euro as a currency. The currency has delivered price stability over the last 12 years with average inflation, as you know, of 1.97%. The credibility of the currency, namely that it will continue over the next ten years to keep its value and to deliver price stability in line with the definition of less than but close to two per cent, is remarkable. This is the solid anchoring of inflation expectations that I have already mentioned. We have a solid central bank and a solid Governing Council. We consider ourselves to be an anchor of confidence in the euro area. On the other hand there are difficulties for some issuers of sovereign bonds. That is clear. It is this set of tensions that you might regard as a crisis. Of course, this has consequences in terms of threats to financial stability. But, I repeat, there is no crisis of the euro as a currency. This is our judgment. There is very hard work to be done, to redress fiscal policies, to redress certain macro-policies, to engage in structural reform. This is the very strong message that we would like to send out. Ever since the creation of the ECB we have been an anchor of confidence, which is essential. As I said earlier, confidence is the most important ingredient in the present time. It seems to me that the global diagnosis on Europe and on the euro area has gradually incorporated what I have just said, namely that one has to consider the fundamentals. By that I mean the fundamentals of the currency, which has kept its value over 12 years remarkably and better than any currency at any time over the last 50 years, and the fundamentals of the consolidated economy, with its broadly balanced current account, a single economy with a single currency which overall has an annual public finance deficit which for 2011 is approximately half that of other major industrialised economies. All this is gradually being taken into account by markets. This is no time for complacency however, it is extremely important that the economies that have difficulties are themselves ahead of the curve in terms of their fiscal policies and their structural reforms.
As regards your second question on our judgment of inflation, I confirm that we have to remain alert. I have already said that we consider that the anchoring of inflation expectations is of the essence. Everybody knows that we will do whatever is necessary to preserve this. As regards price stability, may I invite you to our next meeting because then we will have the medium-term projections and will be able to assess the situation better.
Question: Mr Trichet, how concerned are you by the negative real interest rate in the euro area, how concerned is the Governing Council by that?
Trichet: I have already said that we consider our current key ECB interest rates appropriate. We are permanently alert and will take the decisions that are needed when we judge them to be appropriate, with no pre-commitments.
Question: We know you have an important meeting on liquidity measures next month, I was just wondering if you could tell me, will that come with measures that will deal with the problem of addicted banks and if so would these measures come from the ECB or governments?
And secondly, is the Emergency Liquidity Assistance that Irish banks are getting adding to the overall liquidity in the euro zone system and are there any limits to what Irish banks can do with this liquidity?
Trichet: On the second question, we apply our own rules as regards the Eurosystem. As regards the supply of liquidity we also apply our own rules. And as regards the decisions taken by the Central Bank of Ireland or any other central bank in the euro area in terms of Emergency Liquidity Assistance, these are initial decisions taken by those national central banks. The ECB’s Governing Council looks at them and judge whether or not they are acceptable in terms of their impact on the overall functioning of the euro area.
Question: As you know, the government of the United States has published the Financial Crisis Inquiry Report, which is the result of two years’ work by a US commission. It is a 500-page report, which is quite a challenge for a mere mortal to read – but for you, I imagine, it has been quite easy. And my first question is: Do you think that such reports are important for you as a central banker?
And the second question is: Although I know that you do not like to comment on statements by other people or authorities, I would like to read one sentence which is of a general nature and ask your opinion on this. The sentence is in the conclusion of the report and says: “We conclude this financial crisis was avoidable. Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs.” Would you agree with this or would you disagree?
Trichet: On the question of whether it was judged that there was very significant under-pricing of risks, under-pricing of spreads and underestimation of risk premia in global finance in general before the start of the crisis, even before the start of the financial turbulence, this was certainly possible. I am, on behalf of the ECB’s Governing Council a living witness. I made the point in January 2007 before the start of the turbulence, that we were observing general under-pricing of spreads and risks, general underestimation of risk premia and very low – abnormally low – levels of volatility in global finance. And I was reported having said that. So this was certainly the case, and I have to say that central banks more generally – particularly when they met in Basel – had this sentiment.
But that being said, your other question was: “Was it possible to avoid the crisis?” This is clearly our working assumption. We are drawing all the lessons we can from the crisis at the global level, in the United States, in Europe, in other advanced economies and certainly also in the rest of the world, in the emerging world, with the idea that we could minimise the risk of unfolding of such a crisis through the appropriate strengthening of macro-prudential policies, through the appropriate improvement of rules, regulations, standards and codes in global finance, through the emergence of institutions designed specifically to look at systemic risk and macro-prudential policies - this is now the case, as you know, on both sides of the Atlantic - and through the appropriate coordination of economic and financial macro-level policies with a view to having macro-policies that will avoid imbalances and abnormally loose, unsound behaviour. This has been a dramatic crisis. It has been a crisis which has been the worst since the Second World War and could have been the worst since the First World War had we not ourselves and the other central banks – we were on the front line - not decided to act in a very short span of time, and had governments not also decided to adopt very important measures. So, what is clear is that we do not want that to happen again. We do not want authorities and the private sector to be placed again in such dramatic circumstances. This is no time for complacency either in the European Union, in the euro area or at the global level. We have done a lot of hard work, but a lot of very hard work remains to be done, and it would be an enormous mistake to consider that it is now business as usual, that with the recovery we can be again tranquil and not do the hard work I’ve been mentioning. It is true for the private sector. It is also true for the public sector. We have to be fully aware of this. It is not the case that, just because from time to time we are in more tranquil and calm waters, we should not be extremely active in delivering what is necessary.
Question: You have just said that there is no euro crisis. That seems to contradict Chancellor Merkel, who explained to both the German members of parliament in the Bundestag and the Constitutional Court that Germany had to participate in the Greek rescue scheme and the creation of the EFSF because the currency was under threat. Could you comment on that please?
Trichet: As I have said very clearly, I consider that the euro is a solid and credible currency with all the fundamentals to back up my argument. I will not comment on the statements of any particular head of state or government. I would say that, for me, it was very clearly the financial stability of the euro area as a whole that was being referred to in this speech. By the way, this is exactly what we ourselves were asked. The governments decided to step in, in the case of Greece, after having asked us, the Governing Council of the ECB, whether or not we thought that there was a case for governments to intervene because the financial stability of the euro area as a whole was at stake, as we said “yes”. We considered that the financial stability of the euro area as a whole was at stake.
Question: Mr Trichet, are there any Governing Council members who feel that inflation risks are tilted to the upside?
And my second question is: Do you think that the uncertainty that will probably surround bank stress tests might force you to delay your exit from non-standard measures again?
Trichet: On your first point I would say, on behalf of the Governing Council, that we all consider that we must remain permanently alert and that, again, at the present moment inflation expectations remain anchored, but we have to be alert. This is the position of the Governing Council. We were unanimous today in considering that interest rates were appropriate.
As regards your second question the non-standard measures, as I have already said, will always be commensurate with the problems that we have or do not have. I hope there will come a time when we have no such problems, and when we do not have to help restore the correct functioning of our monetary policy transmission mechanism.