As usual, we conducted our regular examination of recent monetary, financial and economic developments and their implications for a monetary policy aiming to maintain price stability in the medium term. Following this review, the Governing Council decided to leave the ECB interest rates unchanged. Moreover, we exchanged views on achievements so far and the challenges ahead.
Let me briefly report on developments since the last meeting of the Governing Council before turning to our more general assessment. As regards the first pillar of our monetary policy strategy, no new data on monetary developments have become available since 5 October. Turning to the second pillar, oil prices and exchange rates remained two important factors under examination. Before coming down somewhat, oil prices had surged again as markets were concerned about the impact of political tensions in the Middle East. Meanwhile, real GDP growth over the four quarters up to mid-2000 has proved to have been very strong. As mentioned at our last meeting, some uncertainty about short-term growth dynamics stems from oil price developments, as is reflected in survey or confidence data. While these indicators have weakened somewhat in recent months, overall they remain at high levels and underlying forces for continued robust growth remain favourable. This is also reflected in little changed bond market developments.
As foreseen at the time of the Governing Council meeting two weeks ago, energy price developments have had a strong impact on inflation rates ; in September the HICP rate ofinflation rose further to 2.8%, compared with 2.3% in August and 2.4% in July. This development did not come as a surprise and was already taken into account in our considerations on monetary policy action on 5 October.
Overall, latest developments underpin the message we stressed on 5 October, namely that monetary policy continuously needs to ensure that expectations remain firmly anchored in the maintenance of price stability, despite current inflation rates.
In addition to commenting on more recent developments, I should like to take the opportunity offered by this special meeting to make a few remarks on where we stand almost two full years after the start of Monetary Union and where we see the main challenges.
First, the process of monetary policy-making and its implementation has functioned efficiently. Our policy intentions to maintain price stability in the medium term are increasingly well understood by the general public. Second, the euro area economy impressively overcame the negative mood prevailing in early 1999 and has recovered to a state of affairs not seen for more than a decade. Not only has real GDP grown by more than 3 1/2% over the past four quarters, but employment has also increased and unemployment has decreased considerably.
Clearly, the external value of the euro stands in sharp contrast with this very positive picture. The undervaluation of the euro is giving cause for concern that it might have adverse implications for the world economy, including the risk to price stability in the euro area that it entails. Adhering to its mandate and following its forward-looking strategy, however, the Governing Council will ensure that price stability can be maintained over the medium term. The confidence of investors in the internal stability of the euro and the positive outlook for euro area growth are contributing to the attractiveness of investing in the euro area and will support a stronger external value of the euro. Looking forward, there are indeed challenges to be taken up by means of appropriate and determined action, but there are good reasons for remaining confident.
Monetary policy will ensure that risks stemming from import price developments will not translate into more permanent inflationary tendencies, thereby also helping to preserve steady GDP and employment growth in the medium term.
Governments have increasingly come to recognise the benefits of sound public finances and adequate policies over the long term so as not to overburden future generations. However, continued determination is required. While overall budget positions have improved significantly, this has been helped considerably by the relatively low level of interest rates and the strong upturn in growth. These favourable conditions should be used to intensify the process of fiscal consolidation. Governments should demonstrate their commitment to structural budget consolidation by accompanying the forthcoming tax reforms with spending restraint. This would ensure the full benefits of such reforms.
Governments have also acted in the field of product markets in order to make them more competitive to the benefit of consumers. A favourable impact on prices, growth and employment of opening up sectors to competition has become clear with regard to the telecommunications and energy sectors. The challenge is now to further reduce the level of regulation so as to stimulate activities in other sectors of the economy, too.
Governments and social partners have started initiatives to enable labour markets to function more efficiently. The remarkable performance in employment growth in the past few years also reflects an increasing proportion in part-time employment and points to some improvements in labour market flexibility.
Further improvements in labour markets can be supported from many sides. The social partners will play a key role by adhering further to a path of moderate wage increases, in line with price stability, and taking into account both productivity developments and the need to reduce the level of unemployment further. The benefits of such behaviour have already been seen. Moreover, there is a broad consensus that the larger part of the still high level of unemployment is of a structural nature ; this challenge needs to be addressed continuously by policies which remove structural rigidities from the labour markets and which diminish adverse incentives provided by tax, benefit and pension systems. Ongoing structural reform will be particularly important with regard to the changing character of jobs in an economy which needs to be open to rapid advances in new technologies and globalisation.
The Governing Council feels that the first 22 months of Monetary Union have been very successful. It is determined to continue addressing the challenges related to monetary policy and is confident that other policy areas will play their part in the overall policy framework of the Community and the euro area.
Question: Mr. Duisenberg, I will come straight to the subject of the" Times '' interview. I would like to ask you, how would you defend yourself following that interview? Either those comments were indeed a mistake, in which case they were a very, very serious mistake, or you took a deliberate decision to give away the G7 game-plan. I would also like to ask you whether you still consider yourself to be Mr. Euro?
Duisenberg: I do realise that some of my recent remarks - and you are referring to that interview, in particular - gave rise to critical comments and they certainly gave rise to a lot of advice. I have drawn my conclusions and I accept the advice and that is: I am not going to answer any questions related to that recent interview and, insofar as interventions are concerned, any questions related to interventions. I will confirm our well-known policy which is that intervention is a tool available to central banks to be used if and when appropriate.
Question: Mr. President, I understand you do not want to speak about this particular interview. But, given what you have just said about the recent remarks you made, how much damage do you think that the remarks you made have done to your credibility and to the credibility of the Bank?
Duisenberg: I shall stick to my statement. I am not going to comment further on either that interview or the interventions.
Question: The British Prime Minister, Tony Blair, said earlier today that, if he had to make a choice today on joining the euro, his answer would be" no ''. I am interested to hear your comments on Mr. Blair 's comment.
Duisenberg: I have no comments on it, because I do not know the reasoning behind it.
Question: I am just wondering, Mr. Duisenberg, if - in your view - you feel that you are doing a good job?
Duisenberg: The answer is" yes ''.
Question: You said you have received a lot of advice. Did you receive any advice on resigning?
Duisenberg: The answer is" no ''.
Question: I hope that this is of general interest. I was wondering if there was any discussion of the issue of succession at the meeting this morning?
Duisenberg: There was not.
Trichet: Maybe I could just say that the team that we make up, namely the monetary team of seventeen that met under the chairmanship of Wim this morning, is profoundly and unanimously united behind its President.
Question: Mr. Duisenberg, a question. How great is the risk coming from the oil prices and, on the other side, from the stock markets? Do you have some contacts with your partners of the G7? Have we come to a little downward revision of the growth rate and a higher inflation rate, and maybe something like a crash in the asset market? Do you have a risk scenario for this kind of thing?
Duisenberg: The impact of the recent further surge in energy prices leads us to the conclusion that, if they were not to come down quickly, the period during which the actual inflation rates would be over the 2% limit, below which we want them to remain, will be somewhat longer than we anticipated earlier. In addition, the terms-of-trade effects implied in the rise of energy prices will have some impact on dampening the growth prospects for the euro area. But they do not - given the much smaller energy dependence of the euro area economy compared with 20 or 30 years ago - have the impact that would make us change the assessment that we are experiencing, and we are looking forward to experiencing, a period of robust economic growth.
Question: The euro hit a new low yesterday. At what level do you think it is going to become a real problem? And what tools, if not intervention, are available to support the euro? Since that one kind of failed, what would you consider?
Duisenberg: Of course, I can not comment either on the level that there is or that we expect. I can only say that we strongly believe - and in our discussions this morning it was repeated and repeated, and in my introductory statement and also I repeated it - that the euro is undervalued, that there is a misalignment in the currency markets and that there will come a moment at which that will be corrected. As far as the instruments that we have available are concerned, they are the same instruments that we have always had available, namely interest rate policy and interventions. We have them all available, as we have repeated and repeated.
Question: You mentioned that the euro was undervalued, given the fundamentals right now. The economy worldwide is beginning to be a little bit tremulous and we have seen a decline in consumer spending in Europe, a decline in business confidence, and inflation well over the targets. It seems to me that getting overall co-operation for an intervention would be a little bit difficult at this time and I wondered what you are looking at in the medium or long term. Will you wait this out? When do you think you might consider acting and what would be non-inflationary? What kind of move could you make?
Duisenberg: I can not comment on the latter question. On the first question, I would like to correct you. We have indeed seen some decline of both industrial confidence and consumer confidence in the last two months, but not yet in spending. On the contrary, industrial production figures continue to be robust, very high. And we do believe that the recent hesitation in the confidence figures, if I may call it that, has to a very large extent been influenced by the incidents, the blockades on the occasion of the rise in energy prices that many European countries have experienced. We do believe this to be a temporary shock to confidence, the significance of which should not be overstated. We have various indications to confirm the view that we will be in for a prolonged period of robust economic growth.
Question: Mr. Duisenberg, you have promised not to give too much away on interventions. But what measures are you taking to ensure that other policy-makers inside and outside the ECB do not make the same mistake? The second question: you said that some of the indicators were weakening. Are you still saying that we are at cruising altitude or has there been a slowdown? And is reaching cruising altitude or the slowdown something that you would not have expected to occur so early, maybe just a few months ago?
Duisenberg: On the first question, I can not give any further comments. I am still saying we are at cruising altitude. Given our assessments of all the forecasts we have available, both internally and from the outside world - from many, many institutions, both national and international - we do expect economic growth to continue at a rate above 3%, both in this year and next year, perhaps even in the year thereafter.
Question: Would you consider a new rate hike before the end of the year, Mr. Duisenberg?
Duisenberg: What we would consider before the end of the year would depend on the new data that will become available before the end of the year. Still, we do believe that the monetary policy stance that we chose to adopt on 5 October is the appropriate one in the present circumstances.
Question: Would you say that the ECB 's monetary policy is now neutral or even slightly restrictive?
Duisenberg: I would say that, on balance, our monetary policy is still accommodative and is thus no hindrance whatsoever for a further growth of GDP and employment.
Question: Mr. President, it is quite clear that, over the last few months, people - your colleagues in the Eurosystem - have perhaps not been on the same wavelength regarding expectations, the publication of forecasts on growth and inflation matters which your Bank is making. When do you reckon that these data will be released by the ECB?
Duisenberg: I have seen much speculation about that, also in recent days. I can assure you that the Governing Council is working hard on the preparation of the decision whether and, if so, how and when to publish the forecasts.
Question: Having come from Japan myself, I am familiar with the scene of the President of the central bank being criticised in the public and in the media. Taking this opportunity, let me ask you: what is your definition of a good president for the central bank in terms of talkativeness, fairness and friendliness with the market?
Duisenberg: I think the central bank - and this includes its President and its entire leadership, the Governing Council - should, in the end, be judged on the extent to which they have fulfilled their mandate, that is to preserve price stability over the medium term.
Question: Mr. President, you constantly encourage governments to undertake structural reforms. You have said that there was some progress in this respect. Which countries are listening most to you?
Duisenberg: We have - I believe, in one of our last Monthly Bulletin - given an account of structural measures that have been taken here and there and everywhere. They are still not enough, but we do not want to create the impression either that nothing is being done. In many countries, more in some than in others, structural measures to improve the functioning of the labour market are certainly being taken and, in a few countries, this has clearly led to very positive effects in terms of bringing unemployment down and, at the same time, pushing growth up. So, I believe we are being listened to, and governments and social partners can be certain that we will not be silent for a long time.
Question: Two years have to elapse before the end of your mandate, President Duisenberg. If the euro were to fall below 80 euro cents per US dollar, could you envisage drawing the conclusion, that your mandate has been a failure, has not satisfied the markets and would you pass your mandate on to someone else, possibly to Mr. Trichet?
Duisenberg: On that question, as I promised on 31 December 1998, I will give no further comments.
Question: I would like to know if you take all those critical words about your Presidency into consideration. Do you think that some kind of campaign exists against your function?
Duisenberg: I would like to restate that everything I have read over the past couple of days has led me to heed some of the advice which I got from all over the world, through the media, and to draw my own conclusions. And my conclusion, I have made very clear, is that no further comment is to be expected from me either on that interview, or on interventions. I only wish to re-state that interventions remain a tool in our tool-box. And we will fully inform you of their use once they have been used.
Question: Can you tell us if Mr. Fabius expressed his personal support for you at today 's meeting?
Duisenberg: I can not tell you about everything Mr. Fabius said. But the subject was not raised.
Question: Mr. Duisenberg, a while ago you said you wanted to be as predictable as possible. Since that time, there have been a few more surprises. Do you still want to be as predictable as possible?
Duisenberg: Yes, we believe that it is in the interests of a central bank to be transparent, especially for a new institution, and thereby to be as predictable as possible. As I also said at our last press conference, it can not, by definition, always be excluded that there may sometimes be surprises. But our policy is not a policy of surprises. Our policy is a policy of a" steady hand '' working its way towards maintaining our target and that is a rate of inflation of below 2%.
Question: You said earlier that the euro exchange rate was misaligned. I would like to hear your analysis of why this is so. Is it because of capital flows, as we have heard, or is it because of, shall we say, a crisis of confidence in either European governments or the ECB itself?
Duisenberg: Well, let me say that I do not know of any institution, be it the IMF, the OECD, a private economic research institution or a central bank, that has not come to the judgement that the euro, at its current rate, is seriously undervalued. And that means that it is misaligned. We can witness this fact in various indicators, such as the relative balance of payments positions, as well as the capital flows which have taken place. But then I would like to point out, as I said in my introductory statement, that there are first indications that the capital outflows we have witnessed over the past year and a half have already been reversed.
Question: I have one question regarding the actual inflation target that you chose a couple of years ago, 2%. That was pretty arbitrary, you could argue, it could have been 2 1/2%, it could have been maybe a little less than that. The question is: are you envisaging revising this target? Do you have regular meetings about that? And, secondly, do you think under the circumstances, given that the core inflation rate is actually still fairly well-behaved, that there is perhaps not that much reason to respond with further interest rate rises, given that inflation is oriented rather more to the supply side than to the demand side?
Duisenberg: First, we are not at all envisaging a revision of our stated definition of price stability, namely the rate of increase in prices of below 2%. The implication of that definition is that we have to explain why there could be external shocks which temporarily bring the actual rate of inflation to above this figure, which can at times happen and which we have always foreseen could happen. But, having had such an external shock and, I must confess, earlier than foreseen, we do regard this as a temporary phenomenon. We are fully confident that - also taking into account what you said about core inflation, although this is not a concept that we gladly use, but the truth is that, while core inflation has been creeping up somewhat over recent months, it is still well within the range of below 2% and that, in the circumstances, we are having a temporary transgression of actual inflation rates, which may last, as I have said, for some time yet - our monetary policy stance, as we chose it to be on 5 October, after seven successive increases in interest rates, is the appropriate one for the present circumstances.
Question: Mr. President, my question is in the same vein as the previous one. For how many months can the ECB accept a rate of inflation which is closer to 3% than to 2% and at the same time fulfil the mandate of price stability?
Duisenberg: I can not quantify the number of months. We think that it will take rather longer than we anticipated only three months ago, when we already knew that there would be a period in which the actual inflation rate would exceed our 2% maximum limit. But now, given the recent further surge in oil prices, if these prices persist the period will be rather longer than we anticipated only three months ago. However, I can not go any further than that.
Question: Mr. Duisenberg, you said that there are indications that the capital outflows out of Euroland have already been reversed. What are these indications, because in the capital balance there is still an outflow, a net outflow?
Duisenberg: May I ask my colleague Mr. Trichet who has analysed this very, very carefully in order to answer that question.
Trichet: Thank you very much, Wim. I would only mention the fact that foreign direct investment -LRB- FDI -RRB- was - as you have suggested - strongly negative in net terms in 1999, but, according to the present figures, -LRB- although of course we have to remain very cautious -RRB-, there has been a reversal in net flows of FDI since the beginning of this year, so that there is an inflow - a net inflow - of foreign direct investment into the euro area. I think that this is the main indication that something might reverse.
Question: I am sorry, I get my information from the ECB. So I have learnt, I have done my homework, and the ECB has pointed out that the figures for the first part of this year were distorted on account of take-overs of companies and that they were not comparable with earlier periods. So, would you stick to your answer?
Trichet: I shall stick to my answer. Of course, it is absolutely clear that the investment by Vodaphone in Mannesmann is an FDI, which was registered as an FDI from outside the euro area into the euro area. One could say that what happened in 1999 was also a number of investments from the euro area to outside the euro area. So I do not think it would be fair to say that some FDI, whether it is flowing in or out, should be counted, while some should not be counted. So I am only referring myself - and it is absolutely right to say that, it was a remark which we made - I am only referring to the accounting of FDI and it seems to me that it is quite factual. Now, if you study this very, very carefully, you will probably discover that - when you take into account all flows, not only FDI, but also portfolio flows - we are in a slightly better position than before.
Noyer: If I may add, it is more than that. If you take the total of direct investment plus portfolio investment, the change from one year to the other is absolutely dramatic. And this is indeed shown in the figures published by the European Central Bank. You can see that the deficit has been divided by three or four. So there has been a dramatic change in global capital flows, whatever the details of the evaluations may be.
Question: Hopefully this question is of general interest. Can I take it from your comments that perhaps you will no longer be giving interviews to the wider press and that you will restrict your comments to press conferences, following the events of this week, or do you intend to maintain the determination of the Bank to be open and transparent and to be available to the press for interviews such as the one we will not mention?
Duisenberg: We intend to maintain our attitude. It is in our interests to be as open and transparent as we possibly can and are capable of being. And we will use every opportunity to communicate our strategy, our policies and our attitude to the general public, to the European Parliament, to the European Council of Ministers and, most of all, to the general public through speeches, publishing articles, publishing the ECB Monthly Bulletin and, I can assure you, there will also be more interviews in the future.