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, before the committee on economic and monetary affairs of the european parliament, brussels, 1 december 2003. * * * it is my pleasure to appear before your committee for the first time in my capacity as president of the ecb. i would like to tell you that i was very impressed by our last encounter here and i thank your committee and parliament for the confidence expressed by giving your approval to my appointment. i look forward to continuing our regular dialogue in the same fruitful and constructive spirit that was dear to my predecessor wim duisenberg, to whose achievements i wish to again pay tribute on this occasion. i shall begin my first report to you with our assessment of economic and monetary developments, before turning to another issue of topical importance, namely the draft eu constitution. i should like to conclude my statement by briefly addressing the international role of the euro. 1. economic and monetary developments at the time of mr duisenberg ’ s last testimony in september, we noted that economic activity had been very weak in the first half of 2003. at the same time, early signs of a recovery were emerging. since then, data have confirmed our main scenario, which is one of a gradual improvement in economic activity starting in the second half of this year. eurostat has provisionally estimated that quarterly real gdp growth was 0. 4 % in the third quarter of the year. there are, increasingly, reasons to expect the gradual economic recovery in the euro area to broaden and strengthen in the course of 2004. recent data show that the recovery of the world economy is clearly making progress. the expansion of global trade and economic activity should support euro area exports. on the domestic side, recent survey data continue to point towards a further improvement in confidence. the conditions for investment are also improving as a result of firms ’ continued adjustment efforts to enhance productivity and profitability. financing conditions are generally favourable, not least due to the low level of interest rates. finally, terms - of - trade effects stemming from the past appreciation of the euro should also positively affect real disposable income and thus facilitate a pick - up in consumption growth. developments in financial markets are broadly consistent with the overall picture of a gradual resumption of economic growth. as compared with a few months ago, downside risks to the main scenario of a gradual recovery

have clearly receded. overall, the risks to this scenario in the coming quarters now appear to be balanced. over longer horizons, some risks to the sustainability of economic growth at the global level remain. this is due, primarily, to unresolved structural problems, the sustainability of public finances and to external imbalances in some parts of the world economy. as regards prices, the annual rate of hicp inflation declined to 2. 0 % in october, from 2. 2 % in september. looking ahead, inflation rates may not fall as quickly and strongly as was expected at the time of the last testimony of the president of the ecb. we have seen rather strong increases in some categories of food prices owing to the effects of this summer ’ s heatwave. in addition, oil prices have remained higher than expected, owing mainly to ongoing political uncertainties in the middle east. furthermore, in the coming months, planned increases in indirect taxes and administered prices in some euro area countries are likely to have an upward impact on annual inflation rates. however, there are also factors which should continue to dampen inflationary pressures. first, in the context of a gradual economic recovery, wage developments should remain moderate. in addition, the past appreciation of the euro, which is reflected in current subdued price pressures at the producer level, will continue to lower import prices and be passed on to consumer prices over time. at the same time, developments in inflation expectations need to be monitored closely. cross - checking this assessment with our monetary analysis, we see that liquidity in the euro area remains ample following the period of strong monetary growth over the past two years, reflecting past portfolio shifts, precautionary savings and the low level of interest rates. the latter factor also provided a counterweight to the negative impact of weak economic growth on loans to the private sector. in the view of the governing council, the accumulation of excess liquidity should not, at the current juncture, be of concern for price stability, given that, for the time being, the economic recovery is only gradual. however, should high excess liquidity continue to prevail once there is a significant strengthening of economic activity, this could lead to inflationary pressures in the medium term. monetary developments therefore need to be monitored carefully. overall, the governing council of the ecb, at its meeting in november, continued to assess the outlook for price developments as in line with our definition of price stability and considered the current stance of monetary policy