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, Brussels,
22 September 2004.
* * *
Je vous remercie, Madame la Présidente, de votre accueil. Ceci étant ma première audition devant
votre commission dans sa nouvelle composition, permettez-moi de souligner que je partage
entièrement votre désir de continuer les relations étroites et fructueuses que nos institutions ont
développées au cours des dernières années. Je me réjouis à la perspective de poursuivre notre
dialogue dans cet esprit franc et coopératif, sachant combien cela est essentiel pour le bon
fonctionnement de l'Union Economique et Monétaire.
Ich möchte diese Gelegenheit auch nutzen, um der langjährigen Vorsitzenden dieses Ausschusses
und seines Vorgängergremiums, des Unterausschusses für Währungsfragen, Frau Randzio-Plath,
nochmals herzlich für die ausgezeichnete Zusammenarbeit während der vergangenen Jahre zu
danken.
Madam Chairman, honourable Committee Members, in my testimony today I will provide you with the
ECB's assessment of current economic and monetary developments. I will then address a number of
other issues of topical importance, namely fiscal policy, the implementation of structural reforms and,
finally, issues related to euro banknotes.
Economic and monetary developments
At the time of my last appearance before this Committee in April, I foresaw that annual inflation rates
would edge up temporarily to above 2%, mainly on account of oil price developments and increases in
indirect taxes. At the same time, I stated that we expected the economic recovery which had started in
the second half of 2003 to continue, albeit at a gradual pace. In this light, I assessed that the outlook
for price developments over the medium term remained consistent with price stability. Against this
background, the Governing Council had left the key ECB interest rates unchanged at their historically
low level of 2.0% since June 2003.
The data that have become available over the past few months in fact confirm the outlook I gave in
April. They indicate that the economic recovery in the euro area has maintained its momentum. In the
second quarter of 2004, real GDP grew at a rate of 0.5% relative to the previous quarter, after 0.6% in
the first quarter. The conditions for a continuation of the economic recovery remain in place. On the
external side, global demand remains robust, notwithstanding temporary fluctuations, contributing to
euro area export growth. On the domestic side, higher corporate profitability and favourable financing
conditions should support business investment. In particular, the level of interest rates is very low by
historical standards, in both nominal and real terms. Private consumption should also be sustained by
growth in real disposable income and, with some time lag, by an improvement in the labour market.
Against this background, we expect the present gradual recovery to continue in the coming quarters
and to become more broadly based, leading to a somewhat stronger upswing in the course of 2005.
This picture is consistent with the most recent ECB/Eurosystem staff economic projections which, as
you may be aware, are now published on a quarterly basis. The last projections, published on
2 September, envisage that euro area real GDP growth will recover from 0.5% in 2003 to between
1.6% and 2.2% on average in 2004, and will be slightly higher, between 1.8% and 2.8%, in 2005. I
should add that forecasts from international organisations and other sources convey a broadly similar
picture.
While this outlook for economic activity is surrounded by some uncertainty, overall the risks appear to
be broadly balanced. On the upside, the momentum of the recovery, which was stronger in the first
half of 2004 than was anticipated earlier in the year, may imply a positive stimulus in the coming
quarters. On the downside, there are still concerns about continuing economic imbalances in other
parts of the world which could affect the sustainability of the economic recovery, at both the global and
euro area levels. In addition, if oil prices were to reach higher levels than currently expected by
markets, this could dampen somewhat both foreign and domestic demand, even if the recent rise in oil
prices cannot, by any mean, be compared with the historical first and second oil shocks of the 70s and
the beginning of the 80s.
Regarding the outlook for inflation, recent oil price developments, together with increases in indirect
taxes, have pushed inflation rates in the euro area to levels somewhat higher than 2% over recent
months. Nonetheless, there is little evidence as yet of stronger underlying inflationary pressures
building up domestically. In particular, wage developments should remain moderate. Against this
background, the ECB staff projections put average annual HICP inflation at between 2.1% and 2.3%
for 2004 and between 1.3% and 2.3% for 2005. These projections are broadly consistent with other
recently released forecasts. However, several upward risks to the outlook for inflation exist. Concerns
relate in particular to oil price developments, which pose a potential risk of second-round effects
emerging in wage and price-setting. Further risks relate to the future evolution of indirect taxes and
administered prices.
Cross-checking the economic analysis with the monetary analysis also supports the case for strong
vigilance with regard to the materialisation of risks to price stability. The prevailing low level of interest
rates is fuelling monetary and credit growth. While M3 growth has been moderating since the summer
of 2003 as a result of a normalisation of portfolio allocation behaviour (following the easing of the
exceptional economic and financial uncertainty which had prevailed previously), it remains resilient
and is increasingly driven by developments in its most liquid components. Given the strength of
M3 growth over the past few years, there remains substantially more liquidity in the euro area than is
needed to finance non-inflationary growth. As a consequence, inflationary risks could rise. In addition,
high excess liquidity and strong credit growth could become a source of strong asset price increases.
Overall, while the prospects for price developments remain in line with price stability over the medium
term, upside risks to price stability have emerged. The Governing Council will remain vigilant with
regard to all developments which could imply risks to price stability over the medium term. The
markets and the general public should rest assured that price stability will be maintained over the
medium term.
As regards fiscal policy, the latest budgetary notifications provide a mixed picture of public finance
developments. The euro area deficit is expected to increase slightly. While some countries maintain
sound budgetary positions, a significant proportion of the euro area countries are expected to have
deficits near or above 3% of GDP. A majority of these countries are likely to miss the original
budgetary targets set in their stability programmes. Euro area public debt is projected to increase
further. With a few exceptions, public debt will remain largely unchanged or increase in countries with
larger fiscal imbalances.
Although the period of significant further increases in public deficits seems to be coming to an end,
important challenges for the consolidation of public finances are to be faced. Member States should
use the improvement in the macroeconomic environment for renewed consolidation so as to comply
with their commitments under the Stability and Growth Pact. Clearly, this would add credibility to the
European fiscal framework and create confidence in the sustainability of public finances, thereby
reinforcing confidence in the overall economic outlook. As recently stated by the ECOFIN Council,
budgetary policies need to set the right priorities towards structural reform, innovation and
competitiveness in support of the Lisbon agenda to promote economic growth and employment
creation. Fiscal consolidations should be designed to form an integral part of such a comprehensive
reform strategy.
As regards the European fiscal framework, the Governing Council is convinced that, whilst substantial
improvements in the implementation of the Stability and Growth Pact are welcome, there is no need
for changes to the text of the Treaty and of the Pact itself, namely the regulations concerned. The Pact
is a very important and pertinent framework for dealing with countries' fiscal developments on a level
playing-field, particularly within the single currency area. At the same time, we consider that
improvements could be introduced in its implementation. There seems to be some common ground on
elements to improve the implementation of the preventive arm, and the need for a stronger focus on
public debt and sustainability. As regards the corrective arm of the Pact, the ECB's main message is
that the nominal anchor of the framework, namely the 3% deficit-to-GDP reference value should not be
undermined. Therefore, proposals that would allow for a loosening of the excessive deficit procedure,
such as suggestions put forward with regard to the definition of exceptional circumstances and the
time frame for the correction of excessive deficits, and proposals to introduce country-specific
elements are not contributing to the solidity and soundness of EMU in our view.
A sound monetary policy and a stable macroeconomic framework are necessary for sustainable
economic growth in the euro area. But this alone is not sufficient. The implementation of well-designed
structural reforms in labour, product and capital markets is of the utmost importance for the euro area
at the current juncture. The economic recovery would be stronger and more sustained if ambitious,
well-designed structural reforms were to be implemented that improve the microeconomic
fundamentals of the euro area and its resilience to adverse domestic and global economic
developments. In this respect, a convincing commitment to the implementation of structural reforms
and a successful communication of their economic benefits to the general public is crucial for raising
consumer confidence and, ultimately, growth and employment. We are aware of the fact that structural
reforms normally take time to show up in improved economic outcomes, which often makes it
politically difficult to implement such reforms. Against this background we very much welcome the
positive steps undertaken over recent months by several governments and Parliaments in the euro
area and we strongly encourage them to continue and intensify these efforts.
Issues related to euro banknotes
Let me now highlight a few issues related to the experience with euro banknotes during the first couple
of years. Since the introduction of the euro banknotes and coins on 1 January 2002, circulation has
steadily increased. Indeed, by end-August 2004 some 9 billion banknotes with a value of
EUR 460 billion were in circulation, an increase of 10% in terms of volume and 18% in terms of value
compared with circulation one year earlier.
As regards the quality of banknotes, the Eurosystem closely monitors the banknotes in circulation and
takes the appropriate measures to refresh the cash cycle, when needed. At the same time, the ECB is
currently examining ways to enhance the durability of banknotes.
Moreover, to avoid shortages of certain denominations within the euro area which may occur in the
event of strong cross-border flows of banknotes, the Eurosystem has set up a cross-euro area stock
management scheme. This system greatly enhances efficiency in the use of banknote stocks, since
shortages in one country can be compensated for by excess stocks in another country.
Turning to the issue of combating counterfeiting, the rate of counterfeiting has been relatively stable
during the past 12 months, with around 50,000 to 55,000 counterfeit banknotes per month withdrawn
from circulation. Assessing this number against the number of genuine banknotes in circulation
(approximately 9 billion), the population of the euro area countries (more than 300 million) and the
number of cash transactions involving banknotes (estimated to be approximately 120 billion per year),
the initial years of experience with euro banknotes have proven that European citizens can remain
confident in the security of their money. That being said, to improve even more the efficiency of the
fight against counterfeiting, the Eurosystem has recently issued updated communication material on
the security features, which should help cash users to spot counterfeits. However, there is no room for
any complacency.
Cooperation in this domain is constantly being improved. In this context, a steering group comprising
representatives from the ECB, the Commission and Europol was established to ensure the exchange
of information and the coordination of activities in the field of combating counterfeiting at the EU level.
At the same time, the international dimension of combating counterfeiting has gained increased
importance. To take account of this development, the ECB concluded a bilateral agreement with
Interpol - as was already done with Europol - which focuses in particular on the exchange of
information and assistance in training and education exercises. Moreover, the ECB cooperates at the
technical level with central banks or law enforcement authorities in key countries outside the euro area
where euro banknotes are circulating. In addition, bilateral cooperation agreements on combating euro
counterfeiting have recently been concluded with the Bulgarian National Bank and the National Bank
of Ukraine.
I am now ready to answer your questions.