Willem F Duisenberg: Testimony before the Committee on Economic and
Monetary Affairs of the European Parliament
Introductory statement by Dr Willem F Duisenberg, President of the European Central Bank, Brussels,
21 May 2002
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I take pleasure in appearing before you today to continue our regular exchanges of views and to report
to you on the ECB's assessment of economic and monetary developments and on the decisions taken
by the Governing Council. Moreover, I should like to take the opportunity to address in my introductory
remarks two issues related to the growth potential of the euro area economy and to wage
developments, which were raised, among other matters, in a letter that you, Madam Chairman, sent
me recently as a follow-up to the presentation of the ECB Annual Report to this Committee by the
Vice-President of the ECB.
Economic and monetary developments
The evidence which has become available since my last testimony to your Committee on 23 January
2002 has indeed made us confident that a recovery is under way in the euro area. At the same time,
recent developments in consumer price inflation in the euro area have been less favourable than we
expected, mainly due to specific and partly temporary factors. Related to this, the outlook for price
stability appears to be somewhat less favourable now than it was at the turn of the year. However,
there are still uncertainties on the strength of the economic recovery and they, in turn, imply the
existence of uncertainties regarding the inflation outlook - and these uncertainties have not diminished
since the Governing Council meeting on 2 May. Let me now elaborate on this assessment of the
economic outlook for the euro area.
Starting with the analysis under the first pillar of the ECB's monetary policy strategy, the annual growth
rate of M3 remained high in the first quarter of 2002. The high annual growth rate still reflects the
portfolio shifts to liquid positions which occurred last autumn, when the economic and financial
environment was characterised by high uncertainty, and euro area investors showed a particularly
marked preference for liquid holdings. At the same time, we saw some moderation in the short-term
dynamics of M3 in early 2002. However, M3 growth has only recently started to decline and, for the
time being, the reversal of the earlier liquidity build-up is proceeding only slowly. The persistence of
excess liquidity could become a risk to price stability, particularly at a time of economic recovery in the
euro area. In addition, it should also be considered that while the annual rate of growth of loans to the
private sector continued to decline until March, there are also early indications that this decline may be
coming to an end. Overall, the information from the first pillar therefore continues to deserve particular
attention.
As regards the second pillar, we are now certain that the trough in economic activity in the euro area
was reached at the end of last year. The rise in business confidence in recent months is the most
visible indication of the improvement in economic conditions. While the recovery is expected to initially
proceed at a gradual pace, euro area real GDP growth rates should again be in line with potential
growth later this year. These expectations for a rebound in real GDP growth in the euro area are
shared by recently published forecasts of international organisations, which all paint a similar picture.
A reversal of the past reduction in inventories, a process which is now under way, and higher export
growth, driven by a more positive international environment, should contribute to the gradual economic
upswing. Overall, domestic and external factors should foster the recovery. Sound fundamentals and
the absence of major imbalances in the euro area which would require a long correction process
support this positive outlook for the euro area economy.
Yet, despite all these positive elements pointing towards an economic recovery, uncertainties remain
about the strength of the current upswing. These are partly related to the development of oil prices
and to the speed of the recovery of consumption. In addition, some risks to the economic recovery in
the euro area are related to imbalances elsewhere in the world economy.
Turning to prices, recent developments in consumer price inflation have been less satisfactory than
was expected at the end of last year, when annual inflation rates were expected to decline to levels
safely below 2% in 2002 and stabilise thereafter. At present, partly as a result of higher oil prices,
inflation rates during 2002 as a whole could turn out to be somewhat higher than we expected at the
end of last year. For price stability to be maintained, it is essential that past upward shocks to inflation
rates remain of a one-off nature and do not become entrenched in the expectations of economic
agents. Recently published inflation forecasts, developments in indicators of inflation expectations,
and recent trends in wages neither confirm nor contradict such an entrenchment. While we have to
acknowledge that monetary policy cannot affect inflation developments over the short term, we are
determined not to put our achievements at risk.
It is therefore particularly important at this juncture to remain vigilant with regard to the further
evolution of the key factors determining the outlook for prices.
The rather protracted upward trend in services prices is, in this respect, one factor to be closely
monitored. In addition, prospects for price stability depend largely on wage moderation. It is a mistake
to believe that high wage rises per se will increase aggregate demand in real terms. On the contrary,
excessive wage claims will increase costs and create inflationary pressures. By doing so, they risk
reducing competitiveness, employment growth, and thus consumption. Wage moderation is a key
factor not only to maintain price stability, but also to support job creation and economic growth on a
sustained basis.
In this regard, it is important to bear in mind that the key challenge to the euro area remains the
improvement in conditions for an increase in productivity. This would further expand trend potential
growth and thereby create, supported by wage moderation, the conditions for reducing the high level
of structural unemployment in the euro area. In this respect, the speeding-up of structural policy
measures which aim to increase productivity is of the utmost importance. For this purpose, the 2002
Broad Economic Policy Guidelines should set the conditions for stepping up the pace of economic
reform. This requires an acceleration and deepening of structural reforms in the labour, product and
financial markets in order to provide economic agents with the proper incentives.
As regards fiscal policy, it is vital that that all Member States maintain a medium-term perspective in
compliance with the framework of the Stability and Growth Pact. In particular, it is of the utmost
importance that those that have not already done so manage the transition to budgetary positions
close to balance or in surplus in order to ensure the smooth and effective functioning of the Stability
and Growth Pact in the future. Let me strongly emphasise that all the Member States concerned must
honour the commitments made to achieving balanced budgets by 2003-04. Moreover, governments
should pursue ambitious reforms with regard to the size and structure of public expenditure and
revenue, also in order to create room for further tax cuts and to absorb the fiscal costs of population
ageing.
Monetary policy will best contribute to the long-term growth prospects for the euro area if it remains
firmly focused on the maintenance of price stability. This will create a stable monetary environment for
economic agents to operate in. At the same time, greater flexibility in labour, product and financial
markets together with sound fiscal positions and wage moderation will support the objective of
maintaining price stability and will create stable conditions to foster employment creation. Such an
interaction of policies, in which policy actors, in accordance with the Treaty, consistently pursue their
own assignments and responsibilities, is the best possible way to enhance the long-term welfare of the
citizens of the euro area.
I will be pleased to answer your questions now.