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, before the
Committee on Economic and Monetary Affairs of the European Parliament, Brussels,
1 December 2003.
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It is my pleasure to appear before your Committee for the first time in my capacity as President of the
ECB. I would like to tell you that I was very impressed by our last encounter here and I thank your
Committee and Parliament for the confidence expressed by giving your approval to my appointment. I
look forward to continuing our regular dialogue in the same fruitful and constructive spirit that was dear
to my predecessor Wim Duisenberg, to whose achievements I wish to again pay tribute on this
occasion.
I shall begin my first report to you with our assessment of economic and monetary developments,
before turning to another issue of topical importance, namely the draft EU Constitution. I should like to
conclude my statement by briefly addressing the international role of the euro.
1. Economic and monetary developments
At the time of Mr Duisenberg's last testimony in September, we noted that economic activity had been
very weak in the first half of 2003. At the same time, early signs of a recovery were emerging. Since
then, data have confirmed our main scenario, which is one of a gradual improvement in economic
activity starting in the second half of this year. Eurostat has provisionally estimated that quarterly real
GDP growth was 0.4% in the third quarter of the year.
There are, increasingly, reasons to expect the gradual economic recovery in the euro area to broaden
and strengthen in the course of 2004. Recent data show that the recovery of the world economy is
clearly making progress. The expansion of global trade and economic activity should support euro
area exports. On the domestic side, recent survey data continue to point towards a further
improvement in confidence. The conditions for investment are also improving as a result of firms'
continued adjustment efforts to enhance productivity and profitability. Financing conditions are
generally favourable, not least due to the low level of interest rates. Finally, terms-of-trade effects
stemming from the past appreciation of the euro should also positively affect real disposable income
and thus facilitate a pick-up in consumption growth. Developments in financial markets are broadly
consistent with the overall picture of a gradual resumption of economic growth.
As compared with a few months ago, downside risks to the main scenario of a gradual recovery have
clearly receded. Overall, the risks to this scenario in the coming quarters now appear to be balanced.
Over longer horizons, some risks to the sustainability of economic growth at the global level remain.
This is due, primarily, to unresolved structural problems, the sustainability of public finances and to
external imbalances in some parts of the world economy.
As regards prices, the annual rate of HICP inflation declined to 2.0% in October, from 2.2% in
September. Looking ahead, inflation rates may not fall as quickly and strongly as was expected at the
time of the last testimony of the President of the ECB. We have seen rather strong increases in some
categories of food prices owing to the effects of this summer's heatwave. In addition, oil prices have
remained higher than expected, owing mainly to ongoing political uncertainties in the Middle East.
Furthermore, in the coming months, planned increases in indirect taxes and administered prices in
some euro area countries are likely to have an upward impact on annual inflation rates.
However, there are also factors which should continue to dampen inflationary pressures. First, in the
context of a gradual economic recovery, wage developments should remain moderate. In addition, the
past appreciation of the euro, which is reflected in current subdued price pressures at the producer
level, will continue to lower import prices and be passed on to consumer prices over time. At the same
time, developments in inflation expectations need to be monitored closely.
Cross-checking this assessment with our monetary analysis, we see that liquidity in the euro area
remains ample following the period of strong monetary growth over the past two years, reflecting past
portfolio shifts, precautionary savings and the low level of interest rates. The latter factor also provided
a counterweight to the negative impact of weak economic growth on loans to the private sector. In the
view of the Governing Council, the accumulation of excess liquidity should not, at the current juncture,
be of concern for price stability, given that, for the time being, the economic recovery is only gradual.
However, should high excess liquidity continue to prevail once there is a significant strengthening of
economic activity, this could lead to inflationary pressures in the medium term. Monetary
developments therefore need to be monitored carefully.
Overall, the Governing Council of the ECB, at its meeting in November, continued to assess the
outlook for price developments as in line with our definition of price stability and considered the current
stance of monetary policy to be appropriate. At the same time, the Governing Council made clear that
it will carefully monitor all developments that might affect its assessment of risks to price stability.
Turning to recent fiscal policy developments, you are very well aware of our serious concerns. In
recent months we have seen a gradual move away from the commitments made under the Stability
and Growth Pact. The Governing Council had already made clear on 6 November that the
recommendations of the European Commission regarding the steps to be taken in the excessive
deficit procedure had pushed the room for interpretation of the rules and procedures to the limit.
As you already know from the Governing Council's statement to the public last Tuesday afternoon
following the decision of the ECOFIN Council, the Governing Council deeply regrets the ECOFIN
Council's decision not to act on the basis of the Commission's recommendations regarding France
and Germany. It fully shares the views made public by the Commission on the ECOFIN Council's
conclusions.
The conclusions adopted by the ECOFIN Council carry serious dangers. The failure to respect the
rules and procedures foreseen in the Stability and Growth Pact risks undermining the credibility of the
institutional framework and confidence in the sustainability of public finances across the euro area.
The Governing Council takes note of the commitments by France and Germany to correct their
excessive deficits as rapidly as possible, and by 2005 at the latest, and strongly urges the
governments concerned to live up to their responsibilities. It is now absolutely imperative that effective
action be taken to limit negative effects on confidence. Moreover, we also note that the ECOFIN
Council stands ready to act on the basis of the Commission's earlier recommendations to give notice
to the two countries, should they fail to comply with the Council's conclusions.
The public can rest assured that the Governing Council remains staunchly committed to maintaining
price stability.
We firmly believe that the need to correct the excessive deficits in some countries and to pursue
sound fiscal policies in general have to be framed within a comprehensive and credible medium-term
reform strategy. It is necessary for executive branches, parliaments and social partners to push ahead
with structural reforms aiming at enhancing the competitiveness of the euro area, notably in labour and
product markets, as well as in social security systems, in order to foster a more flexible allocation and
utilisation of capital and human resources. The Governing Council very strongly supports recent and
ongoing efforts by a number of governments in this direction. It also encourages social partners to fully
commit themselves to the objective of making the euro area a more dynamic and innovative economy,
as intended by the "Lisbon agenda".
Once there is a convincing commitment to implementing comprehensive structural reforms to foster
the growth perspective of the euro area, confidence will increase among all economic actors, including
consumers. The upswing that we currently foresee is a sign that confidence is returning, but for the
economic recovery to be sustained it is essential that excessive deficits are corrected and that the
reforms currently being discussed are carried out.
2. The draft EU Constitution
For the last two years, the EU has been engaged in intense debates on a future Constitution for the
Union. These debates resulted in the draft Constitution presented by the Convention in June and are
now culminating in the Intergovernmental Conference, which is seeking to finalise the Constitution
before the end of this year. The ECB has followed the constitution-building process with great interest
and welcomes all efforts to further the construction of a united Europe.
When the European Union re-writes its rulebook by giving itself a Constitution, does this mean that
there will be profound changes to the provisions relating to the ECB and to monetary union in general?
Throughout the process of drafting the Constitution, the ECB has consistently advocated that the
monetary constitution of the EU - the basic set of rules and provisions for EMU, as laid down in the
Maastricht Treaty - is sound both in terms of the objectives set and the allocation of responsibilities
between different actors and levels of government.
I am grateful that the Convention has followed a similar line of reasoning. Its draft Constitution takes
over the provisions relating to EMU without changes in substance. The single monetary policy is, by its
very nature, indivisible. Thus, it is an exclusive competence of the Union. The conduct of monetary
policy has been assigned to an independent European Central Bank, which fulfils this task together
with the national central banks of the euro area and with the clear primary objective of maintaining
price stability. The European System of Central Banks is explicitly mentioned in the first part of the
draft Constitution.
However, further refinements to the draft Constitution are possible, and the ECB has made several
suggestions. For example, we strongly believe that price stability should be added to the list of the
Union's objectives set out in the first part of the Constitution, as price stability is of great importance
not only for the ECB but for the Union as a whole. It ensures confidence in the long-term value of the
euro and translates into low and stable medium and long-term market interest rates. It also avoids an
arbitrary redistribution of wealth, thereby helping to protect the weakest members of society. There
can be no doubt that price stability deserves to be one of the European Union's objectives.
Furthermore, we would like to see a clarification of the allocation of responsibilities with regard to the
international representation of the euro. It would also be useful to formally recognise the widely used
term "Eurosystem".
It is now for the Intergovernmental Conference to use the Convention's draft to finalise the
Constitution. I sincerely hope that Foreign Ministers and Heads of State or Government will take
decisions in full awareness of the historic nature of their task. From the ECB's point of view, the recent
proposal to introduce into the Constitution an extended enabling clause which would allow the
European Council to amend, by unanimity, important parts of the Statute of the ESCB and of the ECB
is certainly not welcome. In a letter which I sent to the current President of the Council, Mr Frattini, last
week, I stressed that the ECB is seriously concerned about this proposal. Such an expansion of the
simplified amendment procedure would imply a far-reaching change to the current constitution of the
ESCB, which the ECB could not support.
3. The international role of the euro
Let me conclude my statement with some observations on the international role of the euro, an issue
which I know the European Parliament follows with great interest. The ECB monitors developments in
this area carefully and, as in previous years, we will shortly publish its annual review of the
international role of the euro. The findings of this report suggest that the use of the euro by non-euro
area residents continues to increase gradually and is most prominent in regions neighbouring the euro
area. In addition, the use of the euro is, to some extent, driven by the euro area itself, as euro area
investors account for a significant part of demand for international euro-denominated bonds.
While these features have not changed over the past few years, a number of new developments have
emerged in 2003. First, there is some evidence of rising interest in euro-denominated bonds on the
part of Asian investors. Second, according to the latest data published by the IMF, which were recently
revised, the share of the euro in global foreign exchange reserves also increased between 2001 and
2002, from 16.4% to 18.7%. Third, euro area countries are increasingly using the euro as a settlement
or invoicing currency in trading with non-euro area residents, especially following the cash
changeover. This suggests that the cash changeover may have encouraged exporters and importers
to review their settlement and invoicing practices. As you know, these developments are the outcome
of decisions essentially taken by market participants. They underscore the confidence of non-euro
area residents in the euro.
I am now open to questions.