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. * * * 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 4½ % 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 - 2½ % per annum and a trend decline in m3 income velocity of ½ - 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

to react once price stability is already in jeopardy. the eurosystem will continue to pursue this forward - looking strategy in order to maintain an environment of stable prices, which is also conducive to sustained economic growth and job creation in the euro area. i share the analysis of your draft resolution that governments should take advantage of the favourable economic environment in order to step up the efforts directed towards consolidating budgets and reducing public debt and go beyond the objectives laid down in the stability programmes. at the same time, structural reforms in the labour, product and capital markets should be pursued vigorously. the comprehensive implementation of this policy agenda will contribute to subduing inflationary pressures and thereby support the ecb in accomplishing its tasks. in your draft resolution you also briefly address the potential implications of a “ new economy ”. thus, i should like to comment on the possible emergence of a new economy in the euro area. let me start by noting that various definitions of the new economy exist. in my view, the most useful definition is that which characterises the new economy as a phenomenon which increases the growth rate of productivity over an extended period of time. there is some evidence - although not uncontroversial itself - of the emergence of a new economy in the united states. by contrast, it is difficult as yet to find clear evidence of a new economy in the euro area. of course there is a need to monitor developments further, with the emphasis on identifying new economic trends and potential structural breaks in traditional economic relationships as early as possible. in any case, it is important to stress that for the euro area the achievement of more flexible markets is a prerequisite if the potential gains from new technologies are to be realised in the form of substantially higher productivity growth. we recognise that a crucial feature of the potential emergence of a new economy is increased uncertainty. this concerns, in particular, the evolution of the production potential and the reliability of indicators which are derived from it, such as estimates of the output gap. in this respect, the eurosystem ’ s monetary policy framework is well equipped to cope with such uncertainties. it provides the flexibility necessary to address changes in the economic structure with the aim of maintaining price stability over the medium term. by relying on two pillars, the ecb ’ s strategy explicitly acknowledges uncertainty regarding the structure of the economy and the transmission of monetary policy within it. in the context of this discussion, some observers have urged the ecb to keep interest