Local view for "http://purl.org/linkedpolitics/eu/plenary/2004-10-25-Speech-1-055"
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"en.20041025.13.1-055"2
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"Mr President, the ECB's monetary policy operated in a rather uncertain and challenging environment in 2003. In the first half of the year, real GDP growth stagnated amid considerable uncertainty related to geopolitical tensions and turbulence in oil prices and financial markets. Following the easing of economic and geopolitical uncertainties, prospects for economic activity gradually brightened after the summer of 2003. Nevertheless, overall GDP in the euro area increased by only 0.5% in 2003.
The low level of interest rates is also fuelling the growth of credit to the private sector, and we have witnessed continued strong growth in loans for house purchase. Given the strength of M3 growth over the past few years, there is presently substantially more liquidity in the euro area than is needed to finance non-inflationary growth.
I now turn to other aspects we are looking at. A good and credible monetary policy is certainly a necessary condition for sustainable growth and job creation, but not a sufficient condition by itself. Other conditions must be met, in particular sound fiscal policies and appropriate structural reforms. In this respect, in the area of fiscal policy, last year proved disappointing. The average fiscal deficit in the euro area increased from 2.4% to 2.7%. Moreover, the fiscal situation remained of great concern in countries that had already recorded significant imbalances in 2002.
The aggregate euro area fiscal deficit-to-GDP ratio is not expected to improve in 2004 and the average debt-to-GDP ratio is expected to deteriorate further. This is certainly a source of concern. Last year fiscal policies in the EMU faced a number of serious challenges. On 25 November 2003 the EU Council decided not to act on the basis of the Commission's recommendation and agreed to hold the excessive deficit procedure for the countries concerned in abeyance. On the very same day, the Governing Council of the ECB supported the view of the Commission. The Stability and Growth Pact is the cornerstone of EMU. It is key to providing an economic
to a single currency area which has no federal government and to ensuring macro-economic stability on a sustainable basis.
The Governing Council of the ECB is of the opinion that substantial improvements in the Pact's implementation are needed, particularly as regards the preventive arm of the Pact. At the same time, it is not in favour of making changes to the text of the Treaty or of the regulations which form the basis of the Pact, and we insist on the importance of preserving the full integrity of the nominal anchor of 3% in the corrective arm of the Pact.
I would also stress – as has Ecofin – the vital importance of a reliable and timely reporting of government finance statistics, which would not be subject, in any respect, to political interference and electoral cycles. On that particular point we are in full agreement with Ecofin.
On a more positive note, both 2003 and 2004 have seen some progress towards structural reforms in several euro area countries. While implementing these reforms has not always been easy, I am confident that we will be able to see their positive effects in the years ahead. I have said clearly that the ECB is backing governments, parliaments and social partners that have embarked on those necessary reforms in the euro area. We cannot be complacent. In many areas further reforms are needed. The continuing reform process is key to enhancing the euro area's production potential and ensuring future growth and employment opportunities.
The year 2003 was also marked by the final preparations for the enlargement of the European Union by 10 new Member States, with effect from 1 May 2004. As far as the ECB is concerned, the integration of the central banks of the 10 new Member States proceeded smoothly. Important challenges remain for these countries on the road to adopting the euro. Last week, the ECB, like the Commission, published the first Convergence Report dealing with these countries, together with Sweden. The report identifies several priority areas in which individual countries will be required to make further efforts before they can adopt the euro. The picture that emerged varied significantly from country to country, but many share similar challenges with regard to price stability, fiscal sustainability, exchange rate stability and interest rate convergence. In addition, institutional convergence has not yet been achieved in all countries, in particular in the area of central bank independence. I cannot over-emphasise the latter's importance for the successful conduct of monetary policy.
The ECB very much appreciated the favourable comments contained in the European Parliament's draft resolution on the ECB's monetary policy strategy in 2003. We have always strived to demonstrate a strong commitment to achieving our primary objective of price stability. Inflation has remained subdued, despite a sequence of adverse disturbances. I do not want to dwell further on that, but I will stress the challenge of solidly anchoring medium and long-term inflation expectations – of key importance for delivering price stability and for consolidating an exceptionally favourable yield curve, because, on a medium to long-term basis, these inflationary expectations are incorporated in the market rates.
I have noted that on the most important issues the views expressed in the draft resolution are very similar to those held by the ECB. Nevertheless, there are a number of issues where we have slight differences of views. In particular, the draft resolution asks for the publication of the minutes of the Governing Council meetings, whilst it seems to accept implicitly that individual votes of Members would not be made public. We would very much appreciate it if Parliament could accept the argument that the publication of the votes of individual members of the Governing Council could trigger national public debates on whether national central bank governors have taken due account of national interests, whereas the Treaty calls for all of us to focus on the euro area as a whole. Such public discussions would have adverse consequences for the credibility and the effectiveness of the ECB's monetary policy.
As regards the minutes, I stress that the ECB presents and explains its monetary policy decisions by means of comprehensive public statements at its press conferences which take place immediately after Governing Council meetings. By adopting this procedure during 1999, the ECB contributed to improving the global state-of-the-art in central bank transparency and became the first central bank to release a comprehensive diagnosis explaining monetary policy decisions immediately after they are taken. The information conveyed by the ECB this way is, in essence, similar to what other central banks publish in summary minutes, as it reflects properly the overall discussion in the Governing Council. The ECB is the only major central bank which makes possible immediate interaction with the media. These features make the ECB, in our view, one of the most transparent central banks in the world.
Annual HICP inflation slowed down slightly in 2003 to 2.1% on average from 2.3% on average in both 2001 and 2002. The persistence of inflation above 2% was mainly caused by increases in a number of volatile components of the HICP, in particular oil prices, and, in the second half of 2003, food prices. Rises in indirect taxes and administrative prices also added to inflation in 2003. From a medium-term perspective, however, we expect price developments to remain in line with price stability after the progressive elimination of the influence of those volatile components of the HICP.
This expectation resulting from our economic analysis was in line with our monetary analysis. Much of the strength of monetary growth in early 2003 was due to the high level of economic and financial market uncertainty prevailing at that time, which prompted portfolio shifts into safer, short-term liquid assets included in M3. In view of the moderation of medium-term inflationary pressures in the first half of 2003, as was said by Mr Lipietz, the ECB's key interest rates were reduced by 25 basis points in March 2003 and by 50 basis points in June of the same year. Thus, in June 2003, the interest rate on the main refinancing operations reached 2%. Since then, this interest rate has remained unchanged at this historically very low level, whilst the preservation of inflationary expectations in line with our definition of price stability has contributed very significantly to the low level of medium and long-term nominal and real interest rates. The resulting yield curve has delivered a financial environment very significantly supportive to economic recovery.
The economic recovery, which started in the second half of 2003, has continued this year. In terms of year-on-year growth rates, we reached 2% in the second quarter of this year. By and large, output growth in the last 12 months was close to present estimates of potential growth in the euro area.
We expect a continuation of this growth trend in the coming quarters. On the external side, the world economy is currently recording its strongest growth for 30 years. Some moderation is expected next year, but euro area exports should, nevertheless, continue to benefit from favourable global demand conditions in 2005.
On the domestic side, investment should normally benefit from the positive global environment, the very favourable financing conditions in the euro area and the improvements in corporate efficiency. There is scope in the euro area as a whole for a strengthening of private consumption, but naturally some uncertainty as to outlook exists. One of the risks stems from developments in oil markets. If oil prices were to remain high, or even to increase further, they could dampen the strength of the recovery, both inside and outside the euro area, despite the fact that the oil intensity of the euro area is significantly lower than in the 1970s. We also need to keep in mind that part of the oil price increase is due to strong global demand, which was not the case in the first and second oil shocks, but it remains true that the oil price increase constitutes an adverse supply shock for the euro area economy as a whole. For the oil price shock to be absorbed smoothly, the policy mistakes of the past must not be repeated and, in particular, 'second-round' effects must be avoided.
As regards consumer prices, oil-market developments have had a direct impact on the euro area HICP. Following an annual rate of 1.7% in the first quarter of 2004, inflation reached 2.3% in the second quarter and 2.2% in the third quarter.
Inflation rates over the past year have also been driven up by exceptionally strong rises in indirect taxes and administered prices all over the euro area. Nevertheless, looking ahead, the available information does not indicate -– in our eyes – that stronger underlying inflationary pressures are building up domestically as yet. Wage developments have remained moderate since the last quarter of 2003, and this trend should continue. Provided that there are no further significant shocks to prices, annual inflation rates should drop below 2% in the course of 2005.
However, I should stress that, over recent quarters, we have seen several upward risks to the outlook for price stability emerge, and these call for ongoing vigilance. This again relates to oil price developments and possible second-round effects stemming from wage- and price-setting behaviour. Other concerns relate to long-term inflation expectations and also monetary trends. Indeed, the downward trend in annual entry growth since mid-2003 appears to have halted over the summer of this year and the shorter-term dynamics of entry have strengthened. This reflects in part the fact that the historically low level of interest rates in the euro area continues to support monetary expansion."@en1
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