As usual, we examined recent monetary, financial and economic developments. The Governing Council concluded that recent developments are in line with the interest rate decisions taken in the course of last year. We have therefore decided to keep the key ECB interest rates unchanged. We also confirmed that the current level of key ECB interest rates remains appropriate for the maintenance of price stability over the medium term.
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 7.4% in the period from September to November 2001, from 6.7% in the period from August to October. These high levels of the growth rate of M3 over the past few months reflect a particularly marked preference for liquid holdings by euro area investors in an economic and financial environment characterised by exceptionally high uncertainty worldwide. However, this should remain a temporary phenomenon which does not indicate future inflationary pressures. This judgement notwithstanding, the continued acceleration of M3 and the ongoing process of building up liquidity will require a thorough analysis of monetary developments in the months to come.
Regarding the second pillar, recent information has confirmed our earlier assessment that economic activity in the euro area was weak in the second half of 2001 and will probably remain so in early 2002. However, there are signs which point to a gradual recovery in the course of this year, as reflected, for example, in financial market developments or in recent survey data which indicate that the decline in confidence may have bottomed out. There are no fundamental imbalances which would require a longer correction process, and the general positive conditions for an improvement in economic activity remain in place. Financing conditions, in particular, are very favourable, and the expected further decline in consumer price inflation will lead to higher growth in real disposable income which should support domestic demand. All in all, available data remain in line with a recovery of the euro area economy this year, while the timing and strength of this upturn remain uncertain. Continued close monitoring of further incoming information is thus warranted.
In the current economic environment we do not expect medium-term upward pressures on inflation. However, as has been stated several times in the past, annual inflation rates for the months to come may be somewhat erratic on account of base effects as a consequence of the unwinding of past increases in energy prices and, albeit to a lesser extent, in food prices. In this connection, the possibility of some short-lived upward movements in the annual rate of inflation can not be ruled out, but this should not be a cause for concern. Likewise, downward shifts resulting from such base effects later in the spring should not signal a change in the longer-term outlook for price stability. As regards the cash changeover, we do not expect any noticeable effect on the price level, largely due to strong competition in the retail sector, continued awareness on the part of consumers and the commitment of governments not to increase the average level of administered prices ; however, we will of course remain vigilant.
Beyond short-term developments, we expect that wage moderation in the euro area will continue and that demand pressure on prices will remain subdued, although there are some grounds for concern about forthcoming wage negotiations. It is therefore particularly important to point to the indispensable role of continued wage moderation in fostering employment and maintaining a favourable outlook for price stability. On the basis of current information, annual inflation rates should fall safely below 2% this year and thereafter remain at levels consistent with price stability over the foreseeable future. Any factor which might alter this assessment in either direction will be carefully examined.
Let me also stress today how important it is for fiscal policies to maintain a medium-term orientation within the framework of the Stability and Growth Pact. The current weakness in economic growth undoubtedly presents a particular challenge for those countries which have not yet attained budgetary positions close to balance or in surplus or which have high public debt-to-GDP ratios. However, rather than being detrimental to a return to sustainable economic growth, their adherence to their medium-term objectives will strengthen consumer and investor confidence. Countries without fiscal imbalances can, of course, allow automatic stabilisers to operate fully. That said, however, there is no case for fiscal activism.
Finally, I should like to reiterate our views on structural reform -- particularly following the successful introduction of the euro banknotes and coins. The key challenge for the euro area, now more than ever, is to continue to strengthen the forces of production and expand the trend output growth of the economy in a decisive manner. This will require a deepening of structural reform in the labour and goods markets, as well as technological innovation. Likewise, governments should pursue determined reforms with regard to the size and structure of public expenditure and revenue, also in order to create room for further tax cuts and to absorb the fiscal costs of population ageing. Together with continued wage moderation aimed at sustaining recent labour market gains, these reforms will foster employment and investment.
With the ECB pursuing its primary objective of price stability, with governments willing to foster structural reforms and conduct stability-oriented fiscal policies, and with wage developments consistent with job creation and price stability, the euro -- which is now also available in the form of banknotes and coins -- will represent an economic area characterised by macroeconomic stability and economic dynamism.
Question: Dr. Duisenberg, on structural reform, when you talk to economists about the euro 's exchange rate weakness with the dollar, some of them do n't point to anything to do with the currency per se but talk about the lack of structural reform, particularly in labour markets and particularly in Germany, for a factor which keeps the exchange rate down long term. What is your opinion on the matter and your opinion on the state of structural reforms, the amount of progress, or the lack thereof?
Duisenberg: There has been some progress with structural reform. It is certainly not the case that nothing has been done in the past couple of years, but it is certainly not enough. And it has to be continued with force, we hope, and that is also everything that the governments are working towards, especially the Spanish presidency, ahead of the European summit in Barcelona this year. As far as the causes are concerned, the analysis you just gave was recently also given by Mr. Greenspan, who also ascribed the lack of movement in the exchange rate to the far lower degree of flexibility in the economy of Europe as compared with the United States and, as usual, I happen to agree with him.
Question: Mr. President, you have said many times, and also very recently, that you are expecting an appreciation of the euro. Would you say that the changeover, or yesterday, is a turning-point for the currency?
Duisenberg: I will not speculate further. I am here to fight speculation rather than to add to it. But certainly the movement of the past couple of days was, well, to say the least, gratifying to see.
Question: Mr. Duisenberg, you have told us several times already that whenever there was an intervention by the ECB in the currency market, you would tell us. So, could you tell us something today on this issue?
Duisenberg: I have also learnt never to talk again about intervention until after the event. So I wo n't do that today either.
Question: A question to you, Mr. President, and to the Vice-President also if he maybe has something to add to the question. Do you expect a wider use of the euro as a reserve currency of central banks outside the euro zone as a denomination for bonds, especially corporate ones, or do you think it is possible that all will be paid in euro instead of dollars one day and, if so, when?
Duisenberg: The last parts of the question will undoubtedly be answered by Mr. Noyer. The use of the euro as an international reserve currency is increasing, but very slowly. And it was expected to be very slow, but increasingly we are getting signals that countries, especially central banks of countries, are beginning to realise the possibilities they now have to diversify their reserve holdings. But it is not something we are aiming for, we will just let it happen. But it is happening, and the fact that, for example, in the recent experiences of the cash changeover, we have frontloaded to more than 20 non-euro area central banks sizeable sums, billions and billions worth of euro banknotes, is already an indication of this. The fact also that in the eastern hemisphere, where we are, more than 50 countries, in one way or the other, link their currency or align their currency to the euro is also a telling aspect of the phenomenon. But I do n't want to ask Mr. Noyer to speculate about the" when '', precisely if I assume he knows as much as I do.
Noyer: Certainly, I do not know more than you do. But I can just confirm that this move that we expect is not an objective per se, but that what we expect to happen will probably take place in all fields. We have seen that already in the field of the debt market, where euro issues are now broadly comparable with issues in US dollars. We have seen slow shifts in the portfolio managed by international managers, both in the debt instruments and equity, around, let 's say, one-quarter of internationally managed portfolio now. There is a clear consolidation, as the President just mentioned, in terms of using the euro as a reference currency, for pegging, as a central element of a basket, etc.. In the field of official foreign exchange reserves, that develops very slowly. Of course, the figures are difficult to interpret because very often the comparison which is given is between the figures of official reserves of the European currencies before 1 January 1999 and after. And before 1 January 1999, all European central banks -- euro area central banks, I mean -- had European currencies in their foreign exchange reserves. And then the Deutsche Mark or the Dutch guilders or French francs disappeared to become internal currencies. So that in terms of the word" reserves '', the share of the dollar increased simply because the European currencies disappeared from the European reserves, and of course this blurs the view of developments. But I was in Beijing myself on the day the Vice-Governor of the central bank of China, the People 's Bank of China, announced that they had decided to increase their reserves in euro. I think that is a movement that is quite natural given the importance of the euro area in terms of world trade. But that will happen if and when the countries and central banks deem it appropriate. I am personally sure that it will develop, perhaps slowly, we will see. And for your final question on invoices and settlements, well, we will see. It took decades for the US dollar to overcome the importance of the pound sterling, long after the US economy had become much more important than the British economy. That is something that simply takes a very long time to develop.
Question: The first question I have is about consumption. What does the whole changeover mean for the consumer, for consumption in the euro zone? Is there any evidence, even anecdotal, that there will be a boost in consumption maybe because things have gone so smoothly? The other question I have is, you said that factors affecting prices in either direction will be examined and I wondered what that statement meant in terms of the balance of risks to price stability, where they stand. Does that mean that they are neutral and if not neutral, then in which direction?
Duisenberg: To take the last question first, I would think that they were neutral and we do regard the current monetary policy stance as appropriate for the foreseeable future, which is the same thing again.
Duisenberg: Consumer behaviour, we only have anecdotal evidence, but the anecdotal evidence we have is that the time up until the cash changeover or up until Christmas was a very good time for the retail sector.
Question: Generally, could you say that consumption will get a boost because of this euro changeover just within the last few days?
Duisenberg: I would not see a direct link there. I would see much more the link between the falling of the inflation, thereby the boost to real purchasing power which will make consumption one of the driving forces in the upturn, be it a slow upturn of the European economy.
Question: You have said that the economy of the euro countries is expected to revive sometime this year. We have had some mild evidence now that recovery may be on the way if we look at Ifo, the PMIs yesterday were n't probably as bad as some people had expected. Can you give us an idea about whether you think these mild pieces of evidence are in line with your expectations or better than your expectations or worse than your expectations?
Duisenberg: These pieces of evidence you just mentioned are better than my expectations. We expect a recovery to get under way in the course of this year. But we are still very uncertain about the precise timing and we also think that it will be a very gradual process, as I said in my introduction. Contrary to what you seem to indicate, we expect the first quarter of this year, in which we now are, to be pretty much the same as the last two quarters of last year.
Question: You said that there is some concern for wage negotiations this year. Could you be a little bit more specific about which wage negotiations, what country, what sector?
Duisenberg: No, I do not want to point to individual trade unions, however large they may be. But there is some concern.
Question: Mr. Duisenberg, you predicted throughout much of last year that falling inflation, lower energy prices would boost domestic demand, consumption and so on, and you suggested last month to the European Parliament that you expect the recovery to be domestically led. My question is, how confident are you of this, that the rebound is going to be domestically led, are you confident that it is not going to fail this year the way it failed last year? And, secondly, is the gradual recovery in the euro zone, as you have just said, is that satisfactory?
Duisenberg: Well, it is a fact, be it satisfactory or not, but I said that last year would relate to what will be happening this year, so I have not been disappointed so far. How confident am I? I would like to say: pretty confident, but there is a risk and that is that we are quite uncertain about the external developments, in particular in the United States. There is simply uncertainty around and that does put a downward risk on my confidence.
Question: President Duisenberg, you addressed the many structural reforms which are necessary, and as you said we are talking down to earth, let me ask you a question. What does it mean to you that the euro is the only currency without a government and since the Maastricht Treaty European integration has not been intensified?
Duisenberg: We have developed in Europe a structure of a dialogue between the monetary authorities and the fiscal and economic policy authorities through our dialogue in the Eurogroup, in the ECOFIN, through the presence of -- like you have seen today -- the President of ECOFIN in the meetings of the Governing Council which, given the circumstances, is -- I am inclined to say -- a very good substitute for having one government.
Question: I would like to refer again to the exchange market and the rate of the euro. Where do you see the difference to when the euro was introduced in 1999 to the physical introduction now?
Duisenberg: Well, really there are similarities to when the euro was created on 1 January 1999. That moment was preceded by an upward move of the exchange rate which maybe was somewhat overstating and it has proven to be somewhat overstating the" europhoria '' that governed at that time. So it was no surprise at all that soon after the creation of the euro, it came down again. And that is where the similarities stop because I would be surprised if we saw a similar movement now. And what has happened to the exchange rate in the last couple of days, it is only a couple of days, but at least it is going in the direction which we always have said that the euro had the potential for, namely to appreciate.