At today 's meeting, the Governing Council continued its comprehensive examination of monetary, financial and economic developments and assessed new evidence that has become available over the past few weeks. Our conclusion was that while risks to price stability over the medium term remain tilted to the upside, recent evidence sends mixed signals. Against this background, the Governing Council decided to leave the key ECB interest rates unchanged.
As regards the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 increased to 7.5% in the period from March to May 2002, from 7.4% in the period from February to April. While there was some normalisation of M3 growth in early 2002, M3 dynamics have strengthened again recently. This development may partly reflect renewed portfolio shifts into M3 instruments, related to the recent increase in overall financial market uncertainty. However, more fundamental factors, such as the low opportunity cost of holding money and the economic recovery in the euro area have also driven monetary expansion in recent months. In addition, the rate of growth of loans to the private sector has been recovering. While due caution in interpreting recent short-term monetary developments is warranted, it is a matter of concern that there is significantly more liquidity available in the euro area than would be needed to finance sustainable, non-inflationary economic growth.
Concerning the second pillar, the latest data confirm that a gradual recovery in real GDP growth in the euro area is under way. Information from several surveys and leading indicators for the second quarter of this year point to somewhat higher real GDP growth rates than in the first quarter. Looking ahead, an ongoing strengthening in both domestic and foreign demand continues to be the most likely scenario. The conditions for further recovery in the euro area remain in place. There are no major imbalances in the euro area and financing conditions are very favourable. At the same time, there is continued economic growth outside the euro area. However, in view of recent financial market developments, the uncertainty surrounding the strength of the economic upturn -- both outside and inside the euro area -- has not diminished over recent weeks.
Turning to price developments, Eurostat 's flash estimate indicates that annual HICP inflation fell from 2.0% in May to 1.7% in June. However, it is too early to interpret this fall as a sign of receding upward pressure on prices, given that HICP inflation excluding the more volatile items of energy and unprocessed food prices has remained high throughout the first half of this year, reflecting in particular trends in services prices. Moreover, it is to be expected that overall HICP inflation rates will fluctuate around 2% in the coming months.
The strengthening of the euro exchange rate should have a moderating effect on inflation. However, it is difficult to quantify the size and establish the timing of this effect. For price stability to be maintained on a sustainable basis it is crucial that the high wage increases resulting from recent negotiations in some regions do not spread across the euro area, not least because this would have negative consequences for competitiveness, employment growth and consumption.
Overall, the strengthening of the euro exchange rate is a new factor suggesting a potential for lower inflation rates. However, other factors -- in particular monetary developments and wage trends -- do not indicate a moderation in price pressures. Monetary policy therefore needs to remain vigilant as regards the key factors determining the outlook for price stability over the medium term.
Regarding fiscal policies in the euro area, we have seen some worrying developments in the past few months. Against this background we call upon all member countries to honour the commitments made to achieve budgets that are close to balance or in surplus by 2003-04, in compliance with the framework of the Stability and Growth Pact. This is necessary in order to maintain and further strengthen confidence in the policy framework of the euro area and to establish fiscal positions in all countries that allow automatic stabilisers to operate efficiently without endangering sound fiscal positions in the longer term. Moreover, governments are encouraged to push ahead with reforms relating to the size and structure of public expenditure and revenue, which will also create room for tax cuts and absorb the fiscal costs of population ageing.
In the field of structural reforms allow me to refer briefly to the adoption of the Broad Economic Policy Guidelines. If implemented in a determined manner, structural reforms will contribute to expanding the euro area 's potential for non-inflationary growth and to reducing its high level of unemployment.
Question: Mr. Duisenberg, how concerned are you about the fall in equity markets on consumer and business confidence?
Duisenberg: It is always difficult to say how concerned we are. I am not without concern, both with a view to the developments in the United States and with regard to the European equity markets. But it is one of the factors we look at in assessing our monetary policy stance. And, as you know, we have decided to keep our monetary policy stance unchanged at the moment. So that should be the answer to your question.
Question: Is the fall in the equity markets more of a problem to consumers or to businesses?
Duisenberg: I would say that, given the structure of the holdings of equity in Europe, it would be more of a problem for businesses. In the United States, it would probably be more of a problem for consumers.
Question: Mr. Duisenberg, you talked about new, more mixed evidence for inflationary prospects. Would you go so far as to say that the upside and downside risks are reaching some kind of balance in your judgement now? And, also, could you go so far as to say that there is a consensus on the Governing Council as regards doing nothing at this stage, in the sense of policy?
Duisenberg: As regards your last question there certainly is -LSB- a consensus -RSB-. As far as the balance between upside and downside risks is concerned, we believe that the risks are still somewhat on the upside, but the uncertainties are too great to come to decisions already at this stage.
Question: Mr. Duisenberg, you told the European Parliament in Strasbourg this week that you expected inflation in the remainder of this year and in 2003 to hover around 2%. I presume that there is an annual inflation rate for each month. Would you consider that to be satisfactory inflation performance and could you elaborate a little bit on why you see inflation in this way, hovering at this level, given the concerns you have about wages and money supply growth?
Duisenberg: Well, you will have noticed that in my Introductory Statement I did not use the concept of" hovering '', but of" fluctuating ''. That, however, is a purely editorial matter. The message is the same. For the remainder of this year, we expect the inflation rate to fluctuate, or hover, or whatever you may want to call it, around 2%. In our assessment, that in itself is not satisfactory. But we are taking a longer-term forward-looking view. And, as long as we are satisfied that the forces are such that inflation is likely to fall to just below that level next year, there is no reason for alarm -- yet.
Question: Is it mainly the appreciation of the euro that is, would you say, the chief mitigating factor given the concerns that you have expressed about wages and M3 growth?
Duisenberg: I would say that this is the chief mitigating factor, together with the recent developments in oil prices, especially oil futures prices, which are also mitigating factors. And, if sustained, as long as these factors remain sustained, there is less and less reason to be alarmed. But, as I said in my answer to Mr. Thomas, the balance of risks in this world of uncertainty is still slightly on the upside.
Question: I have two questions: first, the Italian Finance Minister, Giulio Tremonti, said that he had received the approval for the securitisation last October in Rome from Eurostat and the ECB. Eurostat denied this statement from Mr. Tremonti. What is your reply?
Duisenberg: Well, I was not present in the discussion between Eurostat and Mr. Tremonti. What I do believe are the most recent statements to this effect by Eurostat and the revisions they made to the Italian public accounts.
Question: And, second, regarding the Stability and Growth Pact, following the agreement reached in Seville, do you think it is stronger or weaker?
Duisenberg: I hope it is as strong as it was. And we urge governments to stick to the commitments they made under the original Stability and Growth Pact. As I said, we are somewhat concerned about -- may I call it -- the" slippage '' in interpretation which has emerged from Seville.
Question: Mr. President, you have pointed out the fact that the appreciation of the euro has curbed inflation repeatedly. Is the ECB thinking about, or even calculating, the percentage by which you have to increase the interest rates to get the same effect, as far as stability is concerned, as you would get from appreciation of say 5 to 10 cent?
Duisenberg: Our deliberations four weeks ago and today have led us to keep interest rates unchanged. We do not and we did not speculate, theorise or analyse about the size of any change that was not contemplated.
Question: I am a little astonished by that answer. I remember hearing somewhere from the ECB that you do have some quantification of the effects of the euro devaluation losing or gaining price level in the euro area.
Duisenberg: If that is so, then I misunderstood the first question in German. I thought the question was about the size of an eventual change in interest rates.
Question: Maybe I understood the question wrongly, too. I have two questions for Mr. Papademos. First, during the last few days, a lot of model calculations have been presented: for example, if the appreciation of the euro is 10% vis-à-vis the US dollar, or if the effective exchange rate increases by 10%, we will have such and such an effect on the inflation rates and on growth. Have you done such calculations in the ECB? Second, does the ECB have any figures on the development of euro-denominated money market paper in the hands of non-euro residents? I ask this because we have such losses in the stock market. There has been no increase in the aggregates in the United States. Are investors taking advantage of the interest rates differentials between Europe and the United States? Do you have any explanation of that?
Papademos: Regarding your first question, as we stated in the Introductory Statement, it is difficult to quantify the size and establish the timing of the effect of the appreciation of the euro. One conclusion that one can stress from analyses that have been made in general is that the effects of the appreciation, both on inflation and on output, are likely to be visible more in the medium term: that is more in 2003 than in the present year. Now, with regard to your second question, you asked whether there was information about an increase in the holdings by non-residents of the short-term marketable instruments. Yes, there is information that there has been an increase in such holdings and this information is included in the figure given for the net external assets of MFIs, which have also risen substantially. The two developments together suggest that there must have been some offsetting in other types of liabilities of MFIs. Now, at the end of your question there was a concern as to how these developments - that is the increase in demand by non-residents - may affect monetary developments in the euro area. Let me say one point here, they do not create any distortion in the monetary statistics because, since last year, the M3 statistics have been corrected. So they do not include any holdings by non-residents, neither a share of money market funds nor other short-term money market instruments.
Question: Mr. Hayami, at the Bank of Japan, today told the parliamentary committee that he does n't see clear signs of an economic recovery yet, and he also said that the prospects for a recovery rest on exports. Now, in Europe this also seems to be the case, the recovery also seems to be dependent largely on exports. German manufacturing orders data today, for example, show that orders probably would have fallen if it had not been for a huge one-off increase in foreign orders for capital goods. Now, is n't there a big risk that two major economic regions in the world rely on demand from the United States for a recovery, and should n't the ECB be more concerned about the US stock markets ' development and their negative world effects when it decides on interest rates? And my second question would be: can you explain why the euro has fallen against the dollar since the ECB sold yen and bought euro on Friday in the intervention?
Duisenberg: On the first one, I would take issue with the hypothesis that European recovery relies solely on a resumption of exports. It is as much domestic demand-led as it is external demand-led. But at the same time, given that the recovery of domestic demand is also relatively weak, this explains our uncertainty, not about the size of the recovery, but about the strength of the recovery. But we are not relying on others, as I always used to say and still say: Europe is now on its own and we have to do it ourselves. Now, as far as the impact of the interventions is concerned, let me explain briefly. The interventions that took place last week were not co-ordinated interventions, they were interventions initiated by, at the request of, and at the expense of the Bank of Japan, which, under the existing agency agreement that both the ECB and the Federal Reserve have with the Bank of Japan, asked us to, apart from the interventions that they unilaterally made themselves, also do a tiny amount on their account and on their initiative in Europe. Now, the amount, it is fair to say in view of the size of the exchange market, was virtually negligible, and therefore it is by no means an explanation for the concomitant movements in the exchange rates which happened either on that day or in the days thereafter.
Question: Mr. Duisenberg, in Germany there is a discussion about the right or necessary volume or size of the foreign currency reserves and the gold reserve. Is that also a discussion in the ECB or not? And what is your own opinion: how much foreign currency and gold does a strong euro need? And my second question is how far advanced is the discussion about Council decision-making when the eastern European countries join the Council?
Duisenberg: The foreign currency and gold reserves of the Eurosystem were basically inherited from the past. Inside the Eurosystem there is no discussion and there can also be no conclusion about what precisely the appropriate size of the reserves of the Eurosystem should be. We are in the happy position where the Eurosystem as such holds so much foreign currency reserves that it will at all times be equipped to meet any disaster which might loom on the horizon. And the holdings place no constraint on whatever action we might want to take. The discussion on the so-called" enabling clause '' -- for when the European Community or European Union is drastically enlarged -- is ongoing. We are making very good progress, but I must also say we are ultimately asked to come up with a recommendation on what and how things should be changed in the voting procedures of the decision-making bodies of the ECB as well. But we can only answer that question once the Nice Treaty has been ratified by all Member States, and that is still some months off, so we are not in a hurry. In the meantime, we are discussing various models in a very friendly and co-operative way, and it would be legally inappropriate for us to come up with a definitive proposal before the time is ripe to make such a proposal. And that is only after the ratification of the Nice Treaty.
Question: Mr. Duisenberg, I would like to come back to your introductory statement. For a couple of months now, you have been saying that the ECB 's Governing Council is concerned about the huge liquidity and inflation risks that you have under the first pillar. Secondly, you say that you are not absolutely certain as to how you can assess economic developments. But we are living in times of uncertainty, and I assume that this uncertainty will continue. If you wait and wait, is that not a risk for the credibility of the forward-looking, forward-oriented monetary policy?
Duisenberg: We have carefully considered and discussed the risks you draw attention to. As to the credibility of our attitude of, basically, waiting and seeing in these uncertain circumstances, we believe we have adequately explained why we have taken the attitude we cherish at the moment. So, we do see the risks you have pointed out, but we are taking the risks deliberately.
Question: You explained that you were somewhat concerned by the compromise reached in Seville as far as monetary policy is concerned. Could you give us a few more details on that and clarify your thinking somewhat? Do you think, for example, that the condition put forward by France to reach a budget position close to balance in 2004, if there is a growth of 3%, is bad? Do you think that might be an example other countries might want to follow?
Duisenberg: France made a unilateral declaration in Seville on how to interpret the goal of reaching a budget position close to balance or in surplus by, in this case, 2004. The other countries have taken note of this declaration that made the achievement of this goal more or less contingent on the attainment of a growth rate of 3% in 2003 and 2004 of 3%, which might be considered to be -- to say it prudently -- on the upside of the potential growth rate of the country. It is for that reason that I said in my Introductory Statement that the Governing Council is concerned, is worried about recent developments in the context of the Stability and Growth Pact, and we do urge governments to stick unconditionally to the commitments they made when they adopted the Stability and Growth Pact.
Question: I have two questions. How much did the recent turbulence at the stock exchanges influence your present decision to leave rates unchanged...?
Duisenberg:... may I answer this question first? Because the answer to" how much '' is" it did not ''. And now your second question...
Question:... regarding credits, which are rising. There are some experts who think that there are about EUR 250 billion of this credit, even though they do not know where it is going, they suspect that it is going into companies simply to close holes. Is that correct? Where do the credits go? Can you specify that? Usually experts speak about a chunk of some EUR 250 billion...
Duisenberg:... that is a lot of money...
Question:... it is a lot of money. That is why I am asking.
Duisenberg:... but I do not have an answer. You are pointing to facts that are unknown to me. So, we did not discuss it.
Question: You do not discuss where the credits are going?
Duisenberg: Well, not specifically" when '' and" where ''. We had the impression in the past few years, for example, that much of the growth in credit to the private sector was being used for mergers and acquisitions in the United States. But we can not follow that from day to day. And, in addition, I must confess that the statistics on the capital flows are coming in with significant lags of, in certain cases months. So, I can not answer your question. If I could, I would. But if I can not, I do not.
Question: Mr. Duisenberg, could you elaborate a little bit on your concern with regard to equity devaluation. Do you see a potential economic impact of the drop in share prices we can see in the last year?
Duisenberg: Well, we take it into account as one of the indicators under our second pillar, which determines our monetary policy stance. But as you can derive from our decisions, it was not a decisive factor for a move in either direction.
Question: We are also seeing some issues in terms of solvability of insurance companies and pension funds in Europe. It may not be a direct relation to the ECB but it could affect the pension systems in Europe. Is that something that has your concern as well?
Duisenberg: No, we look at it, but we are not talking about it in terms of concern or worry at this stage.
Question: Mr. Duisenberg, I would like to have a comment on the first half of the year after the introduction of the euro banknotes and coins. You have told us before that it was extremely successful. What does that mean for economic growth in the euro area? Does it have any positive effect?
Duisenberg: It was extremely successful in terms of -LRB- i -RRB- the speed with which the notes were distributed and -LRB- ii -RRB- acceptance by the public at large. The effects on economic growth, to which you are referring, will come, but they will come over time. It requires time for price transparency and economic competition to work their way through into the economy. We do not expect sudden and quick results, but it is pretty certain that the results will come.