Lucas Papademos: The ECB's accountability towards the European
Parliament
Introductory statement by Mr Lucas Papademos, Vice President of the European Central
Bank, at the presentation of the ECB's Annual Report 2009 to the Committee on Economic
and Monetary Affairs of the European Parliament, Brussels, 27 April 2010.
* * *
Dear Madam Chair,
Dear honourable Members of the Committee on Economic and Monetary Affairs,
It is a privilege to present to you today the ECB's Annual Report for 2009. This presentation
is a cornerstone of the ECB's accountability towards the European Parliament. In my
introductory statement, I will first briefly review the key economic and monetary
developments in 2009, summarise our current assessment of the macroeconomic outlook
and explain our monetary policy decisions. I will then focus on two highly topical policy
issues, namely the current fiscal policy challenges in the euro area and the planned reform of
financial regulation and supervision in the EU and globally.
Before doing so, I should like to highlight an important event in 2009: the entry into force of
the Lisbon Treaty on 1 December 2009. The new Treaty substantially increases the powers
of the European Parliament. It also gives the ECB the status of a Union institution and
strengthens its independence by explicitly anchoring the ECB's institutional features and
financial independence in primary law. Moreover, the Lisbon Treaty emphasises the
importance of the Eurosystem's mandate by making its primary objective of maintaining price
stability an objective of the EU as a whole.
Economic developments and monetary policy
In 2009 the European Central Bank performed its functions in an exceptionally challenging
environment as the global financial crisis continued to unfold. Following the severe
intensification of financial market tensions in autumn 2008, euro area real GDP contracted by
4.0% in 2009, largely driven by a sharp decline in exports and in private investment. The
decrease in private consumption was relatively contained, although households increased
their saving rates substantially. Economic activity in the euro area reached a trough in the
second quarter of 2009 and has increased at a slow pace since then.
The significant macroeconomic stimulus, the measures taken to support the financial system,
and the pick-up in global activity have underpinned the recovery of the euro area economy.
Looking ahead, the Governing Council expects real GDP to continue to expand at a
moderate pace in 2010 and to strengthen further in 2011. This expectation is in line with the
latest ECB staff projections and the forecasts of other institutions. The recovery is likely to be
uneven over time and across regions. The risks to this growth outlook are assessed to be
broadly balanced, but uncertainty remains high.
With regard to price developments, average annual HICP inflation fell sharply to 0.3% in
2009, from 3.3% in 2008, largely due to substantially lower oil and other commodity prices as
well as a result of the impact of the severe contraction in activity and rapidly deteriorating
labour market conditions. In the course of 2009, annual HICP inflation turned negative for a
few months, primarily as a consequence of the dynamics of commodity prices, particularly oil
prices, and the associated base effects. Excluding energy and food prices, HICP inflation has
been on a gradual downward trend since mid-2008, primarily reflecting a substantial
moderation in labour costs and a sharp fall in profit margins over the course of 2009.
In March 2010, euro area annual HICP inflation rose to 1.4%, from 0.9% in February, mainly
driven by energy and unprocessed food price developments. Nevertheless, in view of the
projected slow economic recovery and high unemployment, inflation is expected to remain
moderate in 2010 and over the rest of the policy-relevant horizon. Risks to this inflation
outlook remain broadly balanced. Inflation expectations over the medium and long 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. The firm anchoring of inflation
expectations to price stability reflects the high degree of credibility of the ECB's monetary
policy.
The analysis of monetary and credit developments confirms the assessment of low
inflationary pressures over the medium to longer term. In the course of 2009, the annual
growth rates of the broad monetary aggregate M3 and of MFI loans to the private sector
declined substantially and in parallel. Towards the end of last year, these growth rates were
in negative territory. The continuous decline in annual M3 growth in the course of 2009
largely reflected the strong downward impact of the exceptionally steep yield curve, while the
subdued levels of activity and trade, and the uncertainty surrounding the business outlook,
dampened firms' demand for bank financing.
Overall, the latest developments in money and credit markets support the assessment of low
inflation risks over the medium to longer term. In February 2010, the annual growth rates of
M3 and of loans to the private sector both stood at -0.4%. The growth of M3 and loans to the
private sector is likely to remain weak in the coming months as well. It is worth pointing out
that the negative annual growth in bank loans to the private sector masks diverging
developments in the annual growth in loans to households, which has been positive over the
past few months, and in loans to non-financial corporations, which has been negative,
although in February the flow of such loans was positive. These differences in sectoral loan
developments are in line with past regularities: growth in loans to households tends to pick
up early in the economic cycle, while lending to non-financial firms typically lags behind
improvements in economic activity.
In an environment of subdued inflationary pressures, the Governing Council lowered, in four
steps, the rate on the ECB's main refinancing operations between January and May 2009 by
a further 150 basis points, to the historically low level of 1%, bringing the total reduction since
October 2008 to 325 basis points. The interest rate on the deposit facility was reduced to
0.25%. The key ECB interest rates have not been changed since May 2009. The Governing
Council is of the opinion that the current ECB interest rates remain appropriate and it expects
price stability to be maintained over the medium term.
In addition to reducing the policy interest rates, the Governing Council adopted further
enhanced credit support measures in 2009, in order to ensure the smooth functioning of the
money market, improve financing conditions and foster the provision of credit to the
economy. These non-standard measures have achieved the intended objectives. In
particular, they have exerted significant downward pressure on term money market rates and
bank lending rates, thereby supporting the financing of households and corporations. Overall,
the timely and effective policy actions of the Eurosystem in response to the crisis and the
ECB's credible commitment to price stability have been instrumental in fostering confidence,
preserving price stability over the medium term and supporting economic recovery in the
euro area in an environment of heightened uncertainty.
When the ECB adopted these non-standard monetary policy measures, it already had a
phasing-out strategy in mind. As financial market conditions improved and economic activity
started to recover, the Eurosystem initiated a gradual phasing-out of those non-standard
measures that were no longer needed. The timely exit from these measures was and is
appropriate, so as to avoid market distortions that could result from maintaining such
measures longer than necessary and to provide incentives for banks to restructure and
strengthen their balance sheets. Thus, in December 2009, and again in early March 2010,
we decided to phase out gradually some of the extraordinary liquidity provision measures
and scale back the number, frequency and maturity of longer-term refinancing operations.
We conducted the last 12-month operation in December 2009 and the last 6-month operation
in March 2010. In early March, the Governing Council decided to return to variable rate
tender procedures for the regular three-month longer-term refinancing operations, starting
with the operation to be conducted on 28 April 2010. At the same time, we will continue to
provide adequate liquidity to the euro area banking system by conducting the main
refinancing operations as fixed rate tender procedures with full allotment for as long as
needed and, at least, until October this year, so as to facilitate the provision of credit to the
euro area economy and further support its recovery. Needless to say, if upside risks to price
stability were to emerge, the Governing Council would take timely and appropriate action.
Fiscal policies in the euro area
Let me now to turn to fiscal policies. Budgetary positions in the euro area deteriorated
significantly in 2009 as a result of the economic contraction, fiscal policy stimulus and
government support measures for the financial sector. Eurostat's latest estimates show that
the average general government deficit ratio in the euro area increased from 2.0% of GDP in
2008 to 6.3% in 2009. Out of the 16 euro area countries, 13 are already subject to an
excessive deficit procedure. This year, all euro area countries are projected to record deficits
above 3% of GDP. According to the updated stability and growth programmes, a discernible
improvement in fiscal positions is not foreseen in most countries until 2011 and 2012. The
magnitude of the worsening of public finances is underscored by the official estimate that the
average debt-to-GDP ratio is expected to reach 87% in 2012, compared with 66% in 2007
- that is 21 percentage points higher than five years earlier. Thus, fiscal imbalances are
sizeable, broad-based and likely to persist for some time to come.
The deterioration in the fiscal position has been especially acute in a number of euro area
countries, with Ireland, Greece and Spain having recorded double-digit deficit ratios in 2009.
The large revisions to Greece's budget deficit for 2009 revealed a very serious fiscal
imbalance and triggered adverse financial market reactions. Following the announcement of
additional fiscal consolidation measures by the Greek authorities in March 2010, the ECB
welcomed these measures as convincing steps towards achieving the ambitious but
appropriate budgetary objectives for 2010. All these measures should be implemented in a
timely and effective manner. Despite the commitment of the Greek government to fully
implement the announced measures for 2010 and the statements by the euro area Heads of
State or Government of 25 March and by the Eurogroup of 11 April, financial market
pressures persisted and recently intensified. It is essential that the economic programme
currently being prepared by the European Commission, the ECB and the IMF together with
the Greek authorities specifies comprehensive fiscal measures and structural reforms that
will address the root causes of Greece's fiscal imbalances and structural weaknesses, so as
to ensure the sustainability of its public finances and improve the country's international
competitiveness.
More generally, there is concern that the persistence of sizeable fiscal imbalances in Europe
and elsewhere may undermine the public's trust in the sustainability of public finances and
entail risks to economic growth and to financial stability. In the current circumstances, the
Stability and Growth Pact, which has been put in place to safeguard sound and sustainable
fiscal positions, is facing its biggest challenge since its adoption in 1997. Therefore, it is now
imperative that all euro area countries strictly adhere to the Pact's provisions. On the positive
side, it is promising that, according to the updated stability programmes, all euro area
countries subject to an excessive deficit procedure plan to correct their deficits in line with the
Council's deadlines. It is also encouraging that most of these programmes focus on
containing government expenditure, as the available evidence demonstrates that this is the
most effective way to achieve a lasting reduction in fiscal imbalances.
Nevertheless, in several stability programmes, the fiscal strategies presented are not
underpinned by adequately specified measures, in particular for the latter years of the
projection horizon. Moreover, in a number of cases, the stability programmes are based on
optimistic macroeconomic assumptions that put the correction of the excessive deficits,
according to the Council's deadline, at risk.
In this context, let me stress that the ECB welcomes the statement by the European Council
on 25 March, expressing its commitment to strengthen and complement the existing
institutional framework so as to foster budgetary discipline and ensure fiscal sustainability.
The establishment of a task force, which will be chaired by the President of the European
Council, to make proposals to achieve this objective and to explore all options to reinforce
the legal framework, is an important step forward. In particular, it is essential to improve the
incentives for national authorities to pursue policies, particularly in good times, that support
the sustainability of public finances, and to ensure that economic surveillance results in
effective policy actions that prevent budgetary risks and address structural problems to
promote the competitiveness of the European economies.
Towards a more resilient financial system
Let me now conclude by addressing issues concerning financial regulation and supervision.
As regards the regulatory reform agenda defined by the G20 leaders, significant and
wideranging work has already been carried out or is under way, but we should not be complacent.
It is crucial that the momentum for regulatory reform does not wane. There is still much to do:
First, it is essential that the planned reforms effectively lead to a harmonised global
regulatory framework. Second, it is an urgent priority that the Basel Committee proposals on
capital requirements and liquidity standards are properly calibrated and finalised by the end
of 2010. Third, we need to ensure that the regulatory framework effectively captures all
systemically important financial institutions, and that moral hazard problems related to them
are fully addressed.
In the European Union, the enhancements to the Capital Requirements Directive should be
swiftly adopted and an agreement on the Directive on Alternative Investment Fund Managers
be promptly reached. As regards the establishment of the new EU financial supervisory
framework, it is important that the legislative process concerning the proposals made by the
Commission in September 2009, which are currently being discussed by your Committee, is
completed as expeditiously as possible and that all relevant parties reach an agreement on
the legal texts so that the European Systemic Risk Board (ESRB) and the three new
European Supervisory Authorities (ESAs) are operational by 1 January 2011. We should not
risk losing momentum.
The ECB has made good progress with its preparations to ensure that the ESRB will
efficiently and effectively perform its tasks from the moment of its inception. Let me assure
you that the support to be provided by the ECB and the ESCB to the ESRB and the future
links between them will not affect the ECB's objectives and the performance of its tasks,
which are clearly defined in the Treaty. The primary objective of the ECB is to preserve price
stability, and the conduct of the single monetary policy is geared towards achieving this goal.
Moreover, the ECB and the NCBs are fully independent in carrying out the tasks conferred
upon them by the Treaty. Thus, there cannot be, and will not be, any potential conflict
between the conduct of the ECB's monetary policy that aims to preserve price stability and
the performance of its tasks that contribute to the safeguarding of financial stability. The
ESRB's recommendations will not concern the definition and implementation of the monetary
policy of the ECB nor the monetary policies of the EU central banks that are outside the euro
area. At the same time, macro-prudential supervision can facilitate the conduct of monetary
policy by helping to prevent systemic risks and mitigate their effects, if they materialise.
Before concluding, let me stress that the timely and consistent implementation of the
regulatory and supervisory reforms, and, in particular, the establishment of a new framework
for macro-prudential supervision, will greatly contribute to containing systemic risks and to
strengthening the resilience of the European financial system. For the ECB, it is a privilege to
have been entrusted with a very special role in the performance of macro-prudential
supervision in the EU. Although, we have ahead of us a very challenging task to carry out, I
am fully confident that the ECB, in collaboration with the NCBs and the other members of the
ESRB, will successfully meet this challenge.
Madame Chair, honourable Members of the Committee, my presentation today before your
Committee is the last in my capacity as Vice-President of the ECB. I should like to warmly
thank you for our enriching and constructive exchange of views. Over the past eight years, I
have always appreciated the cooperation and the fruitful dialogue with the Committee on
Economic and Monetary Affairs of the European Parliament.
Thank you for your attention. I am now at your disposal for questions.