Willem F Duisenberg: Testimony before the Committee on Economic and
Monetary Affairs
Introductory statement by Dr Willem F Duisenberg, President of the European Central Bank, Brussels,
12 September 2001.
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Ladies and gentlemen,
In the light of the unprecedented and tragic events that occurred in the United States yesterday, I
should like to be as brief as possible today in my introductory statement. Firstly, I should like to
express my deep sympathy with the citizens of the United States and, in particular the relatives and
friends of the victims of this brutal attack. Moreover, I should like to emphasise that the European
Central Bank and the national central banks are standing ready to support the normal functioning of
markets and relevant operational systems, if the need arises. Indeed, the ECB has been in close
contact with the other major central banks in the world since the events have unfolded.
Let me now report to you on the recent monetary policy decision taken by the Governing Council of
the ECB.
1. Economic and monetary developments
Over the last few months, the evidence available to the Governing Council has gradually pointed
towards an improvement in the outlook for price developments. This has been particularly apparent
from the information stemming from what we call the second pillar of our monetary policy strategy,
while the information coming from the first pillar of our strategy has remained consistent with a
favourable outlook for price stability in the medium term. At this stage, I do not want to speculate about
the possible consequences of yesterday's developments in financial markets on economic and
monetary developments. We will have a first discussion on this issue tomorrow, at the meeting of the
Governing Council.
As regards the first pillar, the three-month average of the annual growth rates of M3 was 5.9% in the
period from May to July 2001. This figure, however, has to be carefully analysed. First, the figure
needs to be corrected for holdings of money market paper and short-term debt securities by
nonresidents of the euro area. As already announced, the ECB intends to publish an M3 series which is
adjusted for these non-resident holdings of negotiable instruments towards the end of the year. At
present, some preliminary estimates of the impact of these holdings on monetary aggregates are
available. When these are taken into account, the three-month average of the annual growth of M3
would turn out to be slightly above 5%, thus not very far from the reference value of 41⁄2%.
In addition, the increase in the annual growth of M3 in the recent past has to be interpreted with
caution, as several factors indicate that it might not necessarily imply risks to price stability. In fact, the
relatively flat yield curve and the weakness in the stock markets appear to have made the holding of
short-term deposits and marketable paper included in M3 more attractive, thereby temporarily affecting
M3 growth. Furthermore, the recent increase in the money stock seems also to reflect the adjustment
in transaction balances in reaction to the past rise in energy and food prices. This, by itself, should be
seen as a one-off level adjustment and should not indicate future upward pressures on inflation,
provided that the rise in energy and food prices does not trigger second-round effects on inflation via
wages. A further factor which suggests that the rise in M3 growth should be interpreted with caution is
that the annual rate of growth of loans to the private sector has continued to decline over recent
months.
Turning to the analysis from the second pillar of our monetary policy strategy, several developments
clearly pointed to lower inflationary pressures coming from the demand side. Recent data on economic
activity indicate that real GDP growth in the euro area will most likely be lower than was expected a
few months ago. This reflects the slowdown in economic activity in the United States and the
persistent economic weakness in Japan, which have both been more pronounced than was expected
a few months ago, and have also affected other areas of the world. On the domestic side, the past
strong increases in oil and food prices have counteracted the beneficial effects on households' real
disposable income of the recent tax reductions in some Member States. All these factors have also
had adverse effects on investment.
Looking ahead, a gradual strengthening in growth of domestic demand can be expected as the past
increases in inflation continue to unwind. Domestic demand should be further supported by the
positive impact on consumption of the recent tax reductions, and by the favourable financing
conditions in the euro area.
In the current environment, it is likely that the process of wage moderation which we have seen thus
far will continue in the period ahead. First, the slowdown in economic activity should contribute to
containing inflationary pressure stemming from the labour market. In addition, the latest figures on
producer and consumer prices provide encouraging signs that the past increase in consumer price
inflation has been temporary and that, in the absence of further unfavourable shocks, HICP inflation
will return to levels of below 2% in the not too distant future. The expected falling trend in consumer
price inflation should contribute to containing the inflation expectations of economic agents and
thereby have a positive influence on price and wage-setting behaviour. This view is confirmed by bond
yields, which indicate that financial markets expect inflation developments to be in line with the
definition of price stability in the medium term.
Overall, in view of recent monetary, financial and economic developments, the Governing Council saw
scope for a downward adjustment in key ECB interest rates by 25 basis points on 30 August 2001.
The Governing Council considers the new level of key ECB interest rates to be appropriate for the
maintenance of price stability over the medium term.
Turning to fiscal policies, let me express my concern about the possible impact of the slowdown in
economic activity on the willingness of the governments of some euro area countries to stick to the
Stability and Growth Pact and to their stability programmes. Any loosening of fiscal commitments, or
initiatives to "re-interpret" the Stability and Growth Pact itself, can only be counterproductive in the
current circumstances, since this could undermine the confidence in the determination of the euro area
to stick to a stability-oriented fiscal policy. To avoid this, only countries whose budget positions are
close to balance or in surplus have scope to let the automatic stabilisers work fully in this phase of
lower economic growth. By contrast, it would be advisable for those countries with remaining fiscal
imbalances to limit the deviation from the nominal targets set out in their latest stability programmes.
Looking ahead, it will be important that budgetary targets for 2002 be set in such a way that budgetary
positions close to balance or in surplus are either maintained or can be reached within the time frame
set by the existing stability programmes. Indeed, a medium to long-term orientation is essential for the
conduct of fiscal policies in all euro area countries. Short-term discretionary measures aimed at
strengthening domestic demand not only risk having an unwelcome impact on the economy, partly as
a result of time lags, but may also affect the solidity of public finances and the consolidation process in
a more lasting manner.
Efforts to set the conditions for the further expansion of the production potential of the euro area must
remain a priority. While progress is being made in a number of areas, more ambitious market-oriented
structural reforms remain a challenge. Labour market reforms aimed at providing the right incentives to
economic agents and the liberalisation of sectors still sheltered from competitive forces are areas in
which progress is still needed. Fiscal reforms to diminish the adverse incentives provided by tax,
benefit and pension systems need to be accompanied by ambitious expenditure restraint. It should
always be kept in mind that such reforms will be beneficial to employment growth in the euro area and
will help to improve the resilience of the euro area economy to potentially adverse shocks in the future.
2. Preparations for the introduction of euro banknotes and coins
Madam Chairman, honourable Committee Members, as you are aware, in less than four months we
will enter the final stage of monetary integration, marked by the introduction of the euro banknotes and
coins. This will make the single currency a tangible reality for the people of Europe, and even more -
the euro in its final visual appearance, as displayed in the star before you, is indeed a new symbol of
European integration. Madam Chairman, honourable Committee Members, it is my pleasure to offer
this star to the European Parliament as a symbol of the achievements of European integration towards
which we have all been working together and in the spirit of excellent co-operation that has always
characterised the relations between our institutions.