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,
at the European Parliament, Brussels, 14 September 2005.
* * *
Madame la présidente, Mesdames et Messieurs les membres de la Commission
économique et monétaire, j'ai l'honneur de paraître devant votre Commission aujourd'hui
dans le cadre de notre dialogue régulier. À cette occasion, je voudrais rendre hommage à
Wim Duisenberg, qui est décédé à la fin du mois de juillet. Le premier président de la
Banque centrale européenne a apporté une contribution considérable à la construction
européenne. Il a joué un rôle décisif dans la mise en place des institutions monétaires en
Europe, dans le lancement réussi de la nouvelle monnaie, dans l'affirmation de la crédibilité
de notre monnaie unique - l'euro - et dans l'instauration de la confiance placée en elle.
Nous le regrettons profondément.
Je commencerai mon intervention aujourd'hui par une évaluation de la situation économique
et monétaire actuelle. Ich möchte außerdem zu aktuellen Themen der Fiskalpolitik und zu
den Fortschritten im Bereich der Strukturreformen Stellung nehmen. Abschließend möchte
ich die Position der EZB zu den Folgeaktivitäten hinsichtlich des EU-Aktionsplans für
Finanzdienstleistungen erläutern.
Economic and monetary issues
At the time of my last appearance before the European Parliament in July the underlying trend in real
economic growth in the euro area remained modest. Looking ahead, we expected that positive
fundamental factors - notably strong global demand and robust earnings in the euro area - would
contribute to a certain pick up and a broadening of economic activity.
The latest data and indicators have not changed this assessment. According to Eurostat's flash
estimate, real GDP grew at a quarter-on-quarter rate of 0.3% in the second quarter of this year,
compared with 0.4% in the first quarter of 2005, confirming that the underlying growth dynamics
remained subdued in the first half of 2005. At the same time, the most recent survey indicators have,
on balance, supported the view that economic growth could improve in the second half of this year.
Looking further ahead, conditions continue to be in place for positive fundamental factors to influence
the outlook and for economic activity to pick up beyond the short term. On the external side, ongoing
growth in global demand and improvements in euro area price competitiveness should support euro
area exports. On the domestic side, investment should benefit from the exceptionally low level of both
nominal and real market interest rates prevailing across the entire maturity spectrum, as well as from
the robust growth of corporate earnings and ongoing improvements in corporate efficiency.
Consumption growth should gradually rise, broadly in line with expected developments in disposable
income.
This picture is consistent with the most recent ECB staff projections, which envisage euro area real
GDP growing at rates of between 1.0% and 1.6% in 2005 and between 1.3% and 2.3% in 2006.
Compared with the June projections, the ranges projected for real GDP growth have been adjusted
slightly downwards. For 2005, this mainly reflects slight downward revisions of past data, while for
2006 this reflects the projected effects on disposable income of increases in oil prices.
This outlook for economic activity is subject to a number of downward risks, relating mainly to higher
oil prices, low consumer confidence and concerns about global imbalances. In particular, the potential
further dampening impact of oil prices on the outlook for growth is being monitored very closely. Oil
prices have continued to rise, increasing considerably since the beginning of the year, and
developments in futures prices suggest that market participants expect the current tightness in oil
markets to persist. Obviously, the situation has been further complicated by the tragic effects of
Hurricane Katrina. All our thoughts are with the people of the city of New Orleans and all affected
neighbouring areas and we are touched by the wave of global solidarity helping them to cope with
their immediate needs. At the same time, it remains difficult to assess the full extent of the damage
and the period of time necessary for its repair. Normally, despite the significant wealth destruction
resulting from such storms, the economic impact at the national level is limited to the short term and is
increasingly offset by the positive impacts of rebuilding activity. At the moment, we consider that the
global impact will most likely remain limited and temporary, but we will of course continue to monitor
very closely any available further evidence.
Turning to price developments, recent increases in oil prices have pushed headline inflation rates to
levels in excess of 2% over the last months. According to Eurostat's flash estimate, annual HICP
inflation was 2.1% in August, compared with 2.2% in July, and inflation rates are expected to fluctuate
around current levels over the next few months, with some further increases towards year-end. At the
same time, when analysing underlying domestic inflationary trends, there continues to be no
significant evidence of upside pressures building up in the euro area. In particular, wage increases
have remained contained over recent quarters and this trend should prevail for the time being, given
the current labour market situation.
This picture is broadly in line with the new ECB staff projections. ECB staff project average annual
HICP inflation to lie between 2.1% and 2.3% in 2005 and between 1.4% and 2.4% in 2006. These
projections constitute significant upward revisions to the Eurosystem staff inflation projections
published in June, mainly reflecting the fact that oil prices have once again increased by more than
was suggested earlier by forward rates.
Upside risks to this new baseline inflation scenario remain, relating to potential further rises in oil
prices, administered prices and indirect taxes. More fundamentally, the main risks to the inflation
outlook stem from potential second-round effects in wage and price-setting behaviour triggered by
ongoing oil price rises. In this respect, it is essential that the social partners continue to meet their
responsibilities. Against this background, we will continue to monitor inflation expectations very
closely. Particular vigilance is required in order to ensure that longer-term inflation expectations
remain well-anchored in the euro area.
Turning to the monetary analysis, money and credit have continued to grow robustly in the euro area
over the last few months, mainly driven by the prevailing low level of interest rates. In particular, the
growth of mortgage borrowing remains very strong. In this context, price dynamics in housing markets
need to be monitored closely. The liquidity situation in the euro area remains ample by all plausible
measures, indicating risks to price stability over medium to longer horizons.
In conclusion, oil price developments have again led to upward revisions of inflation projections for the
year ahead. At the same time, medium-term domestic inflationary pressures still remain contained,
while the balance of risks to the baseline inflation scenario is tilted to the upside. Cross-checking the
economic analysis with the monetary analysis confirms the need for particular vigilance in order to
keep medium-term inflation expectations firmly anchored at levels consistent with price stability. By
achieving this, monetary policy is making a significant contribution towards economic growth and job
creation in the euro area.
Turning to fiscal policies, the latest available information suggests that the pace of fiscal consolidation
in many euro area countries remains unsatisfactory. It is of particular concern that targets for
correcting excessive deficits are at risk in some cases. Moreover, countries that have recently
breached the 3% deficit limit are being granted relatively long periods to correct the situation in what
constitutes a very generous application of the reformed Stability and Growth Pact. Against this
background, it is important to recall that the best contribution that fiscal policies can make to stability,
growth and cohesion in the euro area is to effectively tackle existing fiscal imbalances as part of a
determined and well-designed economic reform programme. In this context, a rigorous implementation
of the new rules is needed. This would reinforce the credibility of the Stability and Growth Pact, boost
expectations of sound fiscal policies and thereby help to increase confidence in economic growth
prospects.
As regards structural reforms, the European Commission has recently presented the "Community
Lisbon Programme", which contains a list of measures at the EU level to relaunch the Lisbon strategy.
The ECB fully backs this initiative, in particular the measures to further open EU markets and to
simplify the regulatory framework within which business operates. Progress at both the Community
and the Member State level is crucial to addressing the economic challenges facing the EU.
Financial services policy
I would now like to say a few words about the European Commission's Green Paper on Financial
Services Policy for the period 2005-2010. As already expressed in its contribution to the Commission's
public consultation, the Eurosystem supports the key policy orientation of the Green Paper, which
highlights the need to focus on the consolidation and consistent implementation of the legislative
framework for financial services. To this end, the potential of the Lamfalussy framework should be
exploited to the extent possible.
As regards the area of financial regulation, the Eurosystem concurs with the emphasis placed by the
Commission on the objective of rationalising the existing framework. The proposal for "better
regulation" based on open, transparent and evidence-based policy-making is fully supported. The
Eurosystem also supports the suggestion by the Commission to launch a feasibility study on the
development of one body of consistent law. We regard such a "financial services rulebook" as a tool to
rationalise the existing set of EU rules for financial institutions and, in particular, to reduce complexity
and legal uncertainties and to eliminate possible inconsistencies.
Still in the context of financial regulation, the completion of the current FSAP legislative work is also
important. In that connection, I would like to mention in particular the Capital Requirements Directive,
on which, I am informed, work is proceeding smoothly. Also, I would like to make a specific reference
to the issue of securities clearing and settlement, to which the Eurosystem attributes great importance.
An efficient securities clearing and settlement infrastructure is of fundamental importance to the
integration and smooth functioning of financial markets. To this end, the Eurosystem supports the
Commission's intention to put forward a proposal for a directive on securities clearing and settlement.
On the question of new regulatory initiatives, we share the view that asset management and retail
financial services are areas where regulatory intervention could be considered.
In the area of financial supervision, the Eurosystem fully supports the Commission's view that the
current institutional set-up should be exploited to the maximum extent before any potential structural
change is considered. In particular, the Eurosystem agrees that the main policy objective in the area of
financial supervision is two-fold: first, to enhance the competitiveness of EU financial markets and
institutions and to facilitate the development of cross-border finance both in terms of institutions and in
terms of products and services - the so-called financial integration angle; and second, to ensure the
effectiveness of standards for oversight and supervision in a more integrated financial system - the
so-called financial stability angle. In this respect, we attach particular importance to the consistent
implementation of financial services legislation and the pursuit of supervisory convergence, as well as
to the effective cooperation between home and host authorities. We are of the view that it is important
that home-host coordination be developed on a robust and consistent basis for the financial groups
involved in a way that both ensures effective supervision and reduces compliance costs. The Level 3
Committees play a very important role in this respect. Furthermore, we see a need for the current
regime for the supervision of liquidity risk to be reviewed against the background of financial market
developments, including the introduction of the euro.
As regards financial stability, which represents an area of particular interest to the Eurosystem, we are
of the opinion that the refinement of financial stability arrangements should remain a key priority for
the EU. There are three broad areas where the Eurosystem sees room for enhancing the present
arrangements, namely financial stability assessment, the management of financial stress and deposit
insurance. In this respect, let me recall that the provision of Emergency Liquidity Assistance is a
central banking function and that there is an agreement within the Eurosystem on how this facility
operates in the euro ara. Thus, there are no specific issues relating to the provision of Emergency
Liquidity Assistance that need to be addressed in the context of the post FSAP work.
Finally, let me stress again that the Governing Council of the ECB is very strongly attached to the full
completion of the single market for banking services and to a level playing field making absolutely no
difference between nationalities.
I am now ready to answer your questions.