Jean-Claude Trichet: Hearing before the Economic and Monetary Affairs
Committee of the European Parliament
Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank,
at a hearing before the Economic and Monetary Affairs Committee of the European
Parliament, Brussels, 21 March 2011.
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Dear Madam Chair,
Dear Honourable Members,
As on a number of occasions before, our regular meeting takes place in extraordinary times.
The tragic developments in Japan with the deplorable loss of human lives, but also their
potential global economic and financial implications have galvanised the international
community into action.
Here in Europe, our hearing today comes at a time between two meetings at the level of
Heads of State or Government. And it comes at a time when the very important decisions on
the economic governance reform in this Parliament are coming closer. Before focusing on
the economic outlook and topics for today, let me therefore say a few words on the economic
governance reform.
Comme vous le savez, le conseil Ecofin a adopté la semaine dernière une « approche
générale » sur ce dossier. Cette approche contient diverses améliorations. Pourtant,
plusieurs des propositions très importantes pour renforcer suffisamment le cadre de
gouvernance ne sont pas encore prises en compte. Ceci est nécessaire pour tirer toutes les
leçons de la crise. Nos concitoyens européens, qui ont le souci de notre avenir à long terme,
demandent aux autorités de faire tout ce qui est nécessaire pour empêcher une répétition
des développements que nous avons vécus ces dernières années. Ainsi, selon un
«Eurobaromètre» récent, presque 80% des citoyens dans les pays de la zone euro
considèrent qu'une plus grande coordination des politiques économiques entre les Etats
membres - c'est-à-dire une gouvernance effective et efficace - serait nécessaire pour
combattre la crise financière et économique.1
Vor zehn Tagen haben die Mitgliedsstaaten eine Erklärung zur verstärkten Abstimmung der
Wirtschaftspolitik im Eurogebiet gegeben. Diese Erklärung berührt inhaltlich viele Punkte der
vorliegenden sechs Gesetzesvorschläge. Besser noch als diese Erklärung parallel stehen zu
lassen, wäre es, ihre Kernpunkte in das gegenwärtige Gesetzgebungsverfahren
einzubringen. Dies würde der Absichtserklärung ihre volle Glaubwürdigkeit zukommen
lassen.
I. Economic and monetary developments
Let me turn to the euro area economic and monetary developments since our previous
meeting last November. I will concentrate on the analysis of the Governing Council on the
occasion of its meeting of 3 March.
Incoming data have confirmed our view that the underlying momentum of economic activity
remains positive. Looking ahead, we expect the economy to further benefit from the ongoing
recovery in the world economy, the very accommodative monetary policy stance and the
measures adopted to improve the functioning of the financial system.
As regards price developments, inflation in the euro area is on the rise. In February HICP
inflation stood at 2.4%, after 2.3% in January. This increase largely reflects higher
commodity prices. In particular, sharp increases in energy prices have led to upward price
pressures in the earlier stages of the production process. It is crucial at this stage to avoid
that the recent rise in inflation translates into broad-based second-round effects, for instance
via price-setting or higher wages. Such effects would give rise to broad-based inflationary
pressures over the medium term.
In the view of the Governing Council, as expressed on 3 March, risks to the price outlook are
on the upside. Commodity prices could increase more than expected. Also, indirect taxes
and administered prices could turn out higher given the need for fiscal consolidation in the
coming years. Finally, the ongoing recovery in activity could result in stronger than expected
domestic price pressures.
As regards our future monetary policy stance, I have nothing to add to what I said, on behalf
of the Governing Council, on the occasion of our last monetary policy decision meeting
earlier this month.
As regards liquidity-providing operations, the Governing Council decided to conduct them in
the second quarter of 2011 on the same conditions as in the first quarter of 2011. This
means that we will continue to apply fixed-rate tender procedures with full allotment in all our
refinancing operations at least until mid-July.
II. Interaction between banks and sovereign debt
Let me now turn to the specific topics you have asked me to address and start with sovereign
debt. I should like to emphasise once again that the right way to avoid the risk of sovereign
debt crises in an economic and monetary union is through sound national macroeconomic
policies and strengthened economic governance.
At the same time, the governments have considered that a permanent crisis management
mechanism would be useful. From the side of the European Central Bank, the design of such
a mechanism is essential for it to provide a positive contribution to financial stability in the
euro area as a whole. I would like to highlight two aspects: first, the mechanism may in no
way weaken the incentives for sound fiscal and macroeconomic policies pursued in all
member states. It must in particular not weaken incentives for preemptive fiscal and
macroeconomic adjustment by countries concerned, thereby avoiding moral hazard. Second,
given that the euro area is characterised by an exceptionally high degree of economic and
financial integration among countries, the mechanism should be able to employ a range of
instruments to be effective in stemming against contagion in situations of acute market
instability. If indispensable, supporting countries while still keeping some market access, may
be an appropriate way and would imply a prudent use of funds. In this context, I continue to
consider secondary market interventions as a helpful tool in this context.
Regarding the institutional method to set up the ESM, the ECB, like the Parliament, supports
the largest possible recourse to the Union method. It would welcome that, on the basis of the
experience gained, the ESM could become a Union mechanism at the appropriate point in
time. In the meantime, the ECB encourages that the assessment of circumstances leading to
the activation of the ESM and the conditions on financial assistance entail an appropriate
involvement of Union institutions, thus benefiting from their expertise and their Union-wide
perspective.
Turning to the issue of bank resolution, the presence of sound bank resolution mechanisms,
limiting the costs associated to a bank failure in the case of a cross-border group, is likely to
facilitate the negotiations to share the public costs incurred if and when required. Therefore,
we support the overriding policy objective of the new EU framework for bank recovery and
resolution proposed by the Commission.
Although the implementation of the new resolution regime in the EU could already reduce the
fiscal costs of bank failures, I believe that explicit arrangements should also be put in place to
ensure that in the future the financial sector bears the burden of possible crises to come. As
part of a credible resolution framework, bank levies (possibly accumulated in resolution
funds) could possibly be considered.
However, a levy on banks should be seen as a complementary tool in the set of instruments
aiming at increasing the loss absorbency of systematically important banks - notably capital
and liquidity surcharges, and contingent capital. The Financial Stability Board is currently
exploring several options, in particular on contingent convertible capital and bail-in debt
instruments.
To this end, I welcome the fact that the European Commission is considering bank levies and
bail-in in its plans for the future EU crisis management framework. The ECB stands ready to
further contribute to the challenging work that is still ahead of us in the development of this
framework.
I would like to take the opportunity of today's meeting to address another topical issue: the
finalisation of the proposed EU Regulation for OTC derivatives, central counterparties and
trade repositories. We would welcome if the draft report of your Committee on this significant
legislative initiative took account of the important role that central banks play for ensuring the
stability and efficiency of market infrastructures. Central banks have proven their relevant
role during the financial crisis and we would thus welcome that their contribution to financial
stability be fully reflected in the new Regulation.
This means that the central banks would be adequately involved in the new EU framework
for central counterparties (CCPs) and trade repositories. They would cooperate with
supervisors in the authorisation and the ongoing risk assessment of infrastructures, technical
standard-setting and decisions regarding the recognitions of third country central
counterparties and repositories. Regarding the arrangements for cooperation and
information-sharing among authorities, the Commission's proposal of colleges provides, in
our view, a set-up that is preferable to bilateral contacts between those authorities and
ESMA.
III. Eurobonds
Let me now say a few words on the other subject you suggested: so-called "Eurobonds". The
ECB is not in favour of introducing such "Eurobonds", understood as guaranteed government
bonds on a joint and several basis, in the present circumstances. We note that the aim is to
support the development of euro area bond markets, as well as at providing a possible
mechanism to alleviate or resolve the ongoing sovereign debt crisis.
With respect to supporting the euro area bond market, the main advantage could be cost
savings from reducing the liquidity premium in the bond markets. This could arise particularly
if Eurobonds gained benchmark status, comparable for instance to US Treasury bonds. As
regards the impact on sovereign debt developments, moving to Eurobonds would remove the
financial market pressure in the short term but, if not replaced by new mechanisms,
fundamentally reduce incentives for sound fiscal policies.
In our institutional set-up, fiscal discipline is induced via existing domestic provisions; the
fundamental institutional framework of governance (the Treaty and the Stability and Growth
Pact) and the assessment by savers and investors.
Jointly guaranteed bonds would not permit savers and investors to assess fiscal policies of
individual countries. As long as we do not have a political federation with a federal budget,
this would create an incentive problem. It would impair the incentives for fiscal prudence at
the domestic level.
Consequently, Eurobonds would be the natural counterpart if national fiscal competences
were clearly at the level of a union which would be a federation. In the present institutional
framework we need to make very important progress in the collegial governance and
surveillance of fiscal policies which remain national.
Dear Honourable Members, I thank you for your attention and am at your disposal for
questions.