Turning to business, we have decided to leave the key ECB interest rates unchanged. The basic components of our economic and monetary analysis remain in place. In particular, the medium-term outlook for price stability continues to be favourable, allowing us to conclude that the historically low level of ECB interest rates remains appropriate. This also lends ongoing support to economic activity. We will continue to carefully monitor all developments which might affect our assessment.
The more detailed considerations underlying our decision are as follows:
Starting with the economic analysis, real GDP growth in the euro area was virtually stagnant in the first half of this year. However, the latest data and information are consistent with a moderate pick-up in activity in the second half. In particular, there are signs that economic activity might have firmed somewhat in the third quarter, and confidence indicators available up to September generally point to some improvement in economic expectations. In line with available forecasts and projections, this upturn should gradually strengthen in the course of 2004. Externally, the recovery in world economic activity appears to be proceeding. This should support demand for euro area exports, counteracting the effects of the deterioration in price competitiveness. Domestically, companies seem to be continuing their adjustment efforts to enhance productivity and profitability. This, together with the low level of interest rates, should contribute to a recovery in investment. Furthermore, terms-of-trade effects stemming from the past appreciation of the euro should positively affect real disposable income in the euro area, and thereby private consumption. Developments in financial markets are generally consistent with this overall picture.
The short-term risks to our main scenario of a gradual recovery appear to be broadly balanced. However, some risks to the sustainability of economic growth at the global level remain. These are related to the medium-term sustainability of public finances in major industrialised countries and, in this connection, the adjustment of external imbalances in some regions of the world.
Turning to the outlook for prices, according to Eurostat 's latest flash estimate, HICP inflation in September was 2.1%. This was unchanged from August. For the remainder of this year, HICP inflation should hover at around 2%. Exchange rate developments help to contain short-term upward pressure on prices, while higher unprocessed food prices related to the hot and dry weather conditions in some euro area countries could imply some limited upward risk over the next few months. For early 2004, there is still some uncertainty about the precise impact on HICP inflation of planned increases in indirect taxes and administered prices in a number of euro area countries. Looking beyond the short term, however, we continue to expect inflation to fall below 2% in 2004 and to remain in line with price stability thereafter. This expectation is based on the assumption of moderate wage developments in the context of a gradual economic recovery. In this respect, we note that inflation expectations in the euro area are anchored at levels below but close to 2% over the medium to long term.
Turning to the monetary analysis, the strong monetary growth over the past two years has been fuelled by past portfolio shifts, precautionary saving and the low level of interest rates. The latter factor also provided a counterweight to the negative impact of weak economic growth on loan developments. In fact, there are signs of a pick-up in the growth rates of loans to the private sector.
At the current juncture, the accumulation of excess liquidity is not a cause for concern given the subdued economic growth in the euro area. However, if it were to persist in conjunction with a significant strengthening of economic activity, it could lead to inflationary pressures in the medium term.
Summing up and cross-checking the information from the two pillars, our economic analysis continues to confirm the expectation that price pressures will remain subdued in the coming years, in the context of a gradual economic recovery and moderate import price and wage developments. In view of the economic situation, the strong monetary expansion should not be seen as adversely affecting this outlook for the time being. Overall, therefore, the medium-term outlook for price stability remains favourable.
As regards fiscal policy, we would like to reiterate our serious concerns. There is growing evidence that most countries will miss their budgetary targets for 2003 by a significant margin and, in a number of cases, budgetary plans for 2004 are not reassuring. While the deterioration of budgetary balances mainly reflects the lower-than-anticipated economic growth, it is worrying to see that not all countries with severe imbalances have so far introduced sufficient consolidation measures. It is fundamental that the credibility of the institutional underpinnings of EMU be maintained.
In this respect, let me stress that the Treaty and the Stability and Growth Pact provide an appropriate framework for maintaining fiscal discipline within adequate bounds of flexibility. Far from being a mechanical scheme to constrain fiscal policies, the excessive deficit procedure establishes a sequence of incentives for countries to prevent and correct severe budgetary imbalances. At each instance of this sequence, a country 's fiscal efforts and changes in the economic environment are assessed and taken into account in the design of further steps. Countries are therefore continuously made aware of the risks and costs arising from any delay in taking policy action to preserve the sustainability of public finances. To maintain the credibility of the fiscal policy framework it is essential to fully abide by its rules and to implement them in every respect. Doing so and complying with the requirements of the ECOFIN Council will lead to positive confidence and growth effects, which can be strengthened if fiscal plans are part of a comprehensive and credible medium-term strategy with emphasis on structural expenditure reform.
Finally, although it might mean stating the obvious here in Lisbon, the Lisbon Strategy, which was agreed upon back in March 2000, is of the utmost importance in the process of implementing structural reforms. More reforms are urgently needed to reduce structural rigidities in labour and goods markets so as to address the main economic problem of the euro area, namely the high level of structural unemployment. At the same time, current efforts to set in motion important changes in pension and health systems and in other areas in order to prepare for the ageing of society are of immense significance in ensuring the sustainability of our social security systems.
Let me close with a few personal remarks. As you are aware, this will most probably be the last press conference following a meeting of the Governing Council that I will chair. From my perspective, these press conferences have been a success. Their purpose is to inform the media and the general public in detail, and on an almost" real-time '' basis, about the outcome of Governing Council meetings. They have allowed us to communicate and clarify our policy decisions in an open and transparent manner. Indeed, in my view, this practice makes the ECB one of the most transparent central banks in the world. I would like to take this opportunity to thank the media for their work over the five-and-a-half years in which I have had the privilege of being at the helm of the Governing Council. I wish you all the best.
Question: Have you been surprised at the pace of the euro 's rise against the dollar in the past months and also at the reaction of the financial markets to the G7 's communiqué on exchange rate flexibility? And secondly, is the euro 's current exchange rate, in your view, sufficient to facilitate an economic recovery in Europe?
Duisenberg: Well, you will not be surprised to hear that I am not going to say much about that subject. First of all, I am not and was not surprised particularly, if you realise that today 's exchange rate is exactly the same as when we started on 1 January 1999, when I started. The role played by the exchange rate in our monetary policy strategy is by now very well known to you, and it does not need to be repeated here. Of course, we do not normally comment on specific levels or movements. Now I insist on emphasising that the thrust of the G7 discussions in Dubai, to which you refer and in which I took part, was not related to the bilateral euro-dollar exchange rate, but rather to the desirability of spreading the adjustment of existing macroeconomic imbalances more widely across the regions of the world. And I am afraid, ladies and gentlemen, that is all I am going to say about exchange rates today.
Question: Mr Pedro Solbes was very sympathetic with France and its budget problems. How do you understand the position of Mr Pedro Solbes?
Duisenberg: Well, the process is not over yet. Last week the French government introduced a new budget. Next Monday the Eurogroup will meet to have a first discussion on that topic and then the timing, the judgement and the ultimate judgement will take another couple of months so that, according to the normal procedures, by about Christmas we should know more and be determined to do what has to be done. In the meantime, today Mr Solbes got from the Governing Council of the ECB all the support he might need for his further endeavours, he being the guardian of the Stability and Growth Pact.
Question: Mr President, in your statement you mentioned that the Governing Council deemed rates appropriate. Was that a statement for the present or do you expect them to remain appropriate for a while?
Duisenberg: Given the present circumstances, given our present analysis of the medium-term outlook for price developments and in the light of the other things I said, such as we expect inflation to be below but close to 2% over the medium term, you can extend the word" appropriate '' over a time frame as long as you like.
Question: Mr Duisenberg, you expressed your utmost concern about the Lisbon strategy, saying that it was extremely important that these structural reforms be carried out to make Europe more competitive by 2010. As we sit here in Lisbon and this government itself is now beginning to tackle those issues, what still needs to be done and how well are countries like Portugal doing in order to get Europe truly competitive up to the standards that people are looking for by 2010? And the second issue is, I have not heard anything about the oil price. How much consideration did you give to the oil price in making your most recent assessment?
Duisenberg: On the Lisbon strategy, it is fair to say that the original target to make, over a period of ten years, the European economy the most dynamic economy in the world, requires a lot of structural reforms to be realised. It is fair to say then that if the parties to that agreement live up to their determination, there still remains more to be done than has been done so far. As far as oil prices are concerned, we noted with some concern that there has been some recent uptick in the oil prices, but this was not such an overriding phenomenon that we should take it into account in coming to our conclusion that, as the Handelsblatt just reiterated, our rates, at least, are appropriate.
Question: Is there a risk of disappointingly low growth?
Duisenberg: Well, you heard that we are sticking to our main scenario, which we have reiterated and published over and over again, of a moderate -- but underlining the word" moderate '' -- pick-up of growth during the second half of this year, and we see signs of that emerging and continuing further and accelerating further in the course of 2004. Our present expectation is that this will lead to, by the end of or in the second half of next year, a rate of growth for the euro area which then comes, at an annual rate, close to the long-term potential rate of growth of the euro area.
Question: Now, the euro rate is at the same level as in January 1999, you said. But it also seems to be very close to the rate of June when you cut the rates. Did this increase of the euro in the last days change the scenario as far as growth prospects are concerned?
Duisenberg: Well, I could say even more about where the euro rate is today. It is at about a level where it was as an average over the last 25 years. So, day-to-day movements do not -- almost as a matter of principal -- influence our decisions.
Question: I would like to know not about the level of the exchange rate today, but I am sure that the Governing Council has analysed the sustainability of the recent trend of the euro to appreciation. I would like to know at what level does the Governing Council consider that the appreciation of the euro is a threat to price stability? This is the first question, the second question is the following: the ECB has recently redefined its monetary policy strategy. It has redefined the objective for inflation as a value below 2% but close to 2%. The forecast of the ECB for the next year is for inflation of around 1.3%. If the mid-point of the interval for projections is 1.3%, I would like to know if this value is compatible with the definition of the desirable level of inflation next year and what the ECB can be expected to do in the case of such a forecast becoming concrete, being realised.
Duisenberg: The first question is easy to answer. The Governing Council does not have any particular rate for the exchange rate in mind which it would call appropriate. We do believe that exchange rates in general should, over the medium or long term, reflect the economic fundamentals of the regions concerned. Then for next year, close to but below 2% implies a rate which is close to but below 2%, but higher than 1.3%, I can assure you.
Question: Two days ago, Mr. Solbes told the European Parliament that the possibility to apply to France the special circumstances that are in the pact was under discussion. Do you agree with that, do you think that France could deserve the special circumstances for the technical recession it has apparently suffered?
Duisenberg: The ECB, that is Mr. Papademos and myself, will give our judgement and support to the European Commission for the process that will take another two or three months, as I just told you. And that 's all I am going to say at this point about individual countries. We will be very explicit when we are in the appropriate forum, which is the Council of Ministers.
Question: Are you now more confident than four weeks ago that growth will really recover? And a long-term question: how do you expect that the problem with the US current account deficit, this imbalance, will be solved, and is there a way that it could be solved without a strong appreciation of the euro? And the last question on today 's occasion: what is your biggest wish and your biggest warning for the future ECB and your successor? What would be your message and your advice for the ECB without you?
Duisenberg: I am as confident as I was four weeks ago about the resumption of economic growth, not more, not less. The United States has a big problem of basically twin deficits, a close to 5% current account deficit, a close to 5% fiscal deficit, that you can afford for one year, two years or three years, but at some point there has to be an adjustment. We hope that the bulk of that adjustment will come through a pick-up of growth in the United States, and for the rest it is a problem for them and for us and for the rest of the world. We do hope -- that is what I said in my statement earlier -- that the burden of adjustment which has to come will be spread more evenly over the entire world than has been the case up until now.
Question:... your advice for the ECB?
Duisenberg:... oh, in particular for my successor you mean? To do as I did.
Question: Would you think that the recession in Portugal is experiencing should or could justify a violation of the 3%?
Duisenberg: This is basically a question for Governor Constâncio, but a recession as such, in my opinion, never justifies a violation of the 3% limit.
Constâncio: May I add something here. Well, I agree that this is the case. A recession by itself is a growth rate of below 0%. But as you know, it is also in the regulations of the Pact that if the recession is over minus 0.75% this can create a presumption that the ECOFIN Council can consider this as a special circumstance. So there is a reference here to a specific value, which is not an automatic guarantee that it will be accepted as a good reason for violating the 3%, but -- as is written in the regulations -- it creates the possibility. The position of the Portuguese government -- and the position that I have also expressed myself publicly several times -- is that Portugal should not take advantage of this possibility. And the Portuguese government has indicated that it is preparing the necessary measures to comply with the limit of the 3% deficit.
Question: Two questions about inflation. One is a follow-up to your reply to Mr Costa, I believe, about the ECB 's inflation estimate for 2004, which I believe currently stands at 1.3%. Do you expect this inflation estimate for 2004 to be revised upwards? And the second question has to do with the impact on the inflation outlook of the current strength of the euro. If the euro remains at its current level of strength, do you expect that this would have an impact on the inflation outlook?
Duisenberg: Well, in my statement I combined the recent appreciation of the euro exchange rate and its effects with the impact of unprocessed food prices and some other elements. There has been some pick-up in oil prices, which I also addressed. On the whole, our forecast remains consistent with our definition of price stability, that is, close to but below 2%. But we are inclined to think that it will not be as low as the 1.3% mentioned earlier.
Question: And what about the euro?
Duisenberg: Well, I answered that already. The euro is one of the indicators we look at. And, as I said, the euro is now at a level corresponding to its average for the last 25 years, so we can weather any storm.
Question: Mr Duisenberg, I have a follow-up question to your growth expectations. You repeated the Council 's expectation that euro area growth -- annualised rates of growth -- would begin to approach trend potential sometime late next year. Of course, in trend potential, there is a range that the ECB stuck to before, defined as between 2% and 2.5%. And, assuming that this is still the case, are you talking about annualised rates of growth and might this be towards the lower end of that range or towards the upper end, or in the middle? And a related question, is there a risk that growth next year, average growth rates for the euro area, would be more likely to be at the upper end of the range? And Eurosystem 's staff projections?
Duisenberg: As you correctly state, we estimate the long-term growth potential in the euro area to be in a range of 2-2.5%. And I am not going to let myself be led into forecasts as to whether it will be closer to the bottom or the top. We believe it will be in that range. And I can not say any more than that.
Question:... and the risks to the upside, the risk that we would have more growth than we expect...
Duisenberg: Well, that is a risk I would be very happy to take.
Question: Mr Duisenberg, you talk about serious concerns about fiscal policies. As for Italy, it will not exceed a deficit limit of 3% of GDP this year. But the new budget proposal is full of one-off measures. What do you think about this? Are these serious concerns too?
Duisenberg: Well, that is a cause for concern. The more one-off measures there are the more it is necessary -- over time -- to replace them with structural measures working their way through over many, many years. And that is something which still has to be done in Italy. But also in other countries. And, I am inclined to say that there are some countries which really are in the danger zone, and Italy is one of them.
Körber: Last question. One more question from Mr Major? Do you want to correct your article from this morning maybe?
Question: Mr Duisenberg, you said you were as confident as four weeks ago about growth. No more, no less. Four weeks ago Mr Papademos talked about downside risks. You have not mentioned them today. That would suggest to me that there is a change of tone at the ECB and you are now much more confident about growth. Is that true?
Duisenberg: I have said that the risks are more or less balanced, both to the up and to the downside. I said so in my Introductory Statement. But then referring to the first remark that Mr. Koerber made about your article of this morning about a statement that you claim was made by Mr Issing, I want to emphasise that Mr Issing was either misquoted or misread. On no occasion has he made the statement he is purported to have made when giving an analysis in Zürich yesterday. And Mr Issing himself asked me to say precisely this if I had the opportunity to do so.