At our meeting today, which took place in the exceptional circumstances associated with the conflict in Iraq, we comprehensively reviewed monetary, financial and economic developments. We discussed at some length the potential economic implications of the military operations. In the Governing Council 's view, it is not possible at this juncture to assess what effect they will have on the global economy, and on economic developments and the medium-term outlook for price stability in the euro area. Overall, the basic elements of our assessment of 6 March on the outlook for price stability remain in place and accordingly we decided to keep interest rates unchanged.
We also noted that the outbreak of the war has not affected the functioning of the financial system. As indicated in our press release of 20 March, the Governing Council will act to ensure the proper functioning of financial markets, providing sufficient liquidity in the euro area as needed.
Let me now explain our assessment of economic developments in more detail.
As regards the analysis under the first pillar of our monetary policy strategy, the three-month average of the annual growth rate of M3 was 7.4% in the period from December 2002 to February 2003, up from 7.0% in the period from November 2002 to January 2003. Given the continued high volatility in financial markets, mainly related to the geopolitical uncertainty, M3 growth continued to be fostered by portfolio shifts away from more risky assets. However, M3 growth appears also to have been affected by the low level of short-term interest rates prevailing in the euro area, as indicated by the strong growth in its most liquid components. At the same time, credit growth showed signs of stabilisation in early 2003, after the moderation observed throughout last year.
Turning to the analysis under the second pillar, recent data and surveys continue to confirm that real GDP growth in the euro area remained weak in early 2003. In particular, the persistence of geopolitical tensions continued to negatively affect sentiment and dampen economic activity, thereby adding to the forces which had already depressed the outlook for the euro area before the escalation of tensions in the Middle East. As a result, we should only expect a modest rate of economic growth for 2003. However, the evolution of economic growth for the rest of this year is particularly difficult to foresee at the moment, given the exceptional degree of uncertainty arising from the military conflict. Our baseline scenario continues to be one of a moderate recovery associated with diminishing uncertainty, starting in the second half of 2003. However, we will need to review the economic implications of the war as soon as a clearer picture emerges. A number of scenarios, implying widely different outcomes for economic activity, are conceivable at present. Yet it would be premature to assign specific probabilities to any such exercises, which are mainly of an illustrative nature.
Looking at price developments, annual HICP inflation is estimated by Eurostat to have been 2.4% in March 2003, unchanged from February. The recent drop in oil prices is not likely to be reflected in the price statistics until April.
As for the outlook for price stability over the medium term, it is particularly important to clearly distinguish between short-term volatility and more fundamental factors. While oil price developments may very much influence the pattern of inflation rates over the coming months, other factors should dominate beyond the short term. The lagged effects of the appreciation of the euro exchange rate since mid-2002 will continue to dampen upward pressure on prices, as will the modest economic growth. If the recent significant reduction in oil prices is sustained, inflation rates will in all likelihood fall below 2% in the course of 2003 and remain in line with price stability thereafter ; evidently, this presupposes that wage moderation prevails.
Overall, the present policy stance is consistent with the preservation of price stability over the medium term. It maintains a monetary environment that is in itself favourable to economic growth in a situation in which other factors are having an adverse effect on economic activity. Exceptional circumstances are complicating the assessment of economic trends. We will therefore continue to monitor events carefully and evaluate them in the light of our mandate.
Regarding fiscal policies, the Stability and Growth Pact provides a robust and flexible framework for addressing any strains on public finances without undermining the principle of budgetary discipline. While letting, where possible, automatic stabilisers operate in reaction to changing economic circumstances, there is no reason to pursue fiscal activism. It remains essential that both the commitments made in the stability programmes and the requests to further improve fiscal positions, as subsequently agreed in the ECOFIN Council, are implemented in full. This will help to build confidence in the fiscal framework and anchor expectations about the future macroeconomic environment.
In a highly uncertain environment, it is all the more essential that governments help to boost investor and consumer confidence by taking decisive action to implement structural reforms in labour and product markets and in public finance. On the one hand, there appears to be a broad consensus among policymakers and the public that such reforms are important to ultimately raise the euro area 's production potential, improve the flexibility of the economy and make the euro area more resilient to external shocks. On the other hand, notwithstanding some progress in individual countries, the effective pace of reform has so far remained slow and clearly insufficient to meet the Lisbon objectives. Over the past few years this has given rise to an implementation gap. Efforts to overcome structural inefficiencies in the functioning of markets must be stepped up. This would promote confidence in the medium-term production capacity of the euro area and therefore counteract to some extent the current high degree of uncertainty.
Question: A question about the strategy. I would like to know if you discussed the strategy today and is it true that you would like to keep the strategy exactly the way it is now, just strengthening some data collection of the first pillar and leaving it unchanged for the rest?
Duisenberg: I am afraid I can not discuss the evaluation of the strategy, which is under way at the moment. Our experts are actively discussing and evaluating the strategy and are preparing the Governing Council for a thorough discussion. The first discussion will take place in the context of the next Governing Council meeting, and we will have another discussion about two weeks later. Maybe that will be final, maybe we will need another discussion two weeks later -- we are rather flexible on that -- but I can assure you that I will be in a position to answer all your questions, possibly before the end of May.
Question: Did you discuss a specific policy move today? In other words, did you discuss a rate cut? And if so, was it an extensive discussion? And a follow-up question, if you did not discuss a specific move, does that mean you still see a chance for a quick economic recovery once the war is over?
Duisenberg: We had, of course, a substantial discussion, as we always have during the first meeting in the month of the Governing Council, on the monetary policy stance, but without a bias in any direction. And our conclusion was clear: we decided not to change interest rates today. As far as the second part of your question is concerned, as I indicated in my introduction already: uncertainty about future developments is so large that we have various scenarios about what will happen once the uncertainty diminishes. But we do not know when that will happen, and the" when '' is very determinant for the kind of scenario you are discussing. So it would be pure speculation to go into further detail about the various scenarios which might develop, without knowing which one has the greatest possibility of being realised.
Question: Have you been surprised at the extent of the weakness seen in the economic data out so far for March, not just the sentiment indicators but also the contraction in manufacturing and services activity? And does this now suggest that 1% growth in the euro zone this year will be a best case scenario?
Duisenberg: We have not been surprised by the development of the data. What maybe surprises us is the higher degree of volatility that we observe in the markets, both in the foreign exchange markets and in the markets for financial assets. That is... well, if not a surprise, then at least a phenomenon that we closely observe. By setting a firm framework for the future monetary policy stance, we hope to contribute to diminishing this volatility to the best of our abilities.
Duisenberg: Now, as regards the second part of the question, our baseline scenario is still, as you indicated -- and as I indicated at our previous press conference -- for a modest, if not very modest, rate of growth on average over this year and for the resumption of economic recovery in the course of the second half of this year.
Question: Mr. Duisenberg, you stressed the uncertainty of the economic environment caused by the war. Should we take that to indicate that while the war is going on, it is unlikely that you will adjust interest rates? Or is an interest rate adjustment possible even before the war has ended? Furthermore, you mentioned that HICP is stable at 2.4%, but core inflation is somewhat lower than that. How much importance do you attach to the trend of core inflation as opposed to headline inflation?
Duisenberg: A change in the monetary policy stance is possible at any moment when our analysis -- which is based on a well-defined monetary policy strategy, as you all know -- leads us to decide on such a change - war or no war. And I can not quantify the degree of significance we attach respectively to core inflation, headline inflation or overall inflation, as you call it. We look at all those things simultaneously. They are just one part of our analysis which gives rise to certain policy decisions.
Question: In view of the difficult economic situation internationally, compounded by the war, to what degree could a rate cut affect and improve the situation? If we bear in mind that in Japan interest rates are close to zero, have been close to zero for a long time, and nothing much has changed. Turning to Italy, the changeover has been referred to as a major factor affecting the economy. A proposal has been made to introduce $ 1 and $ 2 banknotes. The European Central Bank has been studying the situation ; what is your opinion on this?
Duisenberg: You asked: what could a rate cut do in the current circumstances? I am almost inclined to say: we continuously ask ourselves the same question. So the fact that we concluded today that the current circumstances would not give rise to a change in the monetary policy stance or, in other words, to a change in the level of official interest rates, reflects our opinion that the best contribution we can make to a revival of confidence among consumers and investors and in the markets is to stay calm and to present an image of continuity and stability. We are still studying the issue of the $ 1 note, which was raised in particular by the Italian Minister of Finance. Our experts are looking at it, and we do not exclude anything. But do not expect any decision before, we have engaged in preparing for the second series of banknotes to be put into circulation. That is a matter which is in preparation but which is years and years and years from now. And we will decide on that particular question when that moment draws near.
Question: Mr. President, there are a lot of voices from economists that say the Maastricht criteria for fiscal policy should be lessened in order to allow for a recovery of the economic situation. Would you be so kind as to elaborate on the possible advantages, but also on the disadvantages, of a lessening of the Maastricht criteria?
Duisenberg: Neither we nor the ministers have under consideration, as far as I know, any change in the criteria as they are. Now, if you are referring in particular to the cyclical situation in which the euro area finds itself, we see, in the current circumstances, no reason for fiscal activism and no reason to drift away from the policy commitments and the stance for fiscal policy as incorporated in the rules of the Stability and Growth Pact.
Question: Mr. President, with regard to the beginning of the war, do you believe that the volatility of exchange rates and economic conditions overall has increased during these two weeks? A second question: the President of the Chicago Federal Reserve Bank today defined the prospects of the US economy in the medium term as" bright ''. What term would you use for the European economy in the medium term?
Duisenberg: The volatility of the exchange rate has maybe been a little bit more intensive than in the days before the war. Short-term movements are not very significant for the long-term development. The appreciation of the euro since the middle of last year is continuing to have an impact in a dampening of the inflationary pressures. And that has nothing to do with volatility. I am very pleased to hear the sounds from the other side of the ocean, that the prospects there seem to be bright. As far as the euro area is concerned, I can only repeat what I said in my introductory statement: the Governing Council foresees only a modest rate of growth for this year and a moderate start to the recovery in the course of this year.
Question: Mr. Duisenberg, if I heard you correctly, you said that the ECB does not have either an easing bias or a tightening bias right now. It is neutral. Would you like to comment then on the World Bank, the Institute of International Finance and indeed the OECD, who all said that they are concerned about slowing global growth and that there is room for monetary easing at the ECB? Indeed, one of them even said a significant easing was needed.
Duisenberg: Your first question was" if I heard you correctly ''. Well, I did not use the word" bias '' in my statement and I will not. What I did say was that the present policy stance is consistent with the preservation of price stability over the medium term. We will continue to monitor developments at any given time during the coming weeks and months to see whether we come to another conclusion. So, the correct interpretation is: there is no bias. Neither in the direction nor in the amount. I have also read these comments from various international organisations or private institutions such as the IIF. We take note of them with interest, but I have indicated the conclusions to which we come loud and clear in the introductory statement, which was carefully prepared by the Governing Council today.
Duisenberg: Question -LRB- Translation -RRB-: Mr. President, maybe you could explain something. You refer to modest and moderate growth in the second half of the year, but could you give us a figure? What do you mean by modest or moderate?
Duisenberg: Well, it is no secret that we think that, on average, growth for a year that has started so sluggishly will not exceed a figure of around 1%. I think that is a sufficient indication.
Question: Did the Council discuss your succession? -LRB- Translation -RRB- I would also like to ask Governor Fazio what his opinion is about a possible six-month extension of Mr. Duisenberg 's mandate?
Fazio: We have not debated this at the Council. I think that is a sufficient answer.
Question: Mr. President, the war might last for a long time. Even after the war is over, it could imply considerable military expenditure or higher spending in order to guarantee security in a number of countries, as well as in Europe. Are you afraid, Mr. President, that this might lead governments to relax their adjustment policies? Because the necessary resources would objectively be lacking.
Duisenberg: I can not speculate on what will happen after the war, if and when the war is over. It is certainly true that peace is as hard to win as it is to win a war. And what is of concern to the Governing Council is the re-emergence in the United States of the so-called twin deficit situation, where we now see -- and this is a cause of concern -- both the current account and the federal government deficit going in the direction of exceeding 5% of GDP. That is a situation which is unsustainable over the longer run. It could make both their and our lives more difficult in the future.
Fazio: I would just like to repeat one passage from the introductory statement:" In a highly uncertain environment, it is all the more essential that governments help to boost investor and consumer confidence by taking decisive action to implement structural reforms. '' -LRB- Translation -RRB- In a highly uncertain environment, due to geopolitical tensions -- and this is an understatement -- we must rebuild confidence. The current times are characterised by a high degree of uncertainty. Uncertainty leads to cutting expenditure for investment and consumption. The demand for durable goods, capital goods, has been falling. So our philosophy is the following: we must build up confidence, and this applies to both fiscal and monetary policies. At times of uncertainty we must ensure that we stay on the right track.
Question: I was not sure if I actually caught your first answer regarding the possible succession question. Has your thinking in any way evolved on the issue of how you would feel about possibly staying on for longer? Have you communicated this in any way to the Council and how did you respond to reports that the French might actually support your staying on for longer? The second part of my question is: do you see any moves towards a co-ordinated global policy by central banks in order to ease the current economic situation?
Duisenberg: As far as my succession is concerned, I do not take questions on that subject, with the exception of one answer that I can give: in the letter I wrote to President Aznar in February of last year, when he was President of the European Union, I literally wrote" Dear Mr. President, I herewith ask you to permit me to resign on 9 July 2003, or so much later as is in the interest of a smooth transition of the Presidency. '' And I have neither privately, nor publicly, anything to add to that clear statement. On transatlantic co-ordination with the authorities, of course we continuously co-ordinate, or at least discuss, our policies and we inform each other of them and of our policy intentions. But that is an ongoing process and in the current climate there is nothing that would indicate that we need to intensify that. I may want to remind you that when you hear outsiders talk about this, they also talk about it in the light of the upcoming G7 meeting of finance ministers and central bank governors, which is to take place on Saturday next week. But there is nothing exceptional in our minds in this respect.
Question: Could you elaborate, Mr. President, on some of the remarks you have made? If I am not mistaken, these modest and moderate growth forecasts are your current projections on the basis of the current situation. My first question is, are those the same forecasts as two weeks ago? This is the first meeting of the Governing Council after the outbreak of the war. Did you have the same analysis today as you did two weeks ago? Are these moderate and modest forecasts current forecasts? Is recession a possible scenario?
Duisenberg: It may suffice to literally repeat what I said in my introductory statement on behalf of the Governing Council, and I quote:" Our baseline scenario continues to be one of a moderate recovery associated with diminishing uncertainty, starting in the second half of 2003 ''. From that you can infer that we have not changed our baseline scenario and that our forecasts are still the same as they were when we talked to each other one month ago. And I may add that the word" recession '' has not been used in today 's Governing Council discussion. That should be enough of an indication.
Question: I am sorry, but I have another question on your succession. Did you get any signals from the EU governments that they want you to stay on longer? And how long can a smooth transition be: half a year, one year? Is there any time when it is final?
Duisenberg: All the signals I have come from your papers. A smooth transition can take anything from one week to one month, to two months, to three months -- it is completely uncertain. But as long as the transition is smooth the Governing Council and I will be very, very satisfied.