The Governing Council conducted a comprehensive examination of recent monetary and economic developments in order to assess the prospects for the maintenance of price stability in the euro area over the medium term. It concluded that the information which has become available since the Governing Council meeting of 8 November confirmed our expectations and thereby also the forward-looking decisions taken over the past few months by the Governing Council. Against this background, the Governing Council decided to keep the key ECB interest rates unchanged. The Governing Council continues to consider the current level of key ECB interest rates appropriate.
Starting with the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 rose to 6.8% in the period from August to October 2001. This was significantly above the medium-term reference value for annual M3 growth of 4 1/2%.
We confirmed this value of 4 1/2% today in our annual review of the reference value. This decision was taken on the grounds that the evidence continues to support the medium-term assumptions underlying the derivation of the reference value, namely those for trend potential output growth of 2-2 1/2% per annum and for a trend decline in M3 income velocity of 1/2 -1% per annum in the euro area. We will issue a separate press release today providing further background to the confirmation of the reference value.
In comparing current developments with the reference value we have to keep in mind that the reference value is a medium-term concept. Short-run movements of M3 may stem from a number of temporary factors and do not necessarily have implications for future price developments. For this reason the Governing Council made it clear already in 1998 that the announcement of the reference value does not entail a commitment on the part of the ECB to correct mechanistically deviations of monetary growth from the reference value. Rather, developments of M3 are thoroughly analysed by the ECB, in conjunction with other monetary indicators and information from the second pillar, in order to ascertain their implications for the risks to price stability over the medium term.
The recent strong M3 growth confirmed our previous assessment that, in the phase of relatively high financial market uncertainty after the terrorist attacks on the United States, investors have shifted their portfolios towards liquid and relatively safe short-term assets included in M3. Such shifts should be temporary and should not be seen as indicating future inflationary pressures. This assessment of current monetary developments is also underpinned by the fact that credit growth to the private sector has been continuously falling over recent months. However, we will need to continue analysing developments in M3 closely. Should the current economic and financial market uncertainties subside, any persisting excess liquidity in the economy should be carefully reassessed with respect to whether it signals risks to price stability.
Regarding the second pillar, recent information confirmed our earlier assessment that economic activity in the euro area has been weak in the second half of 2001 and will probably remain so in early 2002. This reflects the lower export demand resulting from the current slowdown in global economic activity and the fact that consumption and investment decisions in the euro area are being adversely affected by the current climate of economic uncertainty. However, the conditions are there for economic growth to improve in the course of 2002. There are no major imbalances in the euro area which would require a lengthy correction process. At the same time, financing conditions are very favourable in the euro area. Furthermore, the recent fall in oil prices and, more generally, the expected further decline in consumer price inflation will lead to higher growth in real disposable income and should thereby support domestic demand. Developments in financial markets over the past few weeks signal a more optimistic assessment by market participants of the economic growth prospects in the euro area. All available forecasts indicate an improvement of the euro area economy in the course of next year.
In the current economic environment we should not expect medium-term upward pressures on inflation. The need to sustain employment growth in an environment of price stability will call for a continuation of the process of wage moderation.
In the coming months, movements in annual inflation rates may be somewhat erratic on account of base effects relating to the relatively volatile pattern of price increases in late 2000 and early 2001. However, annual inflation rates are clearly on a downward trend and, barring any unforeseen volatility in components of the HICP, they should fall to safely below 2% next year.
At the current juncture, it is important that fiscal policies maintain a medium-term orientation in order to support the credibility of the Stability and Growth Pact, thereby strengthening the confidence of consumers and investors. Government budget balances in 2001 are, on average for the euro area as a whole, expected to worsen for the first time since 1993, owing to the macroeconomic slowdown and the lack of expenditure restraint in countries which implemented significant tax cuts. The current slowdown presents a particular challenge for countries which have not yet attained budgetary positions close to balance or in surplus or which have high public debt-to-GDP ratios. Countries without structural fiscal imbalances can contribute to macroeconomic stability by letting automatic stabilisers fully operate. However, there is no case for fiscal activism, as this has often proven ineffective in the past and risks reintroducing imbalances.
A key remaining challenge for the euro area is to strengthen the productive forces in the economy by providing the proper incentives for economic agents. The Governing Council believes that the potential upward impact on trend output growth from structural reforms and technological innovation could be large. However, while some progress has been made in the field of structural reform, significant further steps -- especially in the labour and goods markets -- need to be taken in order to achieve a permanent and significant increase in potential output growth in the euro area. Furthermore, in the fiscal area, governments should pursue determined structural expenditure reforms in order to create room for further tax cuts, and for absorbing the fiscal costs associated with the ageing of populations. Such reforms would enhance the effectiveness of the fiscal environment in supporting employment, investment and economic dynamism.
Finally, let me say a few words on the forthcoming cash changeover. First of all, owing to the careful preparations by both the Eurosystem and the other parties involved in the logistics, the changeover is well on track. I gratefully acknowledge the efforts of all the staff of the Eurosystem as well as of banks, retailers, cash-in-transit companies, the vending machine industry and all others who are working hard to make this changeover a success. In economic terms, we expect the cash changeover to have no noticeable direct effects on the average price level in the euro area. This is largely due to the vigilance of consumers and the strong competition in the retail sector, but also reflects the commitment of governments not to increase the average level of administered prices in the context of the cash changeover. In addition, the effects of the cash changeover on M3 growth should remain very limited. Although we have seen a significant decline in currency in circulation over recent months, currency only represents a small fraction of M3 and a large part of its decline has been reflected in higher holdings of short-term deposits with banks. As regards liquidity in the euro area money market, the Eurosystem 's operational framework will facilitate a successful cash changeover, as it ensures maximum flexibility in the implementation of monetary policy. Lastly, the model chosen by the Eurosystem to debit the banks for the frontloaded euro cash will help to smooth this process: the banks will not be debited on one single date, but rather one-third at a time on the settlement dates of the main refinancing operations on 2, 23 and 30 January. To conclude, we expect this event to run smoothly and look forward to a good start to the relationship between European citizens and their new currency.
Let me now give the floor to the Vice-President, who will inform you about some other issues addressed by the Governing Council.
First, I should like to mention that tomorrow the third seminar with high-ranking officials from the central banks of the EU accession countries will be held in Berlin. The seminar, organised by the ECB in co-operation with the Deutsche Bundesbank, will focus in particular on the structures and functioning of the financial sector in the accession countries. It will be followed by a press conference scheduled to begin at 4 p.m. tomorrow.
Second, the ECB budget for 2002 has been approved. It includes a staff increase of about 3%, which will bring the number of ECB staff members to slightly below 1,150 by the end of 2002.
Third, the Governing Council has adopted Decisions on the issue of euro banknotes and the allocation of monetary income. These two Decisions and a related press release will be published in all 11 official Community languages on the ECB 's website this afternoon.
Finally, as the euro banknotes and coins will become a reality for all citizens of the euro area in less than one month, I should like to invite you to join the ECB for a special event in Frankfurt on the eve of the introduction of the euro banknotes and coins. During the morning of 31 December the President of the ECB will award prizes to the 24 children, two from each euro area country, who are the winners of the" Be a Euro SuperStar '' competition. This competition, which was organised by the ECB and the 12 national central banks of the euro area, attracted more than 300,000 entries.
Question: Mr. Duisenberg, the Italian Prime Minister has suggested that governments should delay the date on which they balance their budgets until beyond 2004. I would like to know how that would affect the overall policy mix in the euro zone if it were implemented. Also, Alan Greenspan has suggested with regard to the weakness of the euro in the perception of investors that there is still greater scope for productivity improvements in the United States, rather than in the euro zone. I would like to know if you agree with that analysis.
Duisenberg: It 's strange that I have to answer questions which are raised by others, but as far as the Italian Prime Minister is concerned I have not seen it. Our position is that countries should strictly adhere to the aims set in their own stability programmes to reach a budget which is in balance or in surplus by 2003 or 2004. That differs per country. That does not mean that countries have no room to let the automatic stabilisers work. It does mean that those countries which are not well advanced in reaching their ultimate goal have less room than others. And in the end we do believe that it is of the greatest importance to enhance confidence among both consumers and investors if governments stick to their medium-term strategy, whatever happens. As far as Alan Greenspan 's analysis is concerned, he points to the fact that structural reforms are much further developed in the United States than in Europe. And that may be one of the causes -- the flexibility of the labour market is greater, mobility is greater -- that may be one of the causes for the euro, let me call it," failing '' to catch up with the dollar so far. I happen to agree with him.
Question: Mr. President, in the last press conference you said that markets should listen more to you than to others. Now, before this meeting they have not heard much from you, while other Council members have spoken. If markets were to assume in the future that if they do not hear from you, then no changes in interest rates are expected, would that be a reasonable assumption?
Duisenberg: No, that would not be a reasonable assumption. Markets have heard enough from me. I have been present in the macroeconomic dialogue, I have been present in the Eurogroup meetings, I have given various speeches. But if, let 's say, my" tone '' does not change, I am convinced that markets will even notice that.
Question: Mr. Duisenberg, the German finance ministry today released data on manufacturing orders for October. Economists had expected an increase, but what we saw was a further decline, the fourth in five months. Now, this is only a set of data from one country in the euro area, even though it is a big one. In contrast to that, we see in the United States that the recovery may actually be quicker than expected. We had consumer spending, construction and manufacturing recovering at a faster pace than was previously expected. Do you think the divergence between these two developments has to do with differing approaches to monetary policy in the two areas? And are you perhaps more confident, now that the United States seems to be recovering faster, that Europe could also recover at a faster pace?
Duisenberg: I have not seen those latest figures. All I am confident of is that we in Europe will see a recovery, be it gradual, in the course of 2002. And that, on average, the economic growth performance of the euro area in 2002, according to our expectations, will exceed the growth performance of the United States when looking at the annual average.
Question: Mr. President, two points. Not only has Mr. Berlusconi said that a revision of the Stability and Growth Pact should be thought about. Also in other countries some political leaders have that in their programme. Are you concerned about it and could you tell us what your exact position on the revision of the Pact itself is? And the second point: could you maybe tell us where you will be on 31 December at midnight and what you may do at that time? Thank you.
Duisenberg: I was very confident earlier this week when I attended the meeting of the Eurogroup finance ministers in which all finance ministers reconfirmed their commitment to adhere to the Stability and Growth Pact. And where I will be on 31 December... I know it, but I prefer to keep that to myself, so that I can celebrate in peace.
Question: My question concerns your monetary stance: Are you now in a position of" wait and see '' and very vigilant with the view on M3 data? My second question is related to the first: Could one say that, if it is really true that the recovery will happen during the next year, the cycle of interest rate reductions might now have reached its end?
Duisenberg: The monetary stance is, I can not but repeat myself, judged to be appropriate for the current outlook in our forward-looking perspective, and that includes the perspective as we see it for next year. We do expect inflation to fall to below 2%, and safely so, and to stay there for a considerable time to come.
Question: Mr. Duisenberg, just one question. I am quite sure that you have also made your projections for further developments as far as inflation and GDP in the euro area are concerned. One could assume that, for next year as well, we will probably underutilise production capacities and grow below trend and that, at the same time, we will be above the reference value. Do n't you think that this is a problem for you in communicating your strategy?
Duisenberg: We have taken note of the forecasts that are being prepared by the staff of the Eurosystem, i.e. the NCBs and the ECB, and those forecasts will be made public in our forthcoming Monthly Bulletin -- I believe, on 14 December -- so that I can not comment now on precisely what the forecast would entail for next year. But one thing I would like to emphasise is that we will enter next year in a position of very low growth. And so, when the forecast for next year is made public, you will see an average figure for the year as a whole. But behind that figure, it is very good to realise that there will be an upswing in the course of the year, although the figure for the year as a whole will look rather low. However, by the end of that year we will be close to an annualised rate of the potential growth rate or output as we see it.
Question: Will there also be an upswing for inflation figures during next year?
Duisenberg: We do n't think so.
Question: Mr. President, in just over three weeks 300 million Europeans will start using euro banknotes and coins with the result that the ECB will also become much more tangible for those Europeans. Does that mean that you will have to explain what the ECB does in a way that is more accessible to the general public?
Duisenberg: We already explain so much and, to my mind, so well that it can hardly be improved upon. One thing which is certain is that the existence of the ECB, the acceptance of the ECB and the credibility of the ECB will certainly be enhanced when people realise that it is the institution which, so to speak, gives them the money in their pockets.
Question: Mr. President, Mr. Noyer has told us what will not happen during the money changeover, and because of the money changeover, in terms of prices. Could you elaborate a little bit? I would like to ask you if you expect any short-term or medium-term benefit in economic terms from the money changeover?
Duisenberg: What we do expect are the effects which we have always emphasised. We already see a far greater transparency of prices across the European Union, i.e. the euro area. We see competition to be intensifying because of the single currency. Prices will be quoted in one currency only, and that all the time. This will have a beneficial effect on consumers. The public also count on permanently low inflation rates, to which our monetary policy contributes as much as it can, and that will become visible.
Question: Yesterday, the German Government -- when adopting its updated stability programme -- asked that structural deficits be taken into account, as well as real deficits. First question: what do you think about this? Are you not concerned that one of the euro area countries will go beyond the 3% public deficit level next year. And the third question, perhaps for Mr. Noyer: from 17 December it will be possible for some Europeans to buy euro coins which could already be used in vending machines before 1 January. Are you afraid that this will be a widespread phenomenon? What can you do to prevent this illegal use of coins before 1 January?
Duisenberg: With regard to the first question, we do not expect the euro area -- either in aggregate or even individual countries -- to exceed the 3% deficit limit. You can also see that, for instance, in the forecasts which were recently published by the European Commission, which we do not quarrel with.
Noyer: On the coins, the principle is clear and I do not think that there will be many incidents. We are aware that there may -- by chance or accident -- be a few vending machines that may have been equipped to accept euro coins a little earlier than 1 January. If they were eventually to be used by consumers, that should remain anecdotal and would not mean that the euro coins would circulate. They would just be trapped by the vending machines and kept there. So we do not see that as a problem because it should remain anecdotal and would not entail any real circulation of the coins. Of course, we constantly remind retailers, via the banks who sub-frontload them with cash, that they should not -- and must not -- make use of that cash and put it into circulation beforehand. But I do not think that what you have described is a major issue.
Question: With November HICP coming in at a preliminary 2.1%, do you see a good chance of inflation falling below that 2% figure by the end of this year and would that give you more margin for manoeuvre?
Duisenberg: Judging from the base effects that I have talked about, I still expect inflation to fall below 2% rather early next year, but I can not put a precise date on it. This year, however, seems highly unlikely to me.
Question: I have three questions. Do you see any sign of an upturn in the present slowdown and if so, when? Just a small question on inflation again: inflation is apparently coming down much quicker than we thought and many analysts are already seeing a danger of deflation. Are you also seeing it? And then on the budget: in the present situation, do you advise further cuts in expenditure to stick to the Stability and Growth Pact?
Duisenberg: I said that we expect economic developments to pick up in the course of next year. I can be somewhat more precise: I would expect the upturn in the course of the first half of next year. I see no danger of deflation and, contrary to what you are suggesting, inflation is not falling faster than we expect it to. Month after month, it has been virtually precisely in line with what we expect. On the budget, there are 12 budgets that we have to judge, so I can not give a general answer.
Question: Just one last question. What are the obstacles to cutting rates today?
Duisenberg: There is only one obstacle: we judge our monetary policy stance to be appropriate in the light of what we foresee for the medium-term future, and that is the obstacle. If you have an appropriate monetary policy stance, why should you even consider changing it?