Jean-Claude Trichet: Testimony before the Committee on Economic and
Monetary Affairs of the European Parliament
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank, Brussels,
23 May 2005.
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Madame la Présidente, Mesdames et Messieurs les Membres de la Commission Economique et
Monétaire, je me réjouis de paraître devant votre Commission aujourd'hui et de poursuivre ainsi notre
dialogue régulier. Vous connaissez le rôle important que jouent nos rencontres trimestrielles dans le
contexte de la responsabilité de la Banque Centrale Européenne vis-à-vis nos citoyens, responsabilité
à laquelle, comme vous le savez, la BCE attache beaucoup d'importance. Je commencerai mon
discours avec une évaluation de la situation économique et monétaire. Aus Anlass des unlängst
erfolgten Beitrittes von drei neuen Mitgliedstaaten zum Wechselkursmechanismus II möchte ich
sodann auch kurz zu diesem Thema Stellung nehmen.
Economic and monetary developments
Recent data confirm that some of the downward risks to economic growth identified in the past, in
particular those related to persistently high oil prices, have partially materialised over the last few
months. According to Eurostat's flash estimate, real GDP rose by 0.5% quarter on quarter in the first
quarter of 2005. While this compares favourably with the 0.2% increase observed in the previous
quarter, the apparent improvement largely reflects technical factors related to working day adjustments
to the data. Taking those factors into account, the recent available indicators of economic activity
suggest that the modest growth observed in the second half of 2004 will continue in the first half of
2005, with no clear signs as yet of a broadening or strengthening of the growth dynamic.
Looking further ahead, investment is expected to continue to benefit from robust earnings,
improvements in business efficiency and very favourable financing conditions. On the external side,
euro area exports should continue to benefit from global economic growth. Accordingly, we expect
continued, relatively moderate economic growth in the euro area in 2005 and 2006. This picture is
broadly in line with available forecasts from international and private sector organisations.
The outlook for economic activity continues, however, to be surrounded by relatively high uncertainty.
On the domestic side, uncertainties relate in particular to the evolution of private consumption in
relation with consumer confidence. On the external side, persistently high oil prices and continued
global imbalances pose downside risks to growth. With regard to those global imbalances, let me note
that I fully trust that they can be progressively alleviated only by embarking actively on the homework
that has to be done in all G-7/G-3 economies, in particular by correcting the lack of savings in the US
and implementing structural reforms in Europe.
Let me add that the ECB is also of the view - and I have signed myself the G-7 communiqués since
the meeting in Boca Raton, at the beginning of last year, that are stressing this point - that the
currencies of a number of Asian emerging countries are undervalued against major international
currencies, in particular the euro and the dollar. This is the case of the Chinese currency, but not only
of the Chinese currency.
Turning to price developments in the euro area, according to Eurostat, annual HICP inflation was 2.1%
in April, unchanged from the previous two months. Over the coming months, annual HICP inflation
rates are likely to remain around current levels, partly reflecting upward pressure on energy prices
stemming from oil price increases. As regards the labour market, wage increases have remained
contained over recent quarters and, in the context of moderate economic growth and weak labour
markets, this trend should continue for the time being. Overall, we continue to see no significant
evidence of underlying domestic inflationary pressures building up in the euro area. This picture is
broadly in line with forecasts recently released by international and private sector organisations.
However, there continue to be upside risks to price stability over the medium term and these risks
warrant continued vigilance. Risks are associated mainly with oil price developments and potential
second-round effects stemming from wage and price-setting behaviour. In this respect, responsibility
on the part of social partners remains very important.
Our monetary analysis also calls for vigilance regarding upside risks to price stability over the medium
to longer term. After moderating in the first half of 2004, monetary and credit growth remain strong,
reflecting the stimulative effect on monetary dynamics of the historically very low level of interest rates
in the euro area. As monetary dynamics over the past year have mainly been driven by developments
in the most liquid components of M3, this continues to signal upside risks to price stability in the
medium to longer term. Moreover, strong monetary and credit growth - in particular the marked growth
observed in loans for house purchase - require careful monitoring.
In the context of relatively contained underlying inflationary pressures, the ECB has left its key interest
rates unchanged since June 2003. The low level of nominal and real interest rates has provided
significant and continued support to the economic recovery. At the same time, upside risks to price
stability need to be monitored closely. Cross-checking with the indications from the monetary analysis
supports the case for continued vigilance with regard to those risks.
Monetary policy and heterogeneity
I would like to make some remarks on inflation and growth disparities in the euro area and how they
may be relevant for the conduct of monetary policy.
Inflation dispersion in the euro area declined throughout the 1990s. Since the introduction of the euro
it has broadly stabilised at a low level similar to those observed in other long-standing monetary
unions, such as the United States. Over the same period, the dispersion in real economic growth has
been in line with its historical values. Although dispersion has increased somewhat in the last few
quarters, particularly as regards the four largest euro area economies, it does not appear exceptional
from a historical perspective.
Differentials in growth and inflation across regions and sectors are a standard feature of vast currency
areas around the world. They are a natural product of the continuous readjustment of relative prices
and quantities in a market economy.
At the same time, the persistence of differentials across the euro area is a matter that needs to be
addressed. To some extent, this is a reflection of deep-seated structural inefficiencies, such as
nominal and real rigidities in labour and product markets. Such structural differences call for
appropriate national policies with a view to achieving a higher degree of flexibility and adaptability in
the institutions and market structures of all economies.
In line with its mandate, as laid down in the Treaty, the ECB focuses on maintaining price stability in
the euro area as a whole. The ECB's internal work, analysis and assessment of economic information,
its policy discussions and its deliberations are directed at achieving its primary objective for the entire
currency union. While limiting inflation and growth differentials cannot form an objective for the ECB's
monetary policy, it is necessary for the ECB to assess the underlying causes of such differentials.
Monitoring national and sectoral developments is key to understanding the underlying trends in the
euro area as a whole with a view to formulating the most appropriate monetary policy response.
Consequently, the ECB regularly reviews and analyses all relevant information relating to the various
sectors and countries of the euro area. In this respect, particular attention must be given by
responsible authorities to the evolution of competitiveness indicators, in particular of unit labour costs
in the various national economies. These indicators are key in a single currency area where
realignments are excluded by definition.
The ECB's quantitative definition of price stability, its high degree of credibility and its focus on the
achievement of its primary objective have enabled it to control inflation and to anchor inflation
expectations in the euro area at a very low level in all countries of the euro area. This has resulted in
low interest rates and extremely favourable financing conditions to the benefit of all euro area
economies. Moreover, by anchoring inflation expectations and increasing transparency, monetary
policy contributes to the adjustment of relative prices and facilitates the role of such prices in guiding
the allocation of resources across countries and sectors. This is the best contribution that monetary
policy can make to economic welfare and the achievement of high levels of activity and employment in
our economies.
Fiscal policies and the Stability and Growth Pact
Let me now turn to fiscal policies. While a few countries succeed in maintaining sound budgetary
positions, developments in many euro area Member States remain disappointing. Unless additional
measures are taken, it is looking increasingly unlikely that those countries will reduce their deficits this
year below the reference value of 3% of GDP or prevent them from exceeding that level. In the
meantime, the indebtedness of euro area governments as a percentage of GDP has again increased.
It is therefore essential that consolidation be given the highest priority in the countries concerned and
that the reformed Stability and Growth Pact be implemented in a strict and timely manner to ensure a
rapid return to sound budgetary positions. This is primarily in the interests of the countries themselves,
especially in view of the increasing pressure being placed on government budgets by ageing
populations.
Lisbon Strategy
I would also like to take this opportunity to stress again the need to implement structural reforms in
Europe. These reforms should be aimed at realising a more dynamic and competitive economy with
flexible labour, product and financial markets, allowing for a more rapid adjustment of production
factors to a constantly changing environment. We are faced with the unavoidable challenges arising
from an ongoing deepening in the global division of labour, a fast process of technological change and
the ageing of the European population. The appropriate response is to create the conditions which will
allow both firms and workers to deal with these challenges in the most effective and efficient manner,
thereby ensuring a high level of output growth and job creation in the longer run.
The recent relaunch of the Lisbon Strategy at the spring European Council meeting has rightly
refocused policy priorities on the drivers of growth and employment. This needs a strong commitment
to well-designed and comprehensive structural reforms, the benefits of which are efficiently explained
to the public opinion. By undertaking the measures and convincing the public in this way Europe will
succeed in both improving the economic outlook and sustaining the welfare and prosperity of
European citizens.
The Exchange Rate Mechanism II
A little more than a year has now elapsed since ten new Member States joined the European Union,
and their economic integration has been progressing at an impressive pace for a number of years. A
number of these countries have also advanced significantly in terms of monetary integration. With
effect from 2 May 2005 Cyprus, Latvia and Malta joined the Exchange Rate Mechanism II (ERM II),
bringing the number of countries participating in ERM II to seven. Indeed, Estonia, Lithuania and
Slovenia had already decided - in June of last year - to join Denmark in ERM II. The inclusion of the
new currencies in the mechanism has proceeded in a very smooth and orderly manner.
With their entry into ERM II, these countries have linked their currencies to the euro as a preparatory
step towards the ultimate adoption of the single currency. Being members of ERM II will help them to
orient their policies towards stability. Indeed, as was stressed in the 1997 Amsterdam Resolution of
the European Council on ERM II, the mechanism has been designed as a reference for the conduct of
sound economic policies in general and monetary policy in particular. Thus, the mechanism should
also contribute to the achievement of sustainable convergence.
However, membership of ERM II will not automatically yield sound policies. Rather, successful and
smooth participation in the mechanism requires significant commitments of the part of its members.
Although the precise nature of these commitments depends on the specific situations in the various
participating countries, I would like to stress in this context the importance of pursuing sound fiscal
policies and a stability-oriented monetary policy, as well as measures to enhance the flexibility and
adaptability of the economy. The pursuit of such policies within the ERM II framework will not only be
of direct benefit to the Member States concerned, but will also help to ensure the smooth functioning
of the system as a whole.
In conclusion, membership of ERM II for a period of at least two years and without severe tensions
prior to the convergence examination is a crucial element on the road to the adoption of the euro. This
is not only a phase which tests Member States' eligibility to adopt the euro, but also serves those
Member States' own best interests. I should like to add that each individual Member State's date of
entry and period of participation in the mechanism depends on its specific situation. The ECB as well
as the Commission will continue to carefully monitor exchange rate developments within ERM II,
together with the other convergence criteria, and will present their conclusions in the Convergence
Reports, in line with the provisions of the Treaty.
I am now at your disposal for questions.