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, 8 September 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 report on the outcome of today’s meeting of the Governing Council, which was also attended by Commissioner Rehn.
Based on its regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged. Inflation has remained elevated and is likely to stay above 2% over the months ahead before declining next year. At the same time, the underlying pace of monetary expansion continues to be moderate, while monetary liquidity remains ample. As expected, the pace of economic growth in the euro area decelerated in the second quarter, following strong growth in the first quarter. Looking ahead, we expect the euro area economy to grow moderately, subject to particularly high uncertainty and intensified downside risks. At the same time, short-term interest rates are low. While our monetary policy stance remains accommodative, some financing conditions have tightened. It remains essential for monetary policy to focus on its mandate of maintaining price stability over the medium term, thereby ensuring that recent price developments do not give rise to broad-based inflationary pressures. A very thorough analysis of all incoming data and developments over the period ahead is warranted. Inflation expectations in the euro area must remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make its contribution towards supporting economic growth and job creation in the euro area. We will continue to monitor very closely all developments.
The provision of liquidity and the allotment modes for refinancing operations will continue to ensure that euro area banks are not constrained on the liquidity side. All the non-standard measures taken during the period of acute financial market tensions are, by construction, temporary in nature.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP growth decelerated to 0.2% quarter on quarter in the second quarter of 2011, after 0.8% in the first quarter. As expected, temporary factors which had boosted growth in the early part of the year ceased, and adverse effects resulted from the Japanese earthquake and the lagged impact of past oil price increases. Looking ahead, a number of developments seem to be dampening the underlying momentum in the euro area, including a moderation in the pace of global growth, related declines in equity prices and in business confidence, and unfavourable effects resulting from ongoing tensions in a number of euro area sovereign debt markets. As a consequence, real GDP growth is expected to increase very moderately in the second half of this year. At the same time, we continue to expect euro area economic activity to benefit from ongoing growth in the global economy as well as from the accommodative monetary policy stance and the various measures taken to support the functioning of the financial sector.
This assessment is also reflected in the September 2011 ECB staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between 1.4% and 1.8% in 2011 and between 0.4% and 2.2% in 2012. Compared with the June 2011 Eurosystem staff macroeconomic projections, the ranges for real GDP growth in 2011 and 2012 have been revised downwards.
In the Governing Council’s assessment, the risks to the economic outlook for the euro area are on the downside, in an environment of particularly high uncertainty. Downside risks mainly relate to the ongoing tensions in some segments of the financial markets in the euro area and at the global level, as well as to the potential for these pressures to spill over into the euro area real economy. They also relate to further increases in energy prices, protectionist pressures and the possibility of a disorderly correction of global imbalances.
With regard to price developments, euro area annual HICP inflation was 2.5% in August 2011, according to Eurostat’s flash estimate, unchanged from July. We have now seen inflation rates at relatively high levels since the end of last year, with higher energy and other commodity prices as the main drivers. Looking ahead, inflation rates are likely to stay clearly above 2% over the coming months. Thereafter, on the basis of the path implied by futures markets for oil prices, inflation rates should fall below 2% in 2012. This pattern reflects the expectation of relatively stable wage growth developments in the context of moderate economic growth.
The September 2011 ECB staff macroeconomic projections for the euro area embody these considerations and foresee annual HICP inflation in a range between 2.5% and 2.7% for 2011 and between 1.2% and 2.2% for 2012. In comparison with the June 2011 Eurosystem staff macroeconomic projections, the range for HICP inflation in 2011 remains unchanged, while the range for 2012 is slightly narrower. It is necessary to recall that the staff projections are conditional on a number of purely technical assumptions.
The Governing Council views the risks to the medium-term outlook for price developments as being broadly balanced. On the upside, the main risks relate to the possibility of higher than assumed increases in oil and non-oil commodity prices as well as increases in indirect taxes and administered prices, owing to the need for fiscal consolidation in the coming years. The main downside risks relate to the impact of weaker than expected growth in the euro area and globally.
Turning to the monetary analysis, the annual growth rate of M3 was 2.0% in July 2011, after 1.9% in June. The annual growth rate of loans to the private sector was 2.4% in July, after 2.5% in June. Looking beyond the monthly data and the effects of special factors, trends in broad money and loan growth have broadly stabilised over recent months. Overall, the underlying pace of monetary expansion remains moderate. At the same time, monetary liquidity accumulated prior to the period of financial market tensions continues to be ample.
Looking at M3 components, the annual growth rate of M1 decreased to 0.9% in July, whereas growth in other short-term deposits remained unchanged at 3.7%. These developments continue to partly reflect the gradual increase in the remuneration of short-term time and savings deposits over recent months. On the counterpart side, the annual growth of loans to non-financial corporations continued to edge up slightly, from 1.5% in June to 1.6% in July, whereas the annual growth of loans to households seems to have levelled off at around 3%.
The overall size of MFI balance sheets has remained broadly unchanged over recent months. Where it is necessary to provide adequate scope to expand the provision of credit to the private sector, 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, in line with the findings of the recent stress tests.
To sum up, based on its regular economic and monetary analyses, the Governing Council decided to keep the key ECB interest rates unchanged. Inflation has remained elevated and is likely to stay above 2% over the months ahead before declining next year. A cross- check with the information from our monetary analysis confirms that the underlying pace of monetary expansion continues to be moderate, while monetary liquidity remains ample. As expected, the pace of economic growth in the euro area decelerated in the second quarter, following strong growth in the first quarter. Looking ahead, we expect the euro area economy to grow moderately, subject to particularly high uncertainty and intensified downside risks. At the same time, short-term interest rates are low. While our monetary policy stance remains accommodative, some financing conditions have tightened. It remains essential for monetary policy to focus on its mandate of maintaining price stability over the medium term, thereby ensuring that recent price developments do not give rise to broad-based inflationary pressures. A very thorough analysis of all incoming data and developments over the period ahead is warranted. Inflation expectations in the euro area must remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make its contribution towards supporting economic growth and job creation in the euro area. We will continue to monitor very closely all developments.
Turning to fiscal policies, a number of governments have announced additional measures to ensure the achievement of their consolidation targets and to strengthen the legal basis for national fiscal rules. To ensure credibility, it is now crucial that the announced measures be frontloaded and implemented in full. Governments need to stand ready to implement further consolidation measures, notably on the expenditure side, if risks regarding the attainment of the current fiscal targets materialise. Countries that enjoy better than expected economic and fiscal developments should make full use of this room for manoeuvre for faster deficit and debt reduction. All euro area governments need to demonstrate their inflexible determination to fully honour their own individual sovereign signature, which is a decisive element in ensuring financial stability in the euro area as a whole.
Fiscal consolidation and structural reforms must go hand in hand to strengthen confidence, growth prospects and job creation. The Governing Council therefore urges all euro area governments to decisively and swiftly implement substantial and comprehensive structural reforms. This will help these countries to strengthen competitiveness, increase the flexibility of their economies and enhance their longer-term growth potential. In this respect, labour market reforms are key, with a focus on the removal of rigidities and the implementation of measures which enhance wage flexibility. In particular, we should see the elimination of automatic wage indexation clauses and a strengthening of firm-level agreements so that wages and working conditions can be tailored to firms’ specific needs. These measures should be accompanied by structural reforms that increase competition in product markets, particularly in services – including the liberalisation of closed professions – and, where appropriate, the privatisation of services currently provided by the public sector, thereby facilitating productivity growth and supporting competitiveness.
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: Mr Trichet, you have revised down your growth forecast for this year and next. In the light of that, can we assume that the rates are on hold for the time being? Did you discuss at your meeting today a rate cut?
And my second question is: did you also discuss measures that may increase liquidity to the market at this time? And is there enough liquidity to the banking sector?
Trichet: First, we were unanimous in taking today’s decision as regards the interest rates. Second, as regards the balance of risks for both growth and inflation: if I compare the situation today with what we said a month ago, I would say that a month ago we considered the risks to growth to be balanced, which is not the case today. This is based on the new analyses, presented by the ECB staff projections and the judgement of the Governing Council – which does not necessarily endorse the staff projections but makes its own judgement. The significant change is that today we consider that there is a downside risk to growth. As regards inflation, last month the sentiment was that there was an upside risk to inflation, while today the judgement is that the risks to inflation are balanced. These are the two major changes in the overall assessment of the Governing Council regarding the present situation. This is based on a baseline scenario that has been revised downwards as regards growth. As far as inflation is concerned, there is a narrowing of the ranges but no significant changes as regards the projections for inflation. However, the balance of risks has, in our judgement, changed.
As regards the liquidity issue, which is a very important point, we have already decided that the full allotment fixed rate mode of liquidity supply for the one-week, one-month and three-month operations will apply in the fourth quarter. We stand ready to provide liquidity as we have done in the past, taking into account the needs of the banking sector. This supply of liquidity ensures that there is no liquidity issue for the banking sector of the euro area as a whole – in euro, by definition. When I compare the order of magnitude of the theoretical overall potential eligible collateral, which is in the order of €13 trillion, and the liquidity that is provided, which is a little over €500 billion and oscillates between €530 billion and €550 billion, clearly it is possible to obtain liquidity which is a multiple of what we are supplying. So there is no euro liquidity issue in the euro area for the banking sector at all. All the decisions we have taken in the past show the extent to which we are very keen, through these non-standard measures of full allotment at a fixed rate, to provide liquidity.
Question: Could I follow up on my first question? Is it correct to assume that rates are on hold?
Trichet: What I have said is what I have said.
Question: Just on the weekend in Cernobbio, you called on the Italian government to implement the budget that was outlined on 5 August. Now, that budget has been changed somewhat. Are you satisfied with the changes in the budget which is now going through the parliament, and will the ECB continue to buy Italian bonds?
And secondly, there is some speculation in the market at the moment coming from a note from Morgan Stanley about possible central bank action at the G7. But given that the risks are particularly intensified on the downside for the European economy, is the world economy sufficiently stressed to justify this sort of action?
Trichet: As regards your second question I told you what our judgement of the situation was and to what extent we had significantly changed our assessment of the situation regarding the recent developments that have been observed.
As regards the Italian government we sent messages to the Italian government. I myself sent messages, together with the Governor of the Banca d’Italia, Mario Draghi. Then there was a period of some complex discussions. The last decisions of the government and the vote in the parliament, which is an ongoing procedure, confirm – which was very important for the ECB Governing Council – the first commitment of the Italian government. So we have confirmation that what was said is being implemented, in terms of overall results. And that is of extreme importance. I myself had occasions to say, including publicly in a recent dialogue with the President of the Italian Republic, before the final confirmation was made, how decisive it was that all the commitments that had been made be implemented. As I said in the introductory statement, it is essential for all governments without exception to implement what they have committed to, to be ahead of the curve and to be very determined in order to restore credibility.
Question: You say in the introductory statement that your monetary policy stance remains accommodative, but twice link that statement with the observation that financing conditions have tightened. Does that mean that you see a real risk that financing conditions might render the monetary policy stance not accommodative enough in the near term?
My second question is regarding the EFSF: how confident are you that you can stop buying government bonds once the EFSF has a capacity to intervene in the secondary market, and are the funds available big enough or are you already considering a second reform to the fund?
And perhaps a third question: did the Swiss National Bank ask you for cooperation to meet its new minimum exchange target, and would you consider doing so in future?
Trichet: For the first question: we consider as I said, our monetary policy stance to be accommodative. We also consider that there has been a tightening of financing conditions, which is obvious in some parts of the euro area. Only in some parts of the euro area, but this is a phenomenon that we have observed and we are attentive to. Our non-standard measures – and I elaborated on the fixed rate full allotment mode which is a non-standard measure of primary importance – are there precisely to help restore a better transmission of our monetary policy stance. I would like to emphasise this, it is something which is very important. For the future, as you know, we are never pre-committed. We always do what is necessary to preserve price stability and solidly anchor inflation expectations, taking into account all elements, all parameters that are at stake. It is what we did in the past, and it is what we will continue to do. This anchoring is essential because all nominal medium and long-term rates incorporate inflation expectations, so this very solid anchoring continues to be a major asset of the euro area. The market knows that. That‘s why we have never seen either a materialisation of the risk of inflation or a threat of deflation in the eyes of the market. So that is something which is important to underline. As regards the governments and the executive branches, we expect, we are asking for, we make the working assumption – which is the only reasonable working assumption – that all the decisions taken on 21 July will be fully comprehensively and rapidly implemented. This is also what we call upon the governments to do. This includes getting the EFSF up and running and be able to intervene on the secondary market, as we have asked for. This is absolutely fundamental for us.
On the Swiss issue, we have exchanged views and information with the Swiss National Bank. I have been in touch with the President of the Swiss National Bank. We discussed a number of points, but of course they took their decision under their responsibility, as we have said publicly. The central bank of Switzerland takes full and independent responsibility for its decision. But let me say that there has been a very close relationship, as always, with the Swiss National Bank.
Question: Mr President, are you going to continue to buy sovereign bonds on the secondary market or did somebody raise the issue today in the Council that these SMP measures should be stopped. And if not, how large was the majority for that?
Trichet: As you know, we never communicate anything but the figure for the amount of intervention on the secondary market for the purchase of securities. And I will not say anything more. But you know that on 12 August 2011 we purchased €22 billion worth of securities, followed by €14.3 billion on 19 August, €5.3 billion on 26 August, and last Monday a further €13.3 billion. This is the information that we have provided. This programme is part of our monetary policy decision and is a non-standard measure on top of the major non-standard measures I have already mentioned, the aim of which is to help restore a better transmission of the monetary policy stance.
Question: You said that you see growth risks to the downside. Why didn’t you just lower the GDP estimates further so that the growth risks would be balanced? Since you say that the lower end of next years’ GDP estimates is 0.4% and there is a risk to the downside, does this mean that you see a real risk of recession in Europe next year?
I would also like to ask about the issue of euro area expulsion, which was taken up by the Dutch Prime Minister today in the Financial Times. The German finance minister also called on Greece to do more to remain in the euro area. Do you see that sort of talk as justified and helpful?
And just very quickly to come back to the Swiss case, was the Swiss intervention justified?
Trichet: What we have as far as new projections are concerned are the ECB staff projections. They are not the Governing Council’s projections. We take them as a very important element in the overall assessment of the situation. As always, based on the staff projections, we qualify the balance of risks. But we do not produce Governing Council projections on top of the staff projections. That is different on the other side of the Atlantic, where the forecast is signed by the Federal Open Market Committee itself. The new baseline of the staff projections has, as you said, been reduced substantially. As regards the ranges for this year and for next year, we are of the view that risks are not balanced and that we have to take into account downside risks. On top of that there is an enormous level of uncertainty; this is the main message in this domain. There is uncertainty at the global level; this is evident in the major global economies outside Europe. There is clearly also uncertainty by way of consequence, as well as for other reasons, in the euro area.
Regarding your second question, our message for all governments - not since yesterday, nor the day before yesterday, but since the euro was set up - has been that they should fully respect the Stability and Growth Pact, not only individually but they should also exercise surveillance of what the other countries are doing. We were ‘preaching in the desert’ for a certain period of time and we have even had difficult discussions at some points. It was very difficult to get through the message in the major countries in Europe at a time when benign neglect was the general attitude – benign neglect by governments, by markets and by all partners. Now we are continuing and we are asking all governments to fully implement what is necessary, to fully respect all the rules and to be ahead of the curve. This is particularly valid for those who are in difficulty and for Greece in particular. But not only for Greece - it is valid for all.
As regards your second question I will not comment on what will be done. I make the working assumption that the Greek government – which has received a very strong message from the IMF, from the Commission in liaison with us, and from all the governments of Europe – will do what is necessary, namely to fully, convincingly and immediately respect the commitment that has been made. This is our very firm position, and it is not a new one.
As regards Switzerland, the Swiss National Bank – after due contact and after due and appropriate discussion – has taken a decision in full responsibility. This is a decision that we respect.
Question: When you mention some of the risks to the economy, you mention global growth, equity prices, tensions on sovereign debt markets. Is there really much that monetary policy can do about these types of risk to the economic outlook? Can the tools – the monetary policy tools – at the ECB really be used to influence these things?
My other question is about what you’ve just said about the Swiss National Bank. Last month, when you were asked about Japan’s intervention, you said that these interventions have to be made on the basis of multilateral consensus and a multilateral decision. Does that view hold for the Swiss decision?
Trichet: On the first question, I would say, again, that central banks the world over can and have to – and this is the case for all of us – ensure the solid anchoring of price stability. As you know, all inflation targeters have price stability as the goal for the central bank, because we all consider that this is a necessary condition for sustainable growth and job creation. Not a sufficient condition, but a necessary condition. And we have to accept that we are not in a position to replace economic agents, governments, or any of the other elements of economic policy. We have a very important role, and it is particularly important in times of uncertainty and of absence of confidence, because we have to act as a pillar of stability and confidence. And this is, as you know, what the ECB’s Governing Council and the Eurosystem are permanently trying to do, what they are committed to doing. We are in a situation which is certainly very demanding. At the global level, in advanced economies in particular, but not only, we are observing very significant changes. The crisis was not a single event and localised in time. It is a phenomenon which is very far-reaching and calls for us to be alert and act as soundly as possible in these circumstances. You know that we have always said that we have a concept of permanent alertness. We are never pre-committed and we stand ready to do whatever is necessary in terms of standard measures, in terms of interest rates. Again, this is our doctrine; it’s our policy to stand ready to do whatever is necessary. And it’s also true as regards our non-standard measures. As you know, we were also the first central bank in the world to introduce these when we acted on 9 August 2007.
As regards the currency situation, I do not consider that you can compare the yen, one of the major currencies of the advanced economy, to the Swiss franc. Switzerland is a relatively small economy at the heart of Europe – a brilliant economy in terms of quality, but in terms of size it’s a relatively small economy – which is surrounded by the economies of the euro area. So, I would say that we are looking at two different cases.
Question: I’ll stick to two questions. They might be difficult questions, though.
Trichet: There are no indiscreet questions, only indiscreet answers.
Question: Firstly, could you give us a flavour of the discussion today? Was anyone in the meeting today calling for an interest rate cut, either this month or next month? Can we assume that no one called for an increase this month?
And secondly, in your statement you’ve added this line: “A very thorough analysis of all incoming data and developments over the period ahead is warranted.” Would I be right in concluding that we are in a kind of “wait and see” mode, at least until the next scheduled monetary policy meeting in a month’s time, and that it would therefore perhaps be premature to think you might act before then?
Trichet: As regards the first question, as I have already said, we were unanimous in considering that interest rates should not be changed. As you might imagine, we reflected very thoroughly on the situation, on the multi-dimensional nature of the situation as regards the real economy, and as I have already said, the Governing Council changed its judgement and assessment on the qualification of the balance of risks. We also looked very carefully at the balance of risks for inflation, and again we changed our position, taking everything into account. We always consider the full complexity of the situation. As you know, we in the Governing Council mutually enlighten one another, listening very carefully to each other. We trust profoundly – I trust profoundly – in collegial wisdom. You take a decision at the end when you have heard all the assessments and judgements from all perspectives.
As regards very careful monitoring of the situation, of all developments and so forth, I would say that this is, frankly speaking, our permanent approach. We constantly do that. As you know, we never embark on any unconditional promises or commitments. We stand ready to do whatever is necessary. You should not interpret that as having any kind of new concept behind it. This is the way we look at things, and if you want to see what we will do in the future in terms of the concept underlying our own decisions, you should look at the past and then you will understand. Again, we never said that we would pre-commit to being at this level for such and such a period of time or anything like that. We look at the situation, and we take our decisions accordingly. And we are alert. We are in a situation which is, of course, exceptionally demanding.
Question: First, Anglo-Irish Bank senior bond holders have been coming out repeatedly backing Ireland and the government’s intention to raise the issue with you to impose haircuts on that. Has your position changed on that at all in the recent weeks and months?
Second, in terms of the overall international economic outlook now being a lot worse than when the programmes for Ireland and for other countries were actually devised, is there any argument in favour of having a less ambitious target in terms of the debt-to-GDP target in order to give the countries more of a chance to recover?
Trichet: With regard to the first question, there is absolutely no change to anything.
As regards the second question, when I look at Ireland, I see a country that is gaining credibility regularly and the following needs to be observed: it is a country which is following its path and that has demonstrated a capacity to implement what has been decided; it is increasing its creditworthiness very visibly. We can only encourage Ireland along this path. I have nothing else to say, because improving confidence is in itself an element of growth activation that is extremely important. And so continuing in this direction is good for confidence within the country, for confidence in terms of the external perception of the country and good for growth and job creation.
Question: What kind of externalities on the euro area and on the ECB’s policy could the decision taken by the Swiss National Bank (SNB) against the overvaluation of the Swiss franc have?
Trichet: Given the situation of the SNB and the Swiss economy, taking into account all the elements, we understand the decision that has been taken by the central bank of Switzerland. I have nothing further to say: it was done under their responsibility and after appropriate discussion.
Question: I should like to return to the question of the senior bonds in Anglo-Irish Bank. Could you explain the ECB’s opposition to the notion that the holders of these bonds should have haircuts imposed on them, because it seems to be the firm view of the Irish finance minister that it is appropriate at this point to go down that road? He has also said publicly that the IMF supports him in that stance. Are you able to explain why the ECB is so opposed to this and do you contemplate ever changing your mind on this front?
Trichet: Frankly speaking, I do not understand why this topic keeps on coming up. Our reasoning in this regard was very simple: do everything possible to improve your creditworthiness, meaning of the authorities and of the banking sector. The reasoning is as simple as that: I have nothing else to add at this stage and I have no information regarding any message which may be addressed to us.
Question: We had a debate today in the German Parliament, and the leader of the opposition, Mr Gabriel, attacked the government, but he also attacked the ECB very much. He said that the Securities Markets Programme is the socialisation of debt and he said and I quote “Mrs Merkel, who pushed you to buy those bonds?” and then he said “The €130 billion is the first tranche of Merkel Bonds” and he said to Mrs Merkel “You transformed the ECB from an anchor of stability into a European bad bank”. He said that the ECB is damaged in a sustainable way and that the stability of the money is in danger. It is normal people who are arguing that way in Germany and, if you talk to economists on an off-the-record basis, they say “maybe we should discuss going back to the Deutsche Mark”. What do you tell those people?
Trichet: I will say the following: first, we were called to deliver price stability! We were called on by all the democracies of Europe to deliver price stability and, in particular, of course by the 17 democracies that asked us to issue the currency in their 17 countries. We have delivered price stability over the first 12-13 years of the euro! Impeccably! I would like very much to hear some congratulations for this institution, which has delivered price stability in Germany over almost 13 years at approximately 1.55% - as the yearly average of inflation - we will recalculate the figure to the second decimal. This figure is better than any ever obtained in this country over a period of 13 years in the past 50 years. So, my first remark is this: we have a mandate and we deliver on our mandate! And we deliver in a way that is not only numerically convincing, but which is better than anything achieved in the past.
A second remark I would like to make is that, in the worst crisis since the Second World War, we have maintained confidence in the currency and confidence in our capacity to deliver price stability. This did not happen by chance. It happened because we decided frequently to do things that we were not recommended to do by the various governments. Our independence is inflexible. We were asked to decrease rates in 2004 by the Heads of State or Government of France and Germany, when we were at 2% and the United States was at 1%. We said no and we did not decrease rates. At the end of 2005, we increased rates when ten governments out of twelve were telling us not to do so. We also received the good advice not to do so of the IMF and of the OECD. So, it is not by chance that we have delivered price stability. If we embarked on the Securities Markets Programme for monetary policy reasons and to help restore a better transmission of our interest rate decision, it was because the governments in question, despite everything that we had said to them, did not behave properly and did not monitor things as they should have done. May I remind you that, in 2004 and 2005, some important governments in Europe were asking for a weakening of the Stability and Growth Pact? Do you remember that? And do you remember which governments were asking to weaken the Stability and Growth Pact? The three big governments of Europe, namely France, Germany and Italy! So, let me remind you that we are in the worst crisis since the Second World War. We are doing our job and it is not an easy one! The way in which our democracies are organised such that we have a living debate is excellent. I do not, of course, take part in any kind of public or political debate. We issue the currency for all of our fellow citizens, of all sensitivities, and we deliver price stability. Also, I should mention that it is the most vulnerable, the weakest and the poorest of our fellow citizens who most require us to be absolutely sure to deliver price stability. The situation is difficult, but we have taken all of our decisions in full independence and we try to live up to our responsibilities, even when these are very heavy responsibilities. We expect all other authorities to live up to their responsibilities as well. We are aware that this is not easy for any particular authority in the present circumstances. We have full respect for the difficulty involved in taking the decisions, whether these decisions are taken by governments or by parliaments, as well as full respect for the challenges posed by these times and for the fact that our fellow citizens are the masters – at the end of the day, as a fiercely independent institution, we depend on the sentiment of 332 million fellow citizens, as does any independent entity in democracies. Thank you for your excellent question, which was very stimulating!
Question: How is the Governing Council interpreting the fact that the banks within the euro area have been depositing a huge amount of liquidity at the central banks in the last days, a bit like they did at the end of 2008 after the Lehman Brothers collapse? Was it discussed during the meeting today to maybe decrease the deposit facility rate, which is currently at 0.75%, to help restore better conditions on the interbank market and for more of this liquidity to be injected into the real economy?
Today is the last time that there is a press conference in this room with your presence, because the next one will be in Berlin, before you leave the presidency of the ECB. A very simple question: what are your feelings today?
Trichet: As regards your last questions, it is not the last time. As you mentioned, I will report to the press on the position and assessment of the Governing Council in Berlin next month. So I will not speak twice, you know, like these singers or actors who say in several successive occasions “it’s my last time”. So I am saving myself for the real last time.
On your first question, I would say that we discuss this particular question on the width of the band at each of our meetings. And, as you see, we have decided not to change the width of the band. We consider that it is best to leave it as it is, with plus and minus 0.75%. As regards the functioning of the market, the tensions are visible particularly in the fact that we have requests for liquidity which are above what is observed in normal times, and even sufficiently above for a lot of liquidity to go back to our deposit facility. It is clear that this exerts downward pressure on EONIA. We have observed this in the past. This is an equilibrium which is not particularly wished for by us, but it is understandable when you have this strong demand for liquidity. And again, we are providing liquidity on a full allotment fixed rate basis.
Question: I would like to go back to the Italian austerity package. I didn’t fully understand whether the measures that have been announced are considered by the ECB as enough for Italy to secure a balanced budget in 2013, which is the target that they have set themselves. And also, in your view, are these measures a first step in the right direction? Or is the whole package sufficient? For instance, there are no signs of going forward with liberalisations and privatisations.
Trichet: Put very simply, we are not negotiating with any government. We have sent messages to tell them that the goal of restoring credibility and increasing creditworthiness, which is essential, was in our view calling for a number of orientations. It is not a negotiation, it is a message. After having had, as I said, some hesitation, complexity and so forth, what we have seen at the end of the day was something which was in line with the first commitments, even if there are some changes. We noted that and we also noted that the government had decided to go for a confidence vote. We ask all governments to fully implement what they had decided, to be ahead of the curve. It goes without saying that the goal has to be attained and if there are new decisions to take, in our view and in the view of all external observers, they would have to be taken. We also insist very much – and this is true for all governments – on the necessity to embark on structural reforms, which are the right way to elevate the ‘speed limit’ of growth in Europe. This is the key for all economies in the long run: the ability of Europeans to permit their own economic forces to be unleashed. It is absolutely essential that a number of structural impediments do not continue to exert pressure on growth in Europe.
Question: I have two questions. First, you explained at great length why there is – from your point of view – no reason to be worried about the liquidity of European banks and the banking sector as a whole. Why do you think that, despite all this, there are still lingering doubts about the sector and about individual banks in Europe and in the euro area?
Second, you said in your introductory statement that all efforts must be undertaken to reduce deficits and debt within the euro area. However, there are numerous international institutions and economists who are fearful of a recession being around the corner and who are asking countries like Germany, whom they consider to have some room for manoeuvre, to stimulate consumption and growth with stimulus money. What is your response to those recommendations?
Trichet: In the euro area in particular and in Europe in general, commercial banks play a decisive role in financing the economy. In the euro area, the financing through banks amounts to perhaps 75%, with the markets making a much more modest contribution of perhaps 25%. In the United States the contribution of the markets is perhaps 75% and that of banks 25%. Therefore, since the very beginning of the crisis, we have had a fixed rate tender procedure with full allotment, which is not a concept that you find in the United States or any other economy. As I have already said, it is a very important non-standard measure that we trust is very well adapted to our case. I can therefore understand that, seen from outside, from market places that have no experience of it, there might be fears, but they are unjustified. This does not mean, however, that we do not continue to call on all our financial institutions to be very attentive, in particular to retain earnings and take all possibilities to strengthen their balance sheet position. This idea that the banking sector would be short of euro liquidity is not what we are seeing and certainly is not what we are engineering, if I may.
On the general remark that fiscal soundness in difficult circumstances might be counterproductive, I would say that it has to be analysed very carefully according to each particular situation. When you are in a situation where you are losing confidence because you have not behaved properly in the past, it is elementary that you have to correct that. Moreover, the correction itself, even if in certain models it produces something negative in terms of growth, would nevertheless ultimately be excellent for growth because it would improve confidence. What do you do when you want to grow, but you do not have the confidence of households, entrepreneurs or investors in the sustainability of your overall strategy? There is no contradiction between sound policies and growth and job creation. In those countries with some room for manoeuvre thanks to the resilience they have displayed in the present difficult times, it needs to be examined carefully. In my opinion, not just the euro area, but all advanced economies may have real problems if they are not reasoning in the medium to long term.
Question: Going back to the banks, you pointed out that you are very generous in providing liquidity. On the other hand, there seems to be some hesitation on the side of the banks. Some of them are shying away from using your facilities because it comes with a reputational risk and so on, so many people fear that there is a risk of them deleveraging even faster in order not to need to go to the ECB, so what can you do against this?
Another question that is probably related to this: do you share the view that the euro area banking system is undercapitalised and that capital raising would therefore be the right measure to strengthen the confidence of investors who are funding the banks?
Trichet: First, I really don’t observe such a kind of stigma when I look at the access to our refinancing facility. That might have been the case in the past, but I don’t see it today. My second observation is, as I said in the introductory remarks – there is a paragraph on banks – that we consider it to be absolutely essential that banks are as solid as possible. I would underline the difference between the problem of liquidity, - which is a false problem in my opinion and I can prove it - and the fact that, all things being equal, it is better if banks have very solid balance sheets and are well capitalised. But again, this is not new for us and we have said that month after month. We have just had the stress tests, and we are sticking to the results. We will not echo any message other than our constant one, which is very strong and which the banks are well aware of. I will not dramatise the situation, as has been done by some. I do not think there is any interest in dramatising the situation on the basis of analyses that are not necessarily correct, methodologically speaking.
Question: You were talking about Ireland and Greece recently, do you feel that the problems in Greece could have a negative impact on the international perception of the efforts developed by a country like Portugal and, by the way, what is your assessment of the way Portugal is dealing with the crisis and fulfilling the compromise?
Trichet: Again, we always have to be very cautious, prudent and to look at everything. My sentiment at this stage is that the programme in your country is ongoing and that the authorities have the necessary level of determination. We encourage them, as we encourage all executive branches, to be ahead of the curve and to follow the strategic line which has been approved by the international and European authorities, in liaison with us. For Greece, it is absolutely obvious that, from a medium-term perspective, it is in the major interest of Greece, of the Greek people, and of growth and job creation to make immediately the necessary adjustment. And it is very clear that it would be an enormous mistake for the people of Greece not to make the adjustment that has only recently been committed to with the approval of the international and European authorities.
Question: We did not get a clear answer to an earlier question: will you end government bond buys once the EFSF reform is in place?
And the second question: how confident are you that the “troika” will return to Greece and positively conclude its review, and can you give us an expected time frame for this?
Trichet: I have no response to the second question. It’s the responsibility of the IMF and the European Commission. We are in liaison with the Commission.
On the first point, there is a commitment of the governments, not only to do everything to reinforce their creditworthiness individually under the surveillance of the others, there is also, as I said, a commitment to have the EFSF up and running and be able to intervene on the secondary market. These are the conditions for financial stability to be reasonably ensured in the euro area. Then, at that moment we ourselves do not have to intervene and to help restore a better transmission of our monetary policy stance. We do so only because of the present situation. Of course, the first very heavy responsibility is for those who put themselves in this situation, but there is also a responsibility for the absence of correct, ex ante surveillance. However, those responsible have to correct this and are publicly committed to doing so, which we have taken note of. It is following this public commitment that, for monetary policy reasons, we took our decision.
Question: Mr Trichet, do you consider that recent movements in the sovereign debt market reflect the real situation of the Spanish economy?
Trichet: These are bonds that are signed by the government of Spain. And I would say that anything that goes in the direction of restoring credibility is good. What has been observed seems to indicate that investors are viewing it as a serious orientation. But the encouragement I can give is to say: be ahead of the curve and implement everything as rapidly as possible.
Question: In light of the deceleration of growth which you referred to and also the change in your outlook since last month, I am just wondering if you are comfortable with the interest rate decisions that you made earlier this year. With the benefit of hindsight, was it necessary to raise rates earlier?
Trichet: As you know, we aim for a solid anchoring of inflation expectations, which we consider a necessary condition for paving the way for growth and job creation. When we look at all available indicators of inflation expectations we see that we have indeed preserved a solid anchoring of inflation expectations. Therefore, all things being equal, we have preserved the overall financing environment, which is better than if we had an increase in inflation expectations during this extraordinarily demanding period. That is something fundamental. The current period is, at the global level, extraordinarily demanding. But, yes, we think that what we did was appropriate, again bearing in mind this idea that, if we lose the overall anchoring of inflation expectations, we are losing one of our best assets. As I said, since the beginning of the crisis, we haven’t seen any threat or materialisation of the risk of deflation. We do what is necessary to solidly anchor expectations and to deliver price stability in line with our definition. And our definition is very clear: less than 2%, but close to 2%.
Question: I would like to pose two questions with sub-questions! The first question concern yesterday’s decision by Germany’s Federal Constitutional Court. The Court gave the “green light” to the government for both the Greek package and the EFSF, but it said that, for any future money allocation from Germany, decisions should go through the Budget Committee of the German Bundestag. Do you see this as an obstacle or a push to the implementation and functioning of the ESM?
My second question concerns Italy. The message that you and Mr Draghi sent to the Italian government (the famous message at the beginning of August!), which was described in Italy as a “confidential letter”, has been viewed by some people, including opposition leaders, but also former EU Commissioner, Mario Monti, as putting the government into receivership. Is it true that, in this letter, you listed a series of measures that the government should take, as if you were dictating to the Italian government what it should do?
Trichet: On your first question, we will of course examine very closely the decision taken by the Constitutional Court. I have not yet received a fully fledged analysis of it, so I cannot comment yet on this point. More generally, though, we have always considered it, important that once a decision is taken – and it can be a very solemn decision, taken by either a government or by a parliament, depending on the various institutional frameworks in place in each of our democracies – then, there are a number of decisions to be executed, some of them very rapidly and on the basis of some kind of executive procedure, and in an effective and efficient manner. Again we have to look very carefully at the Constitutional Court’s decision.
As regards Italy, as I said, these are messages: we are not dictating or imposing anything. We considered it our duty – exactly as it was our duty to tell all governments to respect the Stability and Growth Pact – to tell governments, individually and collectively, that they will be better off if they have better governance. We are on record as having launched a large number of messages. We would prefer not to launch those messages and it is not what the Treaty is calling on us to do. The Treaty calls on us to deliver price stability. So, again, we did not dictate anything. We analysed the situation and reflected on what would be important to help restore credit worthiness. In that domain we are not engaging, and never have engaged, in “negotiations”.
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