Mr. Duisenberg's opening statement at the press conference covering the
Introductory
latest meeting of the Governing Council of the European Central Bank
statement by the President of the European Central Bank, Dr. W.F. Duisenberg, at the press
conference held in Frankfurt on 3/11/98.
Ladies and gentlemen, as in previous months, the Vice-President and I are here
today to report on the outcome of today's meeting of the Governing Council of the European
Central Bank. The number of items considered by the Governing Council required a full-day
meeting. Most of the items on the agenda were of a rather technical nature or were related to the
legal implementation of decisions already taken at previous Governing Council meetings. Part of
the meeting was attended by Mr. Edlinger, President of the EU Council, and by Commissioners
de Silguy and Monti.
Let me first turn to the Governing Council's in-depth discussion on
recent
economic, monetary and financial developments.
Starting with the global macroeconomic environment, it was felt that the spiral of
bad news has not continued over the most recent weeks. Also, when looking at market
developments, we have observed a strengthening of the US dollar vis-à-vis euro area currencies
since its trough in mid-October. We have seen a recovery in global stock markets and we have
also witnessed some upward correction of long-term bond yields after they had fallen sharply as
a result of a "flight to quality". However, markets displayed considerable volatility during
October, reflecting the uncertainty prevailing in the world economy.
Whether or not we can now expect a process towards more normal conditions
remains to be seen. Given the underlying causes of the adverse conditions in Asia, Russia and
other parts of the world, a quick resolution is in any case not very likely. Moreover, it is by now
quite clear that the world economy will suffer from these developments in 1999 and that the euro
area will also be affected to some extent.
However, the crucial and widely debated issue is the degree to which such effects
on the euro area will materialise and how long they may last.
As matters stand, there appears to be consensus that euro area economic growth
will slow down to some extent in 1999, driven largely by a weakening in net exports. In its latest
forecast, published on 21 October 1998, the Commission has revised downwards aggregate euro
area real GDP growth to 2.6% in 1999, compared with 3.2% projected earlier this year.
According to the same source, the slowdown is expected to be only temporary and real GDP
growth is anticipated to strengthen again in 2000, with the contribution of net trade improving.
At the same time, the outlook for inflation in the near term remains generally favourable,
assuming continued wage moderation and subdued developments in import prices.
In today's discussion, the Governing Council agreed to examine further the broad
outlook for the euro area at its two meetings in December. In this context, we will thoroughly
discuss the downside risks for output growth resulting from the evolution of world trade and
from international financial tensions and the possibility of still more subdued price
developments. However, one should also mention the fact that a relaxation of fiscal policies and
higher wage increases could lead to a reversal of current developments in consumer prices and
undermine confidence. Any uncertainties arising in these two fields would of course
considerably complicate our assessment, given the high degree of uncertainty already associated
with the developments in the global economy.
With respect to today's review of the monetary, financial and macroeconomic
situation in the euro area, the following aspects were discussed.
First, with reference to monetary growth, let me recall that when looking at
various definitions of broad money, our preliminary data show broadly similar and stable annual
growth rates of between 3 and 5% in 1997 and the first half of 1998. According to our initial
analysis these monetary trends do not appear to signal inflationary pressures at this juncture.
However, a further assessment will be made in December on the basis of more up-to-date
information.
Second, with respect to price developments, euro area HICP inflation fell from
1.2% in August to 1.0% in September 1998. The generally low level of HICP increases mainly
reflects a decline in energy prices, which were almost 4% lower in September than a year earlier,
and in other commodity prices; in addition, price pressure as indicated by industrial output prices
and unit labour costs has remained modest. With respect to the decline in HICP inflation in
September, this is closely related to a relatively strong fall in food prices (from 1.8% in August
to 1.4% in September 1998), which account for almost one-quarter of the total HICP. Such
monthly changes are certainly very difficult to interpret. However, I may point out that food
prices display a larger degree of volatility owing to their seasonal pattern.
Third, taking into account distorting factors such as calendar effects, underlying
developments in euro area-wide real GDP have remained fairly stable. Economic expansion was
broadly unchanged in the first half of 1998 from the solid growth seen in the second half of
1997. Also, at this juncture, data partly available for the summer months point to the possibility
that recent rates of output growth may be broadly sustained beyond the first half of this year.
While the trends appear in some cases weaker, particularly when also looking at some national
data, the latest euro area-wide survey data on confidence, order books and capacity utilisation
generally remain well above their long-run averages. However, further developments in these
data will have to be monitored closely. Concerning the assessment of the monetary policy stance
in the euro area, the Governing Council - having carefully reviewed all factors and developments
- confirmed the view taken at its previous meeting. It considered further interest rate convergence
towards the lower end of the current range prevailing in the euro area as being appropriate.
Measured by key central bank rates, the lowest rates in the euro area currently stand at 3.3%.
Market interest rates have also reached very low levels. In terms of three-month interest rates, the
euro area average rate has fallen to 3.75%, following the reduction of interest rates by a number
of euro area central banks. With the announcement today of further interest rate reductions by the
Banco de España and the Banco de Portugal, both effective tomorrow, the euro area average will
continue its downward trend. Nominal and real long-term interest rates for the euro area are at
historically low levels. It confirms the high degree of confidence that the euro has gained in the
judgement of the general public and of global investors. This confidence is a major asset in the
consolidation of a financial environment conducive to growth.
As has been proven in many instances in the past, monetary policy cannot solve
structural problems. Indeed, monetary policies in the euro area countries have increasingly
converged over the past few years and resulted in low levels of interest rates. Several countries
have followed virtually a "common monetary policy stance" over a longer period, but
performances - for example in labour markets - within the euro area differ considerably from
country to country. The degree of success in this area seems to be closely related to structural
reforms implemented in earlier years.
I am confident that we can cope both with current problems and with future
challenges. This requires a forward-looking, medium-term-oriented monetary policy, which
keeps inflationary expectations low. This is the decisive contribution of monetary policy to the
fostering of growth and employment. Dealing with structural problems is the task of policies
other than monetary policy.
Let me now give the floor to the Vice-President to report on various aspects of the
preparatory work for Stage Three.
(a) Preparations for the "changeover weekend"
With less than 60 days to go before the start of Stage Three, we are obviously attaching
particular importance to the provision of a framework allowing for a smooth changeover to
the euro. We began our preparations a long time ago and I am confident that the ESCB will
be in a position to deliver its entire complex infrastructure to the markets by the morning of
4 January 1999. I expect the banking and financial community in the euro area to be fully
aware both of the logistical challenge that the changeover weekend represents and of the
need for careful preparation. Given the concentration of migration operations to the euro to
be conducted by a multitude of financial agents (i.e. payment systems, securities settlement
systems, custodians, individual banks, exchanges and financial information providers) in
the period from 31 December 1998 to 4 January 1999, the ESCB is preparing to work
together with other public authorities to orchestrate the necessary policy responses to any
unexpected events. To this end, the Governing Council has set up an ad hoc "Changeover
Weekend Committee" which will organise the monitoring of developments vis-à-vis the
final migration to the euro within the ECB and the national central banks and in the
banking and financial industry, both prior to and during the changeover weekend.
Additional details on the preparation of the changeover weekend are provided in a separate
press release which is to be issued to you this evening.
(b) Payment systems issues
With regard to euro payment and settlement systems, I should like to draw your attention
to recent developments which suggest that many market participants consider the euro a
special currency to which the traditional rules applied elsewhere in the developed world
would not necessarily be applicable. Initiatives were taken, or allowed to develop, that
have no precedent in the arrangements concerning other currencies. This relates in
particular to the granting of payment finality and intraday credit in a currency other than a
country's own. Therefore, the Governing Council considered it appropriate to issue a
policy statement clearly spelling out the fact that the rules which apply to all of the other
currencies in the world will also apply to the euro, and that the ECB bears the same
responsibilities as all the other central banks in the world.
This policy statement on euro payment and settlement systems located outside the euro
area is to be issued to you this evening.
The Governing Council also agreed on the main features of the legal framework within
which the TARGET system will operate. These main features are set out in greater detail in
the "Third progress report on the TARGET project", which the Governing Council
endorsed today. In common with previous progress reports, the current one will be
published in the near future and will provide further technical details of interest to market
participants.
(c) Exchange of national banknotes
In the absence of euro banknotes at the start of Stage Three, the Governing Council today
agreed on arrangements according to which the participating national central banks will
exchange legal tender banknotes of other participating Member States for national
banknotes and coins at the official conversion rate as from 1 January 1999. To ensure
substitutability between the national currency units, the Governing Council decided that
each participating national central bank will arrange for such an exchange at one location at
least. The national central banks may, however, limit the number and/or the total volume of
banknotes they are prepared to accept for any given transaction or on any one day.
Further details on that matter are provided in a separate press release which is to be issued
to you this evening.
(d) Allocation of monetary income
As regards the income arising from the issuance of national banknotes from the
participating Member States, the Governing Council today decided that such income will
not be redistributed prior to the introduction of the euro banknotes. The Governing Council
also confirmed, with respect to the allocation of monetary income of the national central
banks of the participating Member States for the financial years 1999 to 2001, that the
monetary income for the said period will be calculated by employing the so-called indirect
method, by multiplying a defined liability base by a specified reference rate of interest. The
sum of the monetary income of each national central bank will be allocated to the
participating national central banks in proportion to their paid-up share in the ECB's
capital. Owing to the temporary character of the current decision, the question of monetary
income allocation will need to be revisited before the introduction of euro banknotes in
2002.
(e) Transfer of foreign reserve assets to the ECB
Today the Governing Council also adopted an ECB Guideline establishing the legal format
as well as the modalities of the initial transfer of foreign reserves from the national central
banks to the ECB. In this connection and as a measure for covering possible foreign
exchange risks for the ECB, the Governing Council endorsed, in line with the Statute of
the ESCB, an ECB Recommendation for a Council Regulation which would authorise the
ECB to increase its capital from the current level of 5 billion euros to up to twice that
amount.
(f) Monetary and foreign exchange policy
Further decisions have also been taken with regard to preparing the monetary and foreign
exchange policy of the euro area. On previous occasions I have mentioned to you that legal
acts are under preparation which specify general principles to be followed by the national
central banks when carrying out operations in domestic assets and liabilities and in foreign
exchange reserve assets remaining with the national central banks. Such instruments,
which are based on provisions of the Statute of the ESCB, aim from a legal point of view
at ensuring the singleness of the ECB's monetary policy and the consistency of such
transactions with the Community's exchange rate and monetary policies. Against this
background, the Governing Council today adopted an ECB Guideline which establishes
certain reporting obligations for the national central banks' domestic asset and liability
management operations and subjects such transactions to the prior approval of the ECB
whenever they exceed a certain amount. A similar ECB Guideline was adopted which
subjects all operations in foreign reserve assets - including gold - which exceed a certain
amount to the approval of the ECB. In addition, the Governing Council adopted an ECB
Guideline according to which any participating Member State's transactions whose foreign
exchange working balances which exceed a certain amount must be notified to the ECB in
advance. A similar arrangement is envisaged between the ECB and the Commission of the
European Communities for all foreign exchange transactions carried out in the context of
implementing the Commission's budget.
In the context of the statutory function of the ESCB to contribute to the smooth
conduct of policies of competent authorities in the field of
banking supervision and financial
stability, the Governing Council discussed the main driving forces that are likely to affect the
EU banking systems in the medium and long term, including the establishment of EMU. The
Council members hold the view that the establishment of EMU is expected to reinforce the
structural tendencies that are already under way in the EU banking systems. These tendencies
include the reduction of excess capacity, pressure on profitability, enhanced competition,
increased internationalisation and geographical diversification. One important aspect is the fact
that EU banks seem to have significantly increased their awareness of the strategic implications
of the introduction of the euro over the past few months. They are devising specific responses
accordingly, which include: (i) improvements in services and procedures; (ii) changes in the
range of products supplied to customers; and (iii) mergers, strategic alliances and cooperation
agreements. We intend to make the outcome of this examination public in due course.
Finally, the Governing Council adopted an ECB Decision concerning
public
access to the documentation and archives of the ECB. This Decision will be published in the
Official Journal of the European Communities.