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 is that risks to price stability appear rather balanced. Against this background, the current level of key ECB interest rates is appropriate.
As regards the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rates of M3 was 7.3% in the period from May to July 2002, compared with 7.4% in the period from April to June 2002. Hence, there is no indication of a significant reduction in monetary growth over the last few months. The recent strength in M3 growth partly reflects both the low opportunity cost of holding money and renewed portfolio shifts into M3 in an environment of financial market uncertainty. In this context, monetary trends need to be assessed with caution. From a longer-term perspective, there is concern that more liquidity is available in the euro area than would be needed to finance sustainable, non-inflationary economic growth. However, at this juncture, there is less risk that excess liquidity will translate into inflationary pressure, given the environment of subdued demand. The trend in the growth of loans to the private sector also seems to point in this direction.
Concerning the second pillar, the latest data confirm a modest recovery in real GDP growth in the euro area in the first half of this year. In the second quarter of this year real GDP growth is estimated to have grown by 0.3% quarter on quarter, following upwardly revised growth of 0.4% in the first quarter. In contrast to the first quarter, developments in demand appear to have been more broadly based, as activity was supported by private consumption, export growth and inventories. However, overall domestic demand growth remained subdued as a result of the protracted weakness of investment.
Looking ahead, the most likely scenario is that of ongoing, albeit modest, growth in real GDP in the second half of this year, with growth rates in line with potential growth in 2003. This delay in the acceleration of economic activity in the euro area broadly corresponds with the world economic outlook, given that the expected pace of the recovery has been scaled down over recent months. Sharp declines in stock prices are having negative effects on consumer and investor confidence. Consequently, the strength of the upturn in economic activity has become more uncertain, both inside and outside the euro area. At the same time, however, the conditions for a stronger economic recovery in the euro area remain in place. On the domestic side, private consumption should particularly benefit from lower inflation and improved real disposable income, while investment should be supported by low nominal and real market interest rates. Finally, the gradual recovery of the global economy is also expected to continue. Nevertheless, risks to the economic outlook, both inside and outside the euro area, need to be monitored closely.
Turning to price developments, in July annual HICP inflation was 1.9%, while the inflation rate excluding unprocessed food and energy fell slightly to 2.5%, its first decline in 2002. Eurostat 's flash estimate for August, which indicates that annual HICP inflation increased to 2.1%, is fully in line with previous expectations that inflation rates were likely to fluctuate at around 2% for the remainder of the year. However, the short-term trend is also dependent on oil price developments, which have increased significantly over recent months.
Looking further ahead, the recent appreciation of the euro exchange rate, as well as the overall economic environment, should contribute to a reduction in consumer price inflation. Moreover, services price inflation is expected to moderate somewhat, following particularly strong increases in 2002. However, for inflation rates to come down to levels below 2% in 2003, as currently projected by most forecasts, it is crucial that oil prices do not escalate and that wage moderation prevails. With respect to nominal wage growth, we have already noted an upward trend over recent years, which continued even when the economy started to slow down. While the information from the latest wage indicators does not signal a further acceleration, wage developments remain a cause for concern, despite the weak cyclical situation.
With regard to the devastating floods which have hit three member countries in particular, we deeply regret the substantial loss of life. The overall macroeconomic impact of these floods should be limited and have no lasting effects. Certain food prices could temporarily rise as a result, also due to bad weather conditions in other euro area countries, and while real GDP growth could initially be dampened slightly it may subsequently be stimulated by reconstruction.
Overall, subdued aggregate demand and the strengthening of the euro should contribute to lower inflationary pressure. At the same time, other factors -- in particular monetary developments, but also wage trends and oil price developments -- might pose risks to price stability in the medium term and therefore need to be monitored closely.
Regarding fiscal policies in the euro area, flood-related costs should lead to a review of priorities and a reallocation of expenditure. In addition, against the background of recent developments, it seems to be more warranted than ever to call on member countries to remain committed to the Stability and Growth Pact. Countries with sound fiscal positions should safeguard their achievements, while countries with remaining imbalances must avoid deficits in excess of 3% of GDP and implement determined policies in order to progress towards budgets close to balance or in surplus. This is essential for maintaining and further strengthening confidence in the policy framework in the euro area and for establishing fiscal positions in all countries that allow automatic stabilisers to work efficiently without endangering sound fiscal positions in the longer term.
In the field of structural reforms we continue to urge governments to implement, in a determined way, the agenda set in the Broad Economic Policy Guidelines. Structural reforms will contribute to expanding the euro area 's potential for non-inflationary growth and to reducing its high level of unemployment. At the same time, they will help to foster confidence among consumers and investors in long-term growth and employment opportunities in the euro area, thereby having a positive effect on spending and investment decisions in the short and medium term. Such confidence is fostered by a determined and broadly based implementation of the reform agenda, focusing, in particular, on labour and product markets.
Question: Mr. President, the Consensus forecast for GDP growth has been cut to less than 1% for this year for the euro area, and it has also been cut for next year. Does the ECB share this, let 's say, Consensus opinion?
Question: Mr. Duisenberg, you mentioned oil prices just now as a concern for the inflation outlook. Some euro area politicians have been talking about the high oil prices being a risk for the recovery, i.e. jeopardising a recovery in the euro area. Do you share this view of the danger of oil prices for the recovery? And what should the ECB do about higher oil prices, should that occur?
Duisenberg: Well, if there is a jump in oil prices, as there has been already, in the first instance it is a danger, an upward risk for inflation. And -- in the sense that there is basically a real transfer of resources going on in this direction -- it is a threat for the pace of the recovery. What the ECB can do about it is very little, if indeed anything at all.
Question: Mr. Duisenberg, on Saturday in Copenhagen you said that interest rates were appropriate and that they were also appropriate for the foreseeable future. But today you did not say" foreseeable future ''. Could you comment on that?
Duisenberg: Yes, I can not keep on repeating myself. But today I said that the monetary policy stance is appropriate and I can not say more than that.
Question: So, it is different from Saturday?
Duisenberg: No, but you always ask this question. If you had asked" is there a bias? '' I would have said" No, we are completely neutral at this moment ''.
Question: Among this uncertainty surrounding the outlook for growth is there one thing in particular that is of greatest concern for you? Also, how great is the danger that the acceleration in growth to its trend potential rate may take even longer to achieve, that is, later than the first half of 2003?
Duisenberg: I can not quantify that uncertainty over a period of time. We think that all the factors are in place to let growth go up to its potential -- sorry, not in the second half of this year as we thought earlier, but, we think, in the first half of next year. How great the risks are to that assessment? We live in a time of extreme uncertainty at the moment, and I really can not quantify it. But let me say, ceteris paribus, we should be on track in the first half of next year.
Question: Can I ask you how important the Irish referendum on the Nice Treaty is and what impact on the euro a second rejection of the referendum would have?
Duisenberg: I would not speculate on future developments which I hope will not take place. I think any impact on the euro would be negligible. But the Irish referendum -- from a constitutional and an institutional point of view -- is extremely important. And I do hope that the Irish, this time, join forces with the mainstream in Europe.
Question: A question to the President and the Vice-President: given the low acceptance of the euro nine months after the changeover among the population of the euro area, even in your own countries -- the Netherlands and Greece -- do you feel any responsibility that the ECB maybe has a problem with communication on the euro, or who is to blame for this development?
Duisenberg: The question was addressed to both the Vice-President and me. Would the Vice-President like to answer?
Papademos: You mentioned a low acceptance. We have n't noticed that. Unless you mean something else, because I think in both countries there was an enthusiastic acceptance of the euro from the first day it was introduced. Now, there have been, of course, some concerns regarding the perceived impact of the changeover on price changes and perhaps you are referring to this. This is a phenomenon that has been observed in various countries because the prices of certain services and certain goods have increased by what is perceived as a significant extent and this has then been generalised so as to imply that the introduction of the changeover has had a significant impact on inflation. But what, of course, we know from the statistics is that -- although it is correct that the prices of some services and some goods have risen somewhat more, and perhaps this has been influenced by the changeover -- the weighted average of the prices of all goods, as recorded by the consumer price index, has been influenced to a very small extent. And you know what the estimates are. The estimated impact is in the order of about 0.2 percentage point. So it is true that there is a discrepancy between perception and reality as recorded in the statistics.
Question: The first question is: are you more worried about the current outlook for inflation or about the current outlook for economic growth? And the second question is: would you consider it an acceptable or reasonable solution if the deadline for reaching the budget balance for some States is postponed from 2004 to a later date? Let 's say two years later?
Duisenberg: I might say that I am equally worried about the inflation prospects as I am about the output prospects. I am very pleased that risks to inflation seem to be balanced at the moment. I am not so pleased that the acceleration of output, which we expected, is taking so long to take hold. As regards the second question, the ECB is not even mentioned in the Stability and Growth Pact, but we do play a role, I admit, and I take great comfort in that at the Summit in Seville the Heads of State or Government solemnly declared that they would adhere to the goals set.
Question: I would like to ask a question concerning banking supervision. Last week this topic was discussed and there were only bits and pieces published. I would like to ask you something: two committees will be formed, one for banking regulation and one for the implementation of the regulation. In the first, the ECB is supposed to be an observer. In the second, the national central banks engaged in supervision will be allowed. So, the first question: is that true? Is this the present state of the discussion? Second, is that sufficient in the eyes of the ECB? Is the representation of central banks sufficient? And the third question is whether you consider the application of the Lamfalussy procedure to the banking industry as appropriate? There was a lot of criticism of this before, during the discussion process.
Duisenberg: Well, answering the first question also answers the second. Nothing has been decided yet. And I regard it as crucial, if there are more level committees to be level one, level two or level three, I regard it as crucial -- and we are working on that -- that both the ECB and the national central banks, and I mean not only those which are in charge of supervision directly, but all of them, are somehow involved in the work of all committees, because there is a close synergy between central banking and supervision and regulation. We should be there. But then it is maybe good to know that the Lamfalussy proposals were made explicitly for the securities industry. And you can not simply transpose the Lamfalussy scheme to the banking sector or financial industry in general. The first to agree to that would be Mr. Lamfalussy. I do n't now whether you know, but I can confirm that Mr. Lamfalussy himself last Friday gave an exposé and his judgement to the EFC, the Economic and Financial Committee. I know that the Economic and Financial Committee, of which the ECB is a member, listened with great care to Mr. Lamfalussy and will take up his ideas and his judgements along with all the other considerations in preparing the final proposal for the structure of European co-operation in banking supervision and regulation for the ECOFIN meeting of 8 October. This is the whole process -- nothing has been decided yet, but the process is in motion and, in my opinion, it is in motion in a good direction.
Question: There is the increasing speculation that Germany will find itself over the3% limit imposed by the Stability Pact this year. Now, if that does happen, how big a constraint is that on the ECB 's freedom of policy manoeuvre? And, second, I would like to ask if a military strike on Iraq does materialise in what direction do you think that fundamentally shifts the balance of risks to inflation?
Duisenberg: I would not join in the speculation about what will happen to the German budget in the course of this year. I note with satisfaction the determination of the German government to" stick to its guns '', so to speak. As far as the Stability and Growth Pact is concerned, in no way would it affect the -- as you call it --" degrees of freedom '' which the ECB has to follow its independent monetary policy. So it would be no inhibition whatsoever. On the risk of a war or military operation in Iraq: of course, this adds greatly to the uncertainties we are confronted with and to which I referred earlier. What precise impact an eventual military adventure might have on the monetary policy of the ECB or on inflationary developments depends, of course, very much on the nature and the size of the activities to be deployed, and the effects -- in particular -- on the oil market and on the remainder or the rest of the region in the Middle East, and is therefore, at this stage, totally unpredictable. But it is one of the uncertainties you and we are being faced with. And I prefer, also in this respect, not to speculate about any likely consequence or any likely reaction to what we know or what we do n't know is going to happen.
Question: Two questions. The first also on the budget situation of some countries. There have been increasing calls recently to re-interpret the Stability and Growth Pact, especially from some of the larger countries. If, after the German elections, the countries decide to re-interpret the Pact, what are you going to do? What can you actually do to convince them not to? And, secondly, does the discussion to change the Pact already have an impact on your policy at this stage? Another question, or the second question on your statements on Saturday. Before you ruled out, basically ruled out, a rate cut on Saturday, some of your colleagues had quite a doveish tone, a different one from yours. Today, did you have to take a vote, and if so, was the outcome unanimous?
Duisenberg: Last question first. Today 's decision was, as so often, again a consensus decision. I would not report on voting, but it was again a consensus decision. There was no dissent, let me put it that way. On the Stability and Growth Pact, I hear the voices here and there who want to change the rules of the game. The ECB sticks to its policy, which says" Do n't change the rules of the game when you have only just begun playing ''.
Question: Mr. Duisenberg, I am sure that you also discussed the G7 meeting in Washington with the Greek Finance Minister and maybe already a possible stance on Friday and Saturday in Copenhagen. What do you say as far as the exchange rate policy is concerned? Can we expect a statement from the point of view of the euro? And how do you assess the dollar risks, especially if you consider the enormous imbalances in the current account. Mr. Issing pointed this out last Friday in Frankfurt very clearly as well.
Duisenberg: I am sorry, Mr. Hutter. You know the exchange rate is not a target for our monetary policy. That is geared towards internal price stability. And I will not join you in making estimates of what the risks for the exchange rate are. I will not speculate on that. As far as the G7 is concerned, we indeed already co-ordinated our position in Copenhagen because it is both the Greek Minister of Finance and me who will attend the G7 meeting on behalf of the euro area.
Question: Mr. Duisenberg, if I could follow up very briefly on the question of consumer feelings about the introduction of the euro. You are probably aware that these consumer boycotts are going on in Italy and Portugal, and what I am wondering is, do you have a hypothesis as to why this was a bigger issue in Germany back in May / April and only now seems to be bubbling up in these countries? Are there perhaps local factors also driving consumer sentiment about this?
Duisenberg: There is a general resentment amongst the public, and it may be growing here and there, against the perceived inflation, which is clearly higher in the eyes of the public than the measured inflation, which encompasses a much larger basket of goods, when you measure it over time. But the resentment amongst the public is in particular against perceived price increases. It is not against the euro -- the euro is maybe the scapegoat for all that -- but it is against the restaurateurs, against the hotel sector, hairdressers and so on, who may in the beginning have abused the transition to the euro by rounding, in a sometimes dramatic way, upward. Now it is our perception that the effects of the changeover are over. That does not mean that there are no price increases any more. But it is an understandable reaction of the public to blame, let me call it" normal '' price increases on a new factor in particular, and that is the new money, the euro. But that will change over time. So I am not too concerned about it. But what I am concerned about is the discrepancy between the perceived rate of inflation and the actual rate of inflation. For example, if you think about goods which you do not buy that often, like a new computer, they have fallen in price. But that is not noticed as much as the daily beer or coffee you are inclined to buy. But it is crucial that this perceived rate of inflation does not become entrenched in the minds of people and thereby lead, for example, to wage demands which are higher than would be justified by the actual broadly based rate of inflation.
Question: Mr. Duisenberg, we are approaching the tenth anniversary of Britain 's, or rather the pound 's unceremonious withdrawal from the exchange rate mechanism. Now as the debate in Britain over whether or not we should join the euro heats up, it would be very interesting to know what your view is on whether or not Britain needs to join the ERM for a two-year period before it could join the euro, were it to vote to do so.
Duisenberg: Well, again, I will not enter into that debate, knowing that the debate is raging throughout the United Kingdom and the best thing I could do to prevent Britain from joining is to speak out about it. And for that reason I will refrain. But I do remember ten years ago -- I was in Bath when that all happened, and when Britain took the plunge in the bath outside the ERM.
Question: Mr. Tremonti, the Italian finance minister, proposed the adoption of EUR 1 and EUR 2 banknotes together with coins in order to prevent more rises in price. 74% of Italians agree with this proposal, and I want to know what you think about it and if you have discussed this in the European Central Bank. Thank you.
Duisenberg: We have no plans to introduce EUR 1 or EUR 2 banknotes, but we have also heard those noises. Of course, we have discussed it. We are assessing the implications of introducing such a banknote. In principle we have nothing against it, but we are assessing the implications and I hope that Mr. Tremonti realises that if such a banknote were to be introduced, he would lose the seigniorage which goes with it. So whether he, as a minister of finance, would be all that pleased, I do not know.
Question: Mr. President, could you elaborate on the ongoing discussion in the ECB Council about the reform of the ECB Council in view of the accession countries and when do you expect this discussion to come to an end, to a conclusion?
Duisenberg: I can not elaborate on that. We are discussing it ; I expect the discussion to lead to a conclusion in the course of this year. All that has been asked of us is to come up with a proposal, if necessary -- that has also to be judged -- to come up with a proposal as soon as possible after the ratification of the Nice Treaty. So we have still some time left, because the Treaty has not been ratified yet and we first have to wait, hopefully, for the outcome in Ireland on this.