The Governing Council today conducted its regular examination of the outlook for price developments and the risks to price stability in the euro area. Following this review, the Governing Council decided to maintain the interest rate on the main refinancing operations of the Eurosystem at 3.5% and to keep the interest rates on the marginal lending facility and on the deposit facility at 4.5% and 2.5% respectively.
Allow me to give you an overview of the main elements of our assessment of the latest information on monetary, financial market and other economic developments.
Let me start with information in relation to the first pillar of our monetary policy strategy. No new monetary data have been released since the last meeting of the Governing Council, which was held in Madrid on 30 March 2000. The annual growth rate of M3 in February 2000 was 6.2%. This implied a small increase in the three-month moving average of annual M3 growth, to 5.9%, from 5.8% recorded for the three-month period from November 1999 to January 2000. M3 growth thus remained around 1 1/2 percentage points above the reference value of 4 1/2%. The picture of generous liquidity conditions in the euro area is also confirmed by the continued strong annual rate of growth of loans to the private sector, which stood at 10.5% in February.
With regard to economic developments in the euro area, following strong growth of real GDP in the second half of 1999, most recent production and survey data suggest that the economic expansion also remained strong in early 2000. In particular, both consumer and industrial confidence have now reached levels which are close to the highest observed since the mid-1980s. This picture of strong growth of domestic demand supports the favourable outlook for economic growth in the euro area as depicted in recent forecasts. The positive prospects for euro area activity also benefit from the strong cyclical upswing in the world economy, which has become more broadly based across industrial and emerging economies and which is expected to continue in the years to come.
The exchange rate of the euro does not reflect the ongoing improvement in domestic fundamentals in the euro area economy. In nominal effective terms, the euro was around 4% lower in mid-April than at the beginning of the year and approximately 14% below its level in the first quarter of last year. Until reversed, this development will put upward pressure on import prices and will continue to affect the risks for price stability in the euro area.
As I have already noted on previous occasions, the rise in the Harmonised Index of Consumer Prices -LRB- HICP -RRB- which we have observed over recent months stems, to a large extent, from the combined effects of both oil price and exchange rate developments. The annual rate of change in the HICP rose to 2.0% in February 2000, from 1.9% in the previous month. The rate of inflation on producer prices also rose further in February 2000, mainly in connection with rising prices for intermediate goods.
In the course of the past few weeks oil prices have declined. This has been in line with the assumption underlying currently available economic forecasts, namely that the oil price increases which we observed until March will partially unwind in the course of the year. At the same time, it is most likely that the complete upward impact on consumer prices via import and producer prices of the oil price and exchange rate developments in recent months has not yet materialised. Against this background, the possibility can not be ruled out that the figure for annual HICP inflation will slightly exceed 2% in the spring of this year, before falling back to lower levels.
What matters for monetary policy, however, are the trends underlying the outlook for price stability in the medium term. In this context, the Governing Council again stressed the need for the continuation of wage moderation in the euro area. As noted earlier, monetary and credit developments confirm that liquidity in the euro area is ample. Developments in the exchange rate of the euro also remain a cause for concern with regard to future price stability. In the light of the favourable prospects for strong economic growth, the impact of these developments on inflationary pressures will need to be monitored closely.
The Eurosystem will remain vigilant in assessing upside risks to price stability and will take appropriate action if and when required. A forward-looking monetary policy which responds to risks to price stability before they materialise will avoid the need for a costly stabilisation of inflation at a later stage. Such a forward-looking approach is clearly also the best contribution monetary policy can make to ensuring the sustainability of the process of economic growth.
This phase of economic growth in the euro area will offer a great opportunity to make further progress in bringing down the high level of unemployment in the euro area. An important means of achieving this will be continued wage moderation, which, in turn, will also help to contain inflationary pressure. This notwithstanding, as I have stressed repeatedly in the past, the key to achieving a sustainable reduction in the level of unemployment will be structural reforms in the euro area, including a lowering of the tax burden and an improvement in the fiscal expenditure structure. Only when labour markets are more flexible and competitive pressures are high will it be possible to prevent bottlenecks from triggering upward pressures on prices at a relatively early stage of an economic recovery.
Fiscal policy has to play its part in this context. The favourable economic prospects will lead to higher tax revenues. In line with the Stability and Growth Pact, it is not opportune to use these extra revenues for higher spending. Now is the time to speed up fiscal consolidation in order to help to reduce further the debt-to-GDP ratios in the Community and to approach more quickly fiscal budgetary positions in surplus or balance.
Let me now give the floor to the Vice-President to present some of the additional topics discussed today by the Governing Council.
I should like to draw your attention to two items: the first reflects the Eurosystem 's growing involvement in the EU accession process and relates to the Governing Council 's position with regard to the appropriateness of euro-based currency board arrangements -LRB- CBAs -RRB- as a strategy to be used by accession countries with regard to adopting the euro ; the second relates to a further enhancement of the ECB 's transparency policy.
Let me start with the Governing Council 's deliberations on CBAs. We concluded that the appropriateness of CBAs will be assessed on a case-by-case basis. Therefore, the Governing Council neither encourages nor discourages the adoption of euro-based CBAs. In any event, such arrangements can not be regarded as a substitute for two years ' participation in ERM II. Accession countries which have operated a euro-based CBA deemed to be sustainable might not be required to go through a double regime shift in their strategies to adopt the euro. Thus such countries may participate in ERM II with a CBA as a unilateral commitment augmenting the discipline within ERM II. However, it should be clearly understood that a common accord would have to be reached on the central parity against the euro.
With a view to further enhancing the ECB 's transparency policy, the Governing Council has today decided to publish all non-confidential legal instruments governing the relationship between the ECB and the euro area national central banks in the Official Journal of the European Communities. The release of these legal instruments in all 11 official Community languages will give interested members of the public an opportunity to gain first-hand knowledge about the internal operation of the Eurosystem. The members of the Governing Council regard the transparency of the decision-making process as an appropriate means by which to strengthen the democratic nature of the institution and to increase the public 's confidence in its administration. This decision is in line with the general policy towards increased transparency in the decision-making process currently being pursued at the Community level.
Question: How do you interpret the recent wage settlements? Are they, on average, better or worse than what you had expected, and are you worried about divergence in the euro area?
Duisenberg: Let me answer the last question first. We are, generally speaking, not worried about divergencies within the euro area. They are normal and natural. The wage negotiations are still going on in full force. We have only incidental or anecdotal information on the outcome of wage negotiations in the various parts of the European Union. And they sometimes diverge. There are some encouraging signs, particularly here in Germany. There are also signs which give more cause for concern in other areas of the European economy. So, the process is still going on, but - as I said in my Introductory Statement - we can not stop emphasising the high importance of moderate wage settlements, in the interests of the all-encompassing fight against unemployment.
Question: Mr. Vice-President. You have mentioned the EU enlargement process. Have you also discussed any institutional changes that might be required with respect to the decision-making bodies of the ECB? For example: could you imagine a Governing Council consisting of about 30 members?
Noyer: Well, the answer is: no, we have not discussed that. But perhaps the President would like to add something.
Duisenberg: We have not discussed it today, but we have discussed it many times before. And we do not see the need for institutional changes in the organisation of the European System of Central Banks, including the ECB.
Question: Obviously, there is a feeling in some central banks, as we could read in the press in the Netherlands, for instance, that the co-operation between eastern Europe and, let 's say, the euro area is going at too high a speed. On the other hand, it is clear that some other countries would not be able to wait until, let 's say, 2007 and 2006 to get into the euro area. So, what exactly has been discussed in this respect - the speed of, let 's say, coming into the euro" orbit ''. Is there any thought of, let 's say, changing the legislation in connection with Article 109 so that non-member countries, too, could join ERM II? And, if I may, a second short question...
Duisenberg: If you would allow me to answer the first one first. I happen, by chance, to have read what was published in the Dutch newspapers. I would like to emphasise that, in the process of accession, you have to clearly distinguish between, I would say, three phases. First, there is the accession to the European Union. Second, sometimes years later, there will be the required entry into the European exchange rate mechanism. And, third, again years later, there will be the possibility - provided all the convergence criteria, both quantitative and qualitative, have been met - of entry into Monetary Union and also of adopting the euro as their currency. So, all in all, we are talking about a process - I do not want to give the idea that we have a precise figure in mind - but we are talking about a process which, to my mind, will take at least a decade to be fully completed.
Question:... maybe just a short question: do you realise that a lot of citizens in central Europe hold large amounts of Deutsche Mark, which - because they are not certain of what is going to happen in 2002 and for how long they could exchange them into euro - they are now changing into US dollars. And this is a rather...
Duisenberg: Well, I do not have figures on that, but let me give some consolation or some confidence to those outside the euro area who hold private reserves in Deutsche Mark. The fact is that about 30% of the Deutsche Mark in circulation is supposed to be circulating outside Germany. Of that 30% most is circulating in central and eastern Europe. They will have to be swapped for euro banknotes as from 1 January 2002. They will not lose their value for a long time after that. There will be a long period after that in which they can still be exchanged for euro banknotes, but only at the central bank, and no longer in the private sector. So, the exchange with banks in the private sector will be possible for a period of approximately one to two months. Those who are still sitting on German banknotes after that will have to go to the central bank if they want to get rid of them, and change them. And this may take a period - well it differs from country to country - of, say, up to 30 years.
Question: Mr. President, a few days ago the American Vice-President, and maybe the next President of the United States, said that the euro is not going to be any threat for the role of the US dollar until the euro countries have separate fiscal policies, until there is no single fiscal policy in Europe. Do you agree with this statement?
Duisenberg: Well, I have not read the statement, so I can not say that I have understood it. But, because it was the Vice-President who said it, I will ask the Vice-President to answer.
Noyer: I have not read it either, but - as you report it to us - I can hardly understand it. I think this is a completely different topic. I can not understand the relationship you mention.
Duisenberg: I could not agree more.
Question: Mr. President, with regard to the Article 4 Report that came from the IMF or that - at least - was published last week, the majority of the Directors on the Global Board see no danger of inflation. They see very loose output, labour markets, in the euro area. And, therefore, they think there is no real reason at the moment for a tightening of policy and that you should allow output to grow, perhaps not least with a view to the unemployment problem. I wonder if that has had an influence on your decision today. Your rhetoric certainly does not reflect the absence, if you like, of concern about inflation at the present time.
Duisenberg: No, it is true and, if I may take this opportunity, what you are referring to is the recently published World Economic Outlook of the IMF in which it was said - as far as monetary policy in Europe is concerned - that, admittedly, monetary conditions were ample, but - given the economic situation and the likely development of inflation - there seemed to be no need to tighten monetary policy. Let me simply say that we, the Governing Council, do not agree with that assessment.
Question:... and nonetheless you did not tighten it today. Perhaps, there is some suspicion you might have been influenced?
Duisenberg: Well, if that suspicion is there, it is unfounded.
Question: Two questions. What will your message on the euro be at the G7 table this weekend and what do you think about the EU forecasts that were released this week? Are they in line with yours?
Duisenberg: At the G7 table the euro will undoubtedly be one of the topics for discussion, and so will the yen and the US dollar. What I am going to say there is that, indeed, as I have just said in my Introductory Statement, the continuous - let me call it - depressed level of the euro exchange rate puzzles us. It will have an impact if it perseveres, but we are not sure that it will and we do not expect it to persevere. If it perseveres, it will have an impact on inflationary developments in the euro area and, in that way, it will be one of the factors we will be taking into account in future monetary policy decisions. As far as the forecasts that have recently been published by the European Commission are concerned, our analysis has led us to the conclusion that - in general terms - we concur with the contents of the forecasts. We are not entirely sure which hypotheses underlie these forecasts. Let me put it this way: we share the optimism on economic growth, as it has been expressed by the Commission, in that we also believe that growth in 2000 and 2001 will be well in excess of 3%. Whether the high figures that the Commission quotes will materialise gives us some reason for hesitation or doubt. As far as the inflation forecasts are concerned, however, where the Commission expects inflation to average out at 1.8% in 2000 and 2001, we have - as I have just said in my Introductory Statement - now reached a level of 2%. We will not be surprised - on the contrary, to the extent that oil price and exchange rate developments work their way through in the coming months, we do expect, for a brief period in the coming months, that the figure might even slightly exceed that of 2%, before dropping back to 2% or less, so that, on average, we are somewhat less comfortable than the Commission seems to feel.
Question:... so more than 1.8%?
Duisenberg: I will not put it in precise figures, but we regard both the growth forecasts and the inflation forecast of the Commission as being on the optimistic side from an economic point of view. The difference is not very large, but... let me leave it at that judgement.
Question:... by optimistic, you mean a little bit too high on the growth side and maybe a little bit too low on the inflation side?
Duisenberg: That is correct.
Question: Mr. President, against the background of the remarks you have just made on inflation and against the background that you repeated the statement today that we can also find in your Annual Report - namely that the ECB acts with a forward-looking perspective before inflation takes off in order to avoid larger and sharper rate hikes later - against that background, would not today have been the right time to move?
Duisenberg: Well, apparently it was not.
Question: Why not?
Duisenberg: For that - in our assessment - you also have to remember that it was only four weeks ago that we raised interest rates by one quarter of a percent. And that was only four weeks after we had raised interest rates in February. To do so now would not create the impression of a very calm, stable and forward-looking policy. On the other hand, all the indications we have given - and I will repeat them again today - are such that I believe that there can not be any doubt in anybody 's mind as to the direction in which the next move will go.
Question: Mr. Duisenberg, you have just made clear again that there is no doubt about the direction of the policy. So it can be assumed from today 's discussions that it was really only about timing and presentation, rather than about substance or direction of the policy. May I also ask...
Duisenberg: But timing is important. Direction is of course important. Magnitude is important.
Question:... so you discussed timing today?
Duisenberg: We discussed everything, but we did not come to a decision.
Question: Mr. President, in the Annual Report of the ECB the depreciation of the euro against the US dollar was attributed largely to the better than expected performance of the US economy and to differentials in the cyclical outlook for the United States and the euro area. Now it appears from a whole range of forecasts, including those of the IMF and the Commission, that the United States will once again outperform the euro area economy in terms of growth this year. Does this mean, in your view, that there remains a fairly large obstacle in the path of the euro going upwards, because of this continued superior performance of the US economy?
Duisenberg: All forecasts that I am aware of indicate that in the course of this two-year period and, most likely, towards the end of this year or early next year - which is later than expected earlier, I admit - the euro area growth performance will overtake this still remarkably good growth performance of the United States. So, that is linked to the timing of the reversal of exchange rate movements which we expect to happen with virtual certainty. But I am not a prophet and I can not predict precisely when. If I could, I would not tell you. If I knew, I would be rich.
Question: Governor, I would like to have your judgement on the Japanese economy today again. The latest comment from BoJ Governor Hayami shocked the market yesterday by mentioning the future monetary policy change in this year. But, on the other hand, the IMF and the United States are clearly and strongly claiming that Japan should retain the super-low interest rate. How do you judge the Japanese economy and what is your opinion about it?
Duisenberg: It is a small question which would require a big answer - which I am not in a position to give. But there are encouraging signs of a recovery of the Japanese economy finally taking hold after so many years of hesitation. The signs are encouraging. And the words of Governor Hayami, as I know them, and he will undoubtedly repeat them the day after tomorrow at the G7 meeting, I can fully understand and support.
Question: I want to go back to the structural reforms. It is obvious that it has been discussed between the German and French Governments the other day - the need to discuss, with an enlarged EMU, that not all countries can participate in the Governing Council. Would you think that it is inappropriate to have such a discussion on the EMU structure, or is it, so to speak, already prepared for the enlargement? And the second question is: in your Annual Report you repeat this" we must use the upward trend now to have more structural reforms ''. And you repeat this at nearly every press conference. But do you really see signs that there are real structural reforms going on?
Duisenberg: First, on the structure of the organisation and the institutional process: I am not aware of what was discussed because I was not there. I do not know whether, and if, the French and German Governments have discussed this matter. All I can say is that the Governing Council of the ECB, in the context of the Intergovernmental Conference which is currently in progress and which has to be concluded by the end of this year, sees no need to change the decision-making structures of the various bodies of the European System of Central Banks. So we will not take any initiative to that effect. And I doubt whether anybody else would take an initiative to that effect. Well, the second part of your question was on structural reforms. We do see signs of structural reforms in various parts of Economic and Monetary Union. But, then, one has to remember that the structural reforms necessary in the labour markets, in the product markets, in the goods and services markets, in government finance, in social security systems, may - and do - differ from country to country, and from region to region. So, it is not easy, it is even impossible to make a general statement about how these structural reforms are proceeding, but our constant and consistent hammering on the need for structural reforms, the need for greater flexibility in the markets, in particular the labour markets, will continue - from press conference to press conference and from Monthly Bulletin to Monthly Bulletin. And, I did so again today, because it is so necessary. But this should not create the impression that nothing is happening anywhere. Many things are happening, but sometimes at a very slow and - occasionally - at an even disappointingly slow pace.
Question: Mr. President, in your Introductory Statement you said that the euro currently does not reflect the fundamentals and that, if that were not to be rectified, it would cause a problem. Does that imply that you would be willing to act with interest hikes solely on the basis of a weak euro?
Duisenberg: It does not imply that. I can repeat it again: the position, the level of the euro, as it has now been for a rather prolonged period, is a position, which - over time - contributes to the upward risks to price stability. And it is that factor - if those upward risks become stronger or if they do not abate - that would induce monetary policy reactions, not the exchange rate as such. The exchange rate as such is not our target.
Question: So, a sequence of higher import prices would be such a case?
Duisenberg: Well, they contribute to the upward risks to price stability, together with the prolonged period of high oil prices. And it is all these factors, together with a few others, which will ultimately lead to a conclusion.
Question: Mr. President, last year you promised a couple of times that the ECB will publish forecasts this year. Are you going to do this already this spring? And second: what kind of forecast will we see? Will it be a broad and detailed analysis or just some dull figures or numbers or scenarios?
Duisenberg: I promised it this year. So I will not bring it forward to the spring. And I hope to keep my promise that it will be this year. As to the precise form, we are still considering it. It is very important - the form and the degree of detail it will include. And, whenever we come to the publication of forecasts, we do want to supplement it with, you might say, an educational explanation of what forecasts mean and what they can be used for, making clear that they are certainly not the only determinant underlying certain decisions to be taken. We therefore want to apply the laws of relativity also to the publishing of forecasts.