Jean-Claude Trichet: Hearing at 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 at the Economic and Monetary Affairs Committee of the European Parliament,
Brussels, 30 June 2011.
* * *
Dear Madam Chair,
Dear Honourable Members,
It is a pleasure to be back in Parliament and your Committee for our regular exchange of
views.
Once again, our meeting comes at a time when important decisions are being taken but also
pending. Of particular concern is the conclusion of the legislative procedure on the economic
governance package.
Je tiens tout d'abord à saluer les efforts continus du Parlement européen et du Conseil afin
de rapprocher leurs positions sur le paquet de gouvernance économique. Le Conseil des
Gouverneurs aurait souhaité que le Conseil européen du 24 Juin dernier fasse un geste
d'ouverture envers le Parlement européen sur ce dossier. Le principal point de désaccord
- l'extension de la majorité qualifiée inversée dans le volet préventif du pacte de stabilité et
de croissance - est d'une importance clé. La zone euro a urgemment besoin d'un cadre de
gouvernance économique renforcé et ambitieux. La crise actuelle démontre, de manière
irréfutable, s'il en était encore besoin, les conséquences néfastes de politiques budgétaires
et économiques malsaines.
Deshalb ist es unerlässlich, zu einer ambitionierten Einigung zu kommen. In der aktuellen
Lage wäre eine Einigung besonders begrüßenswert, um deutlich zu machen, dass die
richtigen Lektionen aus der Krise gezogen werden.
Let me now turn to the economic and monetary developments in the euro area since our
previous meeting in March, as well as the two topics you have asked me to focus on, namely
fiscal consolidation and monetary policy on the one hand, and sovereign debt developments
on the other.
I. Economic and monetary developments
Let me first turn to the economic and monetary developments in the euro area since our
previous meeting in March. In this context, let me also note that we are now in the purdah
period, as the next Governing Council meeting will take place on 7 July. This means that
nothing in what I will say is intended or should be interpreted in any respect in terms of future
monetary policy.
Incoming information since I last spoke to you has confirmed a positive underlying
momentum of economic activity in the euro area. We expect the continued expansion of the
world economy and domestic demand from the private sector as the main driver of economic
growth in the euro area. The latest Eurosystem staff macroeconomic projections are in line
with this assessment. They foresee the economy to grow between 1.5% and 2.3% for 2011
and between 0.6% and 2.8% for 2012. In our view, the risks to this outlook remain broadly
balanced in a context of elevated uncertainty.
As regards price developments, we are observing continued upward pressure on prices,
especially in the earlier stages of the production process. Inflation in the euro area stood at
2.7% in May, after 2.8% in April. The inflation rates seen over the past few months largely
reflect higher energy and commodity prices. Going forward, inflation is likely to stay clearly
above 2% over the months ahead, mainly due to energy and commodity prices. The
Eurosystem staff projections indicate inflation ranging between 2.5% and 2.7% for 2011, and
between 1.1 and 2.3% for 2012. It is of paramount importance that the current relatively high
inflation rates do not translate into second-round effects, via higher wages and price-setting,
and thereby do not lead to broad-based inflationary pressures.
Risks to the medium-term outlook for price developments continue to be on the upside.
Notably, energy prices could increase faster than currently expected, and indirect taxes and
administered prices might be raised faster with a view to reducing budget deficits. In addition,
increasing capacity utilisation may exert stronger upward pressure on domestic prices.
As regards our monetary analysis, we see the underlying pace of monetary expansion
gradually recovering. At the same time, monetary liquidity remains ample. This has the
potential to accommodate price pressures.
As you are aware, we are strongly determined to secure that inflation expectations remain
firmly in line with our aim of keeping inflation rates below, but close to, 2% over the medium
term.
Against this background the Governing Council raised the key ECB interest rates by 25 basis
points in April, in order to adjust the very accommodative monetary policy stance in the light
of upside risks to price stability. Since then we have kept the rates unchanged. At the same
time, as I said in the press conference after the last Governing Council, we see the monetary
policy stance as still accommodative and risks to price stability on the upside. Accordingly, I
said that we are in a state of strong vigilance and that we stand ready to act in a firm and
timely manner to avoid that recent price developments give rise to broad-based inflationary
pressures over the medium term.
As regards our non-standard measures, the Governing Council earlier this month decided to
maintain its fixed rate tender procedures with full allotment in its refinancing operations up to
the third quarter of 2011.
II. Fiscal consolidation and monetary policy
Let me now turn to the topic of fiscal consolidation and monetary policy.
In a monetary union, the central bank when setting interest rates has to take an area-wide
perspective. In the same manner the US Federal Reserve do not and cannot tailor its interest
rate to the specific economic conditions in individual US states.
Setting the policy rate with a clear focus on the euro area as a whole does not, however,
mean ignoring the diversity in financial conditions. Since the financial crisis erupted, the ECB
has adopted a number of non-standard measures to foster as much as possible a smooth
functioning of the monetary policy transmission throughout the euro area.

The current major challenges faced by a few euro area countries are mainly the
result of some governments not conducting sound policies and not implementing
reforms that would benefit their citizens and the European public as a whole. It is
essential that euro area countries fully assume the responsibilities at the national
level that derive from their participation in the euro area. Past experiences of fiscal
consolidation episodes demonstrate the long-term benefits of reducing sizeable
fiscal imbalances. There are at least three reasons why well-designed fiscal
consolidation is beneficial in the current circumstances. Accompanied by
appropriate structural reforms, it promotes long-term growth. For those economies
with large fiscal imbalances, it is indispensable to bolster confidence. And for all
economies it helps create buffers that would be essential to deal with unforeseen
events.

It is also for this reason that the ongoing negotiations on the governance package
should produce an ambitious outcome. I have been emphasising time and again
why we are very much in agreement with the European Parliament on this - the
need for a quantum leap in economic governance through the currently discussed
legislative package.

At this stage, I would like to recall two points:

First, we should not be content with a stronger Stability and Growth Pact only at the
later stages of an excessive deficit procedure. We need to halt any fiscal excesses
early on and correct them. The obvious way is a higher degree of automaticity early
on in the procedures, that is, more reverse qualified majority voting in the preventive
arm of the Pact; and therefore the prospect of more timely sanctions, possibly of a
reputational nature.
Second, we would benefit considerably from an equally ambitious macroeconomic
imbalances framework that detects imbalances early on, through a well focused and
rigorously applied scoreboard; and then corrects them, again in a timely fashion. Here, we
need to focus on those countries that ultimately pose a risk to other euro area countries
through in particular persistent and excessive competitiveness losses.
III. Sovereign debt developments
Let me now turn to the current sovereign debt developments.
As you know, at the euro area level, we see that fiscal consolidation in many countries is
ongoing, and will, according to the European Commission's Spring 2011 Forecast, bring the
euro area general government deficit down to 3.5% by 2012. This is an encouraging
prospect, especially by international comparison. Also for the current year the euro area
fiscal deficit is somewhat less than half of that of the US and Japan. However, selected euro
area countries are currently still facing high debt and deficit levels.
The ECB has always made clear that the best way to cope with the current sovereign debt
positions is a determined and disciplined implementation of agreed fiscal consolidation paths
and the structural reform agenda to promote medium term growth. For the euro area
countries under an EU/IMF programme, a determined implementation of those programmes
is of utmost importance to get back to a sound economic situation. This call has been echoed
by the European Council, which at its recent meeting urged the national authorities,
especially but not only in Greece, to continue implementing rigorously and with the highest
resolve the necessary adjustment efforts to put the country on a sustainable path. To that
end, national unity and cross-party consensus are essential.
As to the possibility of debt action, let me recall what I have said many times on this matter,
on behalf of the Governing Council: We strongly advise against all concepts that are not
purely voluntary or that have elements of compulsion. We call for the avoidance of any credit
events and selection default or default.
Let me add that I am from time to time surprised by the narrow view of private sector
involvement that is generally taken in the present debate. We should not forget that private
capital is also mobilised when embarking on privatisation. Privatisation is a good way of
mobilising private capital and is something that we have encouraged considerably,
particularly in the case of Greece. It is an effective way of mobilising private capital and has
positive consequences not only on the financing of the country, but also in terms of positive
structural effects on growth and employment. Finally, the private sector involvement that
everybody is aiming at is to go back as soon as possible to private sector market financing.
Thank you for your attention.