First of all, we were pleased to see that the euro cash changeover went so smoothly -- more smoothly in fact than we could have hoped. The European public very quickly became familiar with the new banknotes and coins, as is shown by the fact that national banknotes were largely withdrawn well before the final deadline of their ceasing to be legal tender. The Governing Council wishes to express its gratitude once more to all those who helped to make the euro cash changeover such a success.
As usual, at today 's meeting we examined recent monetary, financial and economic developments. The Governing Council concluded that the information which had become available in recent weeks confirmed that the current level of key ECB interest rates remains appropriate for the maintenance of price stability over the medium term. Against this background, the Governing Council decided to leave the key ECB interest rates unchanged.
Starting with the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 stood at 8.0% in the period from November 2001 to January 2002, compared with 7.8% in the period from October to December 2001. The high level of the annual growth rates of M3 is very much related to portfolio shifts to liquid positions, most of which occurred in the autumn of 2001 in an economic and financial environment characterised by high uncertainty. While many investors still seemed to be" parking '' some of their assets in M3 in early 2002, some moderation in the short-term dynamics of M3 could be observed around the turn of the year.
The Governing Council continues to hold the view that the information from the first pillar thus far does not indicate risks to price stability, as the portfolio reallocations which drove M3 growth in 2001 should remain temporary. In addition, the slowdown in the rate of growth of loans to the private sector has been continuing over the past few months. However, we will need to analyse monetary developments closely in the coming months.
As regards the second pillar, there are further signs that the trough in economic activity may have been reached at the end of last year. Coincident and forward-looking indicators increasingly point to improvements in economic conditions. A similar picture is reflected in financial market expectations, especially those embedded in bond yields.
The economic fundamentals of the euro area are sound and there are no major imbalances that would require a lengthy process of adjustment. The expectation of a recovery in the euro area in 2002 is furthermore supported by favourable financing conditions and by real disposable income benefiting from past and expected future declines in inflation. There is also increasing confirmation that economic activity outside the euro area is picking up, which should lead to a gradual strengthening of the external demand for euro area products and services. While the strength of the recovery remains uncertain, there are good reasons to expect a return of economic growth to levels in line with potential towards the end of the year.
Turning to short-term price developments, annual consumer price inflation picked up substantially in January. Part of this increase was expected, as it related to base effects stemming from falling energy prices in early 2001 and to higher indirect taxes in some euro area countries. Furthermore, the increase reflected a considerable rise in unprocessed food prices due to adverse weather conditions in parts of Europe. Part of the latter effect seems to have been reversed in the meantime, as preliminary data for February indicate. Some increases have also been observed in oil prices and in the rate of growth of services prices in January. While there might have been an impact on specific service categories in January, overall there is no evidence that the euro cash changeover has had a significant upward effect on the average price level in the euro area or that the declining trend in annual inflation rates has been affected recently.
In the coming months, the effects of past increases in energy and food prices should gradually subside and annual inflation rates should fall to below 2%. The recent behaviour of producer prices also points in this direction. Beyond that horizon, we expect little upward pressure on prices from aggregate demand and, barring unforeseen developments, inflation rates to be in line with price stability.
However, the current favourable outlook for inflation fundamentally rests on the assumption of a continuation of wage moderation. As I already noted last month, there is some cause for concern with regard to ongoing wage negotiations. A continuation of wage moderation in the euro area is crucial not only to foster employment growth but also to support monetary policy in its task to maintain price stability.
With regard to fiscal policy in the euro area, the Governing Council welcomes the reaffirmed commitments of the governments of euro area countries with fiscal imbalances to adhere to the objective of achieving balanced budgets by 2003-2004. The confirmation of the political will to continue along the path of fiscal consolidation is most appropriate. The Governing Council supports the actions taken by the European Commission in the context of the Stability and Growth Pact and the subsequent outcome of the ECOFIN Council meeting last month. It is now necessary to remain vigilant in order to ensure strict adherence to the medium-term plans and rigorous implementation of the procedures of the Stability and Growth Pact.
In order to further improve the fundamentals of the euro area and to put the expected recovery on a broad and sustainable basis, euro area countries must strengthen their efforts to implement comprehensive structural reforms. Over the past few years progress has been made with regard to enhancing the flexibility of euro area product and capital markets. Euro area countries have also made some headway in terms of improving the way their labour markets operate. These reforms, together with moderate wage developments, have contributed to the strong employment growth and the considerable reduction in unemployment witnessed in many euro area countries in the last cyclical upswing. However, it is worth noting that despite the continued high unemployment in the euro area, firms continue to report difficulties in terms of recruiting suitably qualified workers. This suggests that further improvements in the functioning of euro area labour markets and their ability to match labour supply and demand are needed. Evidence gathered in a recent Eurosystem analysis, which will be published shortly, supports this view. In this context I would also like to stress that structural reforms in different markets should not be seen in isolation. The more efficiently euro area product and capital markets function, the greater the success of labour market reforms will be in creating employment opportunities.
Question: First question: Hans Eichel declared today that he expected end-of-year growth of 3%. Do you consider this expectation reasonable? Second question: with regard to the liberalisation of energy markets, which Heads of State or Government are going to discuss in Barcelona next week, do you think that this is a structural reform that is absolutely mandatory?
Duisenberg: As I said in my introductory remarks, we expect economic growth towards the end of this year to be back at its potential output level, and our estimate is that the annual potential output rate is close to 2.5%. As for energy markets, although these were not discussed today, I do hope that the summit in Barcelona will give further impetus to the privatisation and liberalisation of the energy market.
Question: Mr. President, two questions if I may: you still sound confident on inflation, and you mentioned producer price indices as well. However, some analysts have been saying that some recent rises in producer price indices show that these had reached a trough related to the economic upswing and that they will go up further. So, what is your view of that assessment, because producer prices lead consumer prices? And my second question: what do you think of the way in which European leaders are handling the appointment of a successor to Mr. Noyer? Would you agree that the sort of public competition that is now taking place between countries is typically a European phenomenon that will keep putting pressure on how the public and financial markets view the European economy, and also the ECB? And what is your opinion of the two candidates that have been put forward?
Duisenberg: The evidence that we have on producer prices is that they have been falling steadily over a substantial period of time and that will also ultimately be reflected on consumer prices. I have seen no evidence for a reversal of that trend. You will allow me not to comment on the qualities of all the candidates that are being put forward to succeed Mr. Noyer. I would hope that the European authorities responsible for this -- of which I am not one -- would come to a decision sooner rather than later. But I do admit that, inevitably, it appears to be a typically European phenomenon that these appointments are discussed across the regions of Europe given that we have different nationalities, cultures and languages. But that is only normal and it is a phenomenon we have to live with.
Question: I have two questions, one for the Vice-President and one for the President. Mr. Vice-President, what kind of quality criteria should be required from your successors, sir? Should it be academic or more bank oriented...
Noyer: I think that the only answer is what is stated in the Treaty, as Mr. Duisenberg just said. You need to have a qualified individual with experience in monetary and financial fields, and the rest is a matter of judgement, on which I can not comment.
Question: Could you comment on the most important tasks of the Vice-President.
Noyer: That is difficult for me because first the Executive Board is a collegial body and it should always be remembered that it is not just a collection of individuals, but a team performing a number of tasks under the leadership of its President. So, in my mind, fitting well into the team and being a full team player is a key requirement. Secondly, the precise distribution of tasks among the Executive Board members is a decision of the Executive Board as a whole. In our experience, over the last four years, there has been a certain distribution of responsibilities which, in my opinion, has been very rational, but this is a matter to be discussed and decided on by the Executive Board as a whole and can always be amended if necessary. And thirdly, of course, being a member of the Executive Board means being a member of the Governing Council, and as a member of the Governing Council you need the same kind of qualities as for any member of the Governing Council. May I add that fourthly, you must always be prepared to attend a meeting or fulfil a task on behalf of the President when he is attending to other duties elsewhere. But what you may expect at one time or another to have to attend an euro group meeting or whatever it is alone and be accepted there by the participants. What else can I say, Mr. President?
Duisenberg: You have said more than enough. -LRB- Laughter -RRB-
Question: Mr. President, you sounded very optimistic. How durable do you think the growth will be? Or do you see any further risk of a double dip for internal or external reasons?
Duisenberg: We are indeed reasonably optimistic and, as I said, we see the growth reaching a figure which is about the estimated potential rate of growth towards the end of this year, and we expect that to continue into 2003 and 2004. That is our current expectation. So if you qualify that as reasonably optimistic, I would tend to agree with you.
Question: Two questions Mr. Duisenberg. First, have you changed your expectations regarding the speed at which the inflation rate is going to decline in the euro zone? It seems that Mr. Solbes now expects this to happen around August rather than May, so later than he had previously expected. Second, after the US policy action on steel imports, do you see any signs that, as the next step, the United States may be prepared to give up its strong dollar policy?
Duisenberg: First on the speed with which inflation will fall below the 2% ceiling we have set for ourselves, I have not changed my mind. I expect that to happen in the course of the coming months -- plural !
Duisenberg: I am not going to comment, of course, on the exchange rate. I am rather inclined to turn the thing around and conclude that apparently this -- what I am almost inclined to say -- deplorable action by the United States ' authorities to protect its steel industry may have something to do with the exchange rate of the dollar as it is being experienced by the American steel industry.
Question: Mr. President, the EU governments have asked the ECB Governing Council to come up with a proposal to reform its decision-making process to take account of a likely enlargement of the Council. Is there already a timetable for this? Is there a time where you are confident you might be ready to make a proposal? And how optimistic are you that the ECB Council will actually reach unanimity on this difficult question? I wonder if you can already tell us something about likely features of that proposal.
Duisenberg: On the latter issue, I can not tell you anything. We are working on it. But I would like to emphasise that the European Union Council has not asked us for a proposal to change. What the EU Council has done in the Nice Agreement is to include an enabling clause which makes it possible, after the Nice Treaty has been ratified, to make quick changes if necessary. We have started working on that in case we might consider it necessary -- of which we are not yet sure. And what the EU Council has asked us to do is to come up with proposals, if required, soon after the ratification of the Nice Treaty. But that is still some way off. We are working hard on it, we are investigating various possibilities and we will finalise those investigations, I expect, in the course of this year -- so well before the final ratification of the Treaty of Nice by the 15 Member States.
Question: Mr. Duisenberg, would it be right to conclude that the current level of the main interest rate, 3.25%, is the bottom of the current interest rate cycle? Did we in fact reach the bottom last November? And my second question is actually a linguistic one: in your judgement, should the plural of the currency 's name in English be" euro '' or" euros ''?
Duisenberg: What a question to ask a Dutchman !
Duisenberg: We are of the opinion that we reached the trough in real economic developments around the end of last year and the beginning of this year. As far as interest rates are concerned, we were, are and remain of the opinion that the current monetary policy stance in terms of interest rates is appropriate for the time being, and we are of the opinion that the economy has started to find its way back to recovery. I think that should answer your first question.
Duisenberg: Now, the linguistic issue. I am inclined to delete the" s '' if I am talking about the euro in the plural, if I am talking about 10 euro. I think that is enough !
Question: Mr. Duisenberg, a question regarding the first pillar. Since autumn, you have referred to the monetary expansion of M3 as being temporarily exaggerated. The special factors are always the same or are new. It is said that capital markets are so volatile and the bond and security markets have been in an upward swing for months. What about M3? If M3 is correct, the market expectations are not completely wrong, according to which there will be an interest rate increase, as indicated in the futures markets, in the course of this year. Is the reaction of the futures markets understandable from this point of view? And the second question concerns the reform of the Governing Council of the ECB: I would like to ask again if there is a consensus in the negotiations on a rotating system?
Duisenberg: You have to understand that, when we talk about M3, it is a short-hand expression for a multitude of monetary developments. But we do not look only at M3. We also look at developments in credit to the private sector, to developments in the sub-components of M3, in other words M1 and M2, and it is based on that analysis and on a judgement of a broad spectrum of monetary indicators that we arrive at our conclusions as far as the first pillar is concerned. So please do not see us as mechanistically and narrowly watching only one figure: M3. And as I indicated in my introductory remarks, we do see some components of M3, both on the asset and the liability sides of the balance sheet, showing some signs of moderation already. But we will continue to monitor very closely whether this really is sustained, especially in an environment of a recovery of economic growth, as we are also witnessing. On the -- if any -- reform proposals of the decision-making bodies of the ECB, we are in the midst of the exercise ; we are discussing it intensively among the 18 members of the Governing Council and at this stage, I really can not say anything more than that. And I am not going to comment on particular elements or early stages of the discussions being held, which are fairly intensive and, I am inclined to say, fruitful.
Question: I also have two questions concerning M3. The first one: are your experts able to quantify the effect of these portfolio shifts on M3 growth? Could you say how much of a percentage point is owed to this portfolio shift? And my second question: as you explained, you are doing a very broad analysis of monetary developments. Does this analysis say anything about the money gap? Is it balanced or is it negative or positive?
Duisenberg: The experts are in a position to quantify what you call the portfolio shift or the reluctance of investors to put their liquid assets into more long-term investments. The experts can do that ; I do not know the figures by heart at this moment in time. But if you look at the developments, for example, the dynamic developments of M2 versus M3, then you get a pretty good indication of the quantities involved. Now, I hope that Mr. Noyer has had time to think in the meantime about the second question, because I do not know precisely what a money gap is.
Noyer: -LRB- Laughing -RRB- I could have helped you slightly on the first question. According to the best possible expertise, but all this is of course disputable, filtering out the portfolio shifts could bring back notionally the increase towards 5%, close to 5% instead of 8%. So this gives an order of magnitude. Of course all the work of these experts is extremely careful but it is not scientific truth. It gives an order of magnitude that confirms the assessment that can be drawn from many other factors. Probably most of the explanation is linked to that. And, also, if you look at the annualised development of the last three months, you come to the same kind of conclusion -- that it seems to be progressively -- not completely returning to normal but going in the direction of more normal developments in the very last period. But all this has to be, as the President said, monitored carefully month after month. On the money gap, I prefer not to comment.
Question: Mr. President, I have a question on the German economy. I think the recovery of the German economy will be slower than expected because of structural problems. What is your view on this?
Duisenberg: I am not going to comment on the performance of individual countries. You can only expect me to comment on a euro area wide perspective.
Question: I would like to hear what the President has to say on the trade dispute with the United States: what impact do you, expect this dispute to have on economic growth in the euro area, and what should the European Union do to minimise any impact it might have?
Duisenberg: I can not quantify it. I think the impact on the euro area will be negligible. Those who will suffer most are the American consumers who will have to pay more for certain products than they would otherwise have to. I am thinking especially of the American carmakers and their customers whose lives will be made more difficult.
Question: What do you think should be done against this?
Duisenberg: Well, it is not exactly within the competencies of the European Central Bank, but I fully sympathise with all the efforts being made at the moment in the context of the World Trade Organisation to try to prevent, to the maximum extent possible, the world from slipping back into an era of protectionism. So I support all efforts being made along these lines to avert a trade war and all the detrimental economic consequences that entails, as we saw more than half a century ago.