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,
17 February 2003.
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It is my pleasure to appear before your Committee today. As usual, I will begin my introductory
remarks by reporting to you on the ECB's assessment of economic and monetary developments,
before turning to the ECB recommendation on the adjustment of voting modalities in the Governing
Council, which the ECB adopted following the entry into force of the Treaty of Nice and on which the
European Parliament and the European Commission have been invited to give their opinion.
1. Economic and monetary developments
In its first meeting of December 2002, the Governing Council of the ECB decided to lower the key ECB
rates by 50 basis points. The basis for this decision was the assessment that the prospect for inflation
to fall below 2% in the course of 2003, against the background of subdued economic growth, and for it
to remain in line with price stability thereafter, had strengthened. With this move, the key ECB interest
rates reached a very low level by historical standards.
Before turning to our assessment of the current economic outlook for the euro area, I would like to
report that on 5 December 2002 we also reviewed the reference value for monetary growth, which
plays an important role under the first pillar of the ECB's monetary policy strategy. The Governing
Council decided to leave the current value unchanged at an annual growth rate of 41⁄2% for the broad
aggregate M3, as the evidence continues to support the assumptions which have formed the basis of
the derivation of the reference value since 1999, namely a trend potential output growth of 2-21⁄2% per
annum and a trend decline in M3 income velocity of 1⁄2-1% per annum in the euro area.
When comparing current developments with the reference value, it is important to bear in mind that the
assessment of monetary developments is essential for long-term trends in inflation and that the
reference value is therefore to be seen as a medium-term concept. Short-term movements of M3 do
not necessarily have implications for future price developments. Moreover, deviations of M3 from the
reference value must be analysed in conjunction with other real and financial indicators in order to
understand their implications for price stability.
Turning to our current assessment on the outlook for price stability in the euro area, and starting with
the first pillar, M3 growth remained high in the last quarter of 2002. The continued strength in
monetary growth reflects an ongoing pronounced preference for liquidity in an environment of high
financial, economic and geopolitical uncertainty. In addition, the low level of interest rates in the euro
area makes the holding of liquid assets relatively attractive. Overall, although liquidity remains ample,
it is unlikely at this stage that it will give rise to inflationary pressures, given the current economic
environment and the expectation that some of the portfolio shifts will be reversed once the financial
market uncertainty diminishes. This assessment is supported by the continuing moderate growth of
loans to the private sector, particularly to non-financial corporations.
As regards the information under the second pillar, recently published data and survey information
indicate that economic growth in the euro area remained subdued around the turn of the year and that
the overall sentiment in the economy remained lacklustre. While these indications suggest that growth
dynamics will remain weak for the early part of this year, the most likely scenario remains that of a
gradual increase of real GDP growth rates, starting in the second half of 2003. The current low levels
of interest rates should contribute to this scenario materialising. In addition, while the appreciation of
the euro over recent months is likely to contribute to a dampening of export growth to some extent, this
should be counterbalanced by the assumed recovery in the world economy. In this respect, it should
also be taken into account that the price competitiveness of euro area companies remains favourable
in a medium-term perspective.
At the same time, uncertainty regarding the economic outlook remains high, in particular due to the
ongoing geopolitical tensions. Further turbulence in the oil markets could have a negative impact on
economic activity throughout the world and, therefore, on euro area employment as well. These
concerns could weigh adversely on confidence. In addition, the accumulated macroeconomic
imbalances outside the euro area have led to uncertainty surrounding the strength of the recovery in
other major economies. By way of conclusion, there are still downside risks to the outlook for euro
area economic activity.
Turning to prices, HICP inflation has remained slightly above 2% in recent months. On the one hand,
there was upward pressure from oil prices and from various increases in indirect taxes and
administered prices. On the other hand, the strengthening of the euro, together with base effects,
helped to limit year-on-year consumer price increases. Looking ahead, given the outlook for moderate
economic growth, the gradual pass-through of the appreciation of the euro should contribute to a
dampening of inflationary pressures. Overall, the most likely outcome remains that inflation will fall and
eventually stabilise at a level below 2% in the course of 2003. However, the volatility in oil prices
makes it very difficult to forecast prospects for inflation movements accurately, especially in the short
term.
Moderate wage developments are a major prerequisite in order for price stability to prevail in the
medium term. This will also help to improve the prospects for economic growth and further
employment creation. When looking back we see that wage growth followed an upward trend until
recently, despite the economic slowdown. This indicates that significant structural rigidities have
prevented an appropriate adjustment of wages.
Taking all of the above into account, at its last meeting on 6 February 2003, the Governing Council
concluded that following the decision to lower the ECB key rates by 50 basis points in December, the
monetary policy stance remained appropriate to preserve a favourable outlook for price stability in the
medium term. Consequently, the ECB kept its key interest rates unchanged. Their already low level
should help to counterbalance the negative effects on economic activity that currently stem from the
high degree of worldwide uncertainty and should, therefore, contribute to a sustainable economic
recovery in the course of 2003.
For the time being, we still assume that the high degree of uncertainty will decline in the course of this
year. However, at this juncture it is not possible to assess how the ongoing geopolitical developments
will affect the world economy and, in particular, the euro area economy. The Governing Council will
continue to monitor closely all factors that may affect the prospects for inflation in the euro area.
The euro area outlook will also very much depend on progress in other policy areas. As regards fiscal
policy, full adherence to the fiscal policy framework laid down in the Treaty and the Stability and
Growth Pact provides a sound basis for limiting the risk of fiscal imbalances occurring and thus
contributes significantly to favourable financing conditions for the private sector. At the same time, it
preserves an appropriate medium-term orientation for fiscal policy. The Governing Council supports
the steps taken by the Commission to maintain the functioning of the framework, including the
implementation of excessive deficit procedures and the issuing of early warnings, where required.
Furthermore, I should also like to stress that it is the implementation of structural reforms at the micro
level that ultimately raises the production potential in the euro area. By improving flexibility in the
economy and making the euro area more resilient to external shocks, structural reforms will also
reduce the high level of unemployment. The slow progress in structural reform is one of the key factors
currently hampering a recovery in confidence.
Against this background, the Governing Council welcomes the recent communication by the
Commission on the implementation of the Broad Economic Policy Guidelines. Renewed momentum in
the process of structural reform will not only be crucial to foster confidence among consumers and
investors in long-term growth and employment opportunities in the euro area, but it should also have a
positive effect on spending and investment decisions in the short and medium term.
Finally, I should like to mention that after four years of practice with our monetary policy strategy, the
Governing Council has considered that it is the appropriate point in time to take stock of our
experience so far and to reflect on the various elements of the strategy. All this does not necessarily
imply that we see a need for any changes. We are very satisfied with our strategy and with the fact
that it has given appropriate and effective guidance to monetary policy decisions. Let me also assure
you that there will be no change in our firm commitment to our overriding objective of maintaining price
stability over the medium term, i.e. avoiding both inflation and deflation. Indeed, this could not be
otherwise, since the achievement of the price stability objective is at the core of our mandate in the
Treaty.
2. The ECB Recommendation on the adjustment of voting modalities in the Governing
Council
On 3 February 2003, the Governing Council adopted a recommendation on the adjustment of its
voting modalities, which will prepare the Governing Council for a future expansion of the euro area.
With the timely submission of this recommendation, and a hopefully rapid completion of the overall
procedure, we hope to preclude any uncertainty about the continued effectiveness of the ECB's
governance structures in view of a future expansion of the euro area. In this context, I should like to
emphasise how much I appreciate your Committee's efforts to respect an ambitious timetable in order
to present in good time the Opinion of the European Parliament as foreseen by the Treaty.
As you are aware, the task of coming up with a new voting system presented the Governing Council
with a formidable challenge. I know that the final outcome of our discussion, the rotation of voting
rights based on three groups, has met with certain criticisms not only from the media, but also from the
members of this Committee. Therefore, allow me to highlight a few crucial features of the new voting
system, which might help to clear up any misunderstandings about the functioning of the system and
the motivation behind it.
First of all, I should like to stress that the "enabling clause" contained in the Treaty of Nice had set us
clear legal limits, in that any reform should be restricted to a change in the voting modalities only. More
fundamental reform options were, therefore, outside the scope of our discussions. For example,
suggestions by academics or media commentators to restrict the membership of the Governing
Council, to delegate decision-making on monetary policy to the Executive Board or some form of
Monetary Policy Committee would call for more fundamental changes to the Treaty than foreseen by
the "enabling clause".
The Governing Council sought to devise a system which maintains its capacity for timely, efficient and
euro-area focused decision-making in a substantially enlarged euro area. Therefore, we recommend
to cap the number of NCB governors with a voting right at 15, which is the number of governors under
the "Maastricht" framework if all current Member States were to have adopted the euro, with the six
members of the Executive Board retaining a permanent voting right. At the same time, we introduced
as a new element the principle of "representativeness", linked to the desire that at any moment in time
the NCB governors exercising the voting right represent a reasonable share of the euro area as a
whole. This desire to ensure "representativeness", by way of the differentiation among governors on
the basis of the country ranking, should not be misunderstood as an attempt to re-introduce national
elements into decision-making. On the contrary, the allocation of governors to groups is a purely
auxiliary device, which is used exclusively to determine who votes when. For substantive
decision-making - and that is what was crucial to us - the tried-and-tested principles of the
Eurosystem constitution have been kept fully intact: the principle of ad personam participation of
governors remains valid and the "one member, one vote" principle applies to all members exercising a
voting right. All of this will ensure that, also in a future enlarged Governing Council, it is the force of
arguments that counts in our deliberations and not which country an NCB governor comes from and
whether this is a large or a small country.
Finally, given that the sequencing of future euro area expansions is highly uncertain, the new voting
system had to be sufficiently robust and able to accommodate up to 27 euro area Member States, so
as to avoid having to change the rules every time a new Member State joins the euro area.
In view of all these complications I believe we have succeeded in devising a suitable new voting
system which should muster the unanimous support of the Council and eventually be ratified by the
Member States. I know that it is not as simple as we would have liked. It is, however, as simple or
complex as any other rotation system and fairly similar to the system operating at the Federal
Reserve, where the presidents of Federal Reserve Banks are also allocated to groups and exercise
their voting right in the Federal Open Market Committee (FOMC) with different frequencies.
I hope that our exchange of views later on will help to clarify any other outstanding issues.