Following a comprehensive economic and monetary analysis, we concluded that the monetary policy stance remains appropriate to preserve price stability over the medium term. Accordingly, we left the key ECB interest rates unchanged at their low levels. While annual inflation rates are likely to fluctuate around 2% over the coming months, a gradual and limited decline should take place later on. We also noted that the economic recovery in the euro area has started and that confidence has strengthened further. We will continue to carefully monitor all developments that might affect our medium-term assessment of risks to price stability.
We also discussed the potential implications of the deeply regrettable developments at the ECOFIN Council meeting on 25 November. As we already stressed in our statement on the same day, these developments risk undermining the credibility of the institutional framework and the confidence in sound public finances of Member States across the euro area. Let me add that a credible fiscal framework is key not only to stability but also to growth, and is a precondition for low risk premia in financial markets to be preserved.
I shall now explain our assessment in more detail.
In the context of our economic analysis, the latest data releases confirmed that economic activity in the euro area has picked up. Real GDP growth in the third quarter reflects the strong momentum of the world economy, which we assume will continue next year.
We expect that domestic demand will start improving. Private consumption should be supported by positive terms-of-trade effects due to the past appreciation of the euro. With the usual lag, it should also profit from an increase in employment growth. Business investment is expected to recover gradually, mainly helped by an expansion of external demand, the low level of interest rates and generally favourable financing conditions. Moreover, it should increasingly benefit from the adjustment efforts of the corporate sector to enhance productivity and profitability.
Taken together, we look forward to a gradual recovery in euro area economic growth over the next quarters, leading to a broader and stronger upswing in the course of next year and the year after. The risks to this scenario appear to be balanced. Over a longer horizon, we remain concerned about the sustainability of global economic growth being undermined by external imbalances in some parts of the world economy.
Concerning prices, the latest information is in line with earlier expectations. According to Eurostat 's flash estimate, annual HICP inflation was 2.2% in November, following a rate of 2.0% in October. Similar rates have prevailed for most of this year and this inertia of inflation rates at around 2% is likely to continue in the coming months. Due to adverse food price developments, the evolution of oil prices and planned increases in indirect taxes and administered prices, inflation rates will fall neither as quickly nor as strongly as was expected earlier in the year.
However, when assessing price trends over the medium term, a number of factors should dampen inflationary pressures. First, given the past appreciation of the euro, import prices should contribute to this effect. Second, domestic cost pressures should remain moderate. In particular, wage growth should be contained in the context of a recovery which, for the time being, is expected to remain gradual. Provided that wage moderation can be preserved, which is indispensable for fostering employment, a cyclical recovery in productivity tends to dampen growth in unit labour costs, which has thus far been relatively high when judged against the weakness of the economy.
Overall, these views are also reflected in recently released forecasts and seem to be in line with survey data and financial market expectations. Accordingly, there is a rather broad consensus on the main scenario. At the same time, this outlook for price stability is conditional on quite a number of assumptions, such as those on global developments, oil prices, exchange rates, wage developments and fiscal measures. Therefore, elements of risk to the outlook for price stability need to be kept in mind. In this respect, we noted that financial market indicators for inflation expectations have shown some upward momentum over recent months. While technical factors might also have played a role in the movement of these indicators, and other indicators have remained broadly unchanged, inflation expectations warrant close monitoring.
Turning to the monetary analysis, M3 growth has been very strong over the past two years, reflecting portfolio shifts, precautionary savings and the low level of interest rates. The low level of interest rates has also supported the growth of credit demand. In our assessment, the accumulation of excess liquidity is not of concern for price stability at the current juncture, given that, for the time being, the economic recovery is only gradual. However, should high excess liquidity continue to prevail once there is a significant strengthening of economic activity, it could lead to inflationary pressures in the medium term. We will therefore continue to carefully examine monetary developments.
In summary, the economic analysis indicates that the main scenario for price developments in the medium term continues to be in line with our definition of price stability. This picture is confirmed by cross-checking with the monetary analysis.
Turning to fiscal policies, I have already mentioned that we expressed deep regret following the ECOFIN Council meeting on 25 November. Furthermore, we stressed our support of the Commission 's views on the ECOFIN Council 's Conclusions. We also took note of the commitments made by France and Germany to correct their excessive deficits as rapidly as possible and at the latest by 2005. Moreover, we noted that the ECOFIN Council stands ready to take a decision under Article 104 -LRB- 9 -RRB-, on the basis of the Commission recommendation, should the two governments fail to act in accordance with their own commitments. We strongly urge the governments concerned to live up to their responsibilities. Confidence in the soundness of public finances is essential for sustainable growth in consumption and investment.
The overall fiscal framework of the Stability and Growth Pact remains of central importance and should be fully respected. The same applies to the requirement to avoid excessive deficits, laid down in Article 104 of the Treaty, and to the reference values of 3% and 60% for the deficit and debt-to-GDP ratios respectively, specified in the Protocol on the excessive deficit procedure annexed to the Treaty. These are the foundations for trust and confidence in EMU.
Trust and confidence are also crucial in the context of structural reform. Enhancing the competitiveness of the euro area, in particular in labour and product markets, increasing the efficiency of the tax systems and ensuring the sustainability of social security schemes all foster a better allocation and utilisation of capital and human resources. There is no doubt that measures in these respects improve the growth perspectives of the euro area. However, in order to foster confidence in the shorter term, convincing assurance must be given that these challenges are indeed being tackled in a decisive manner and that clear action is being taken. While some progress has been made, the Governing Council strongly encourages governments to accelerate the implementation of structural reforms and also calls upon social partners to fully commit themselves to the objective of making the euro area a more dynamic and innovative economy.
Question: Mr Trichet, you said you discussed and you talked about the implications of the ECOFIN decision. I was wondering what impact you thought the French and German budget deficits were likely to have on the image of the euro, particularly if they do not live up to their commitments. So, would it damage the image of the euro? And secondly, how are you going to analyse all this in the coming months? How is it going to affect your analysis of monetary decisions?
Trichet: Well, first of all I would say that we have expressed ourselves sufficiently clearly in real time not to have to elaborate too much on our analysis today. I repeated a moment ago that we are sticking to the analysis and to the diagnosis we produced in real time, immediately after the developments that took place in the ECOFIN meeting. What we consider to be of the utmost importance in the present circumstances, of course, is that -- as we say -- each partner should live up to its responsibility. I do not want to comment any more on what would happen if the commitments are not met. It is said in the decision, which was taken by the majority, the qualified majority of the Council, as I have just mentioned, that in that case the recommendations according to Article 104 -LRB- 9 -RRB- of the Treaty would be decided upon by the very same majority because they committed themselves to doing that. And then we are in the" sequencing '' of respecting the prescription of the Stability and Growth Pact. I do not want to elaborate further on that.
Question:... this is not really what I was getting at: is it as much about image as it is about substance, the image that is given by this as much as the substance of the problem?
Trichet: Well, you can not separate the form, the procedure and the substance. All are intertwined in such circumstances. And it was taking account of the full package, with all the elements concerned, that we said what we said: that we regret those developments and that we took note of the commitments that I just mentioned. The commitment by the countries concerned and the commitment by the majority, the qualified majority itself. Thank you very much.
Question: Mr President, your predecessor, Wim Duisenberg, said this autumn that he was praying that the euro would not appreciate too far and too fast. Do you go on praying? And what kind of other ammunition do you have against this appreciation? Is it already worrying when the European industrialists say that we are close to levels which are worrisome?
Trichet: First of all, I already said here that I will not comment on the day-to-day and week-to-week evolution of currencies on markets. We are living, as you know, in a system which is a floating exchange rate system. That being said, I already said that we -- all the central banks in the world -- are pursuing strategies, long-term strategies, aimed at delivering stable and strong currencies. And this is done by all central banks on both sides of the Atlantic, for instance, because it makes it possible to gain the confidence of investors and savers. It is very important to obtain this: very low risk premiums on the medium and long-term rates, in particular, and preserving or enforcing the favourable financial environment, which is of course one of the elements that is important for growth and job creation. So I will not elaborate more than that.
Question: Mr Trichet, we had some rather disconcerting reports about the alleged plans of the EU to exert some currency exchange rate controls. It sounded absurd and nonsense: is it?
Trichet: I do not see at all what you are suggesting or alluding to.
Question: There were some press reports that said that there were plans somewhere in the European Commission, because there was concern about the strength of the euro, to establish some kind of exchange rate controls at some stage. It sounded like going back to the gold standard or something.
Trichet: I am not aware at all of that and it is not in line with what I have just said and what is the present rule of the game.
Question: Mr President, Pedro Solbes joined the meeting. Did you ask the Commissioner about the reports on the new ideas of President Prodi to correct the Stability and Growth Pact, with a better equilibrium between growth components and stability components? Did you ask him?
Trichet: We had Pedro Solbes with us. You know that we invite the Commissioner and also the Eurogroup to our meetings, and they come from time to time. We did not have any report on what you have just said. We had a report on how Pedro was looking at the situation at this stage. But nothing to comment on what you have just indicated.
Question: I have two questions. We have growth in the United States of 8.2%, we have interest rates at 1.0%, and the dollar is going down. On the other side of the Atlantic we have a very strongly appreciating currency, sluggish growth at 1.5 to 2.0% and interest rates at 2.0%. Inflation is almost the same. Is any action needed from the European Central Bank?
Trichet: I have already said what our analysis is. So you have all the elements that are guiding our policy. Everybody knows what our benchmark is ; we give and display our definition of price stability ; everybody can see what the various data are that we might have in mind ; and it is absolutely clear that we take our own decisions on the basis of our own responsibilities. What we have done until now -- and I repeat it because it seems to me that it is important -- is to permit 305 million citizens of Europe to benefit from a financial environment with objectively low medium and long-term rates that did not exist before the euro. We had much higher rates in various economies, and this of course is gained through confidence and credibility in the long-term stability of the currency. This success we had in shipping to the euro, and to the yield curve of the euro, the credibility and confidence accumulated in those areas of Europe with the highest levels of credibility and confidence is, I would say, a very, very important success. Perhaps the first success of the euro. And it is for that reason that we trust that, when we take our decisions on the basis of this aim of preserving and reinforcing confidence, not only are we, of course, doing what we are called upon to do, namely maintaining price stability, but we are also creating an environment favourable to growth and job creation, as I just mentioned.
Question: I have a second question. I saw from your survey of the banking system that private credit is still not expanding very much. So are you not worried about that? Where should growth come from if the euro is still appreciating so much and maybe putting the brake on growth?
Trichet: Our analysis, as I said, is that the private sector, the competitive sector has done a lot to reinforce competitiveness and to reinforce profitability. And it is clear that the last few years have been really dedicated to making these efforts, after the previous episode in the cycle which had been very buoyant and active, as you know. We trust, as I said, that investment will now probably be observed, and we trust that the growth that we have in mind, and that all observers have in mind, will be fostered by consumption, and also by investment. So we expect to observe a progressive, gradual pick-up of investment. That is clear.
Question: I understand you had the new staff economic projections available at your meeting today. Can you give us any detail, any hint, in which direction they were revised? Was the inflation forecast revised upwards? Was the growth forecast revised upwards? Do you see inflation in 2005 still in line with your target, your limit? And secondly, I understand these forecasts assume a fixed exchange rate. Can you tell us on what euro/dollar rate these staff economic projections are based?
Trichet: First of all, as you rightly say at the end of the question: these are projections. These are not forecasts, as you know. And we consider these projections, which are made at the level of the full body of the Eurosystem -- by the staff of the ECB and the staff of the NCBs. These are an important task of the staff, and we had them in mind when we took the decision this morning. I will not elaborate on the figures because we will, as you know, publish them next week in the Monthly Bulletin. All I can say at this stage is that we had in mind, in particular, the fact that inertia of inflation would, as I said a moment ago, be observed in the next few months. And it is something which was confirmed by the projections I have just mentioned. I have already said that: you might remember that a month ago I used -- if I am not mistaken -- the word" stickiness ''. So we know, and we have known for a certain period of time, that as far as inflation was concerned we had inertia, persistence of inflation around 2%, and that is something that we explain to ourselves -- I do not want to elaborate more -- with the price of oil, some increase in the price of processed and unprocessed food, and indirect taxation. These are the three main reasons why we should observe a level of inflation during the next few months which is above what we had projected before, which is what all observers had projected before, because they did not take into account the three elements that I have just mentioned. And everybody knows and understands why these elements will be influencing this inertia of inflation during the next few months. That being said, it has not led us, as you have seen, to modify the judgement and the stance of monetary policy. The present stance of monetary policy is correct.
Question: I am curious about the weight that the ECB assigns to the strength of the euro when it makes its own projections of growth and how important the impact is, e.g. on exports. And at what level of the euro/dollar exchange rate, for example, it begins to pinch, it begins to hurt or to lower the growth projection?
Trichet: There are no indiscreet questions but only indiscreet answers, perhaps ! I will not comment more on the euro/dollar relationship than I have already done. And, of course, when we judge the situation we take account of all data, all parameters, all information -- as you know -- and they all play a role, including the exchange rate, together with the fiscal position and all the other elements, the global environment, and all the elements we have from outside and inside the euro area. We are as comprehensive as possible, as you know, in our economic analysis and we are also, and this is very important, never prisoner of a particular equation, of a particular system of equations, or of a particular algorithm.
Question: Mr President, in your overall assessment you said that the risks to your scenario are balanced. When you went into the details you seemed to mention only upside risks, notably market-based inflation expectations and liquidity. Could you maybe explain this apparent discrepancy?
Trichet: No, there is no discrepancy. Our judgement is that we have to remain vigilant, and that is clearly the situation. We mentioned this on account of a number of elements, including -- as you mentioned -- inflationary expectations, which are of course something that we have to look at very carefully. That being said, we maintain that the monetary policy stance is correct and in line with our monetary policy, our concept of monetary policy.
Question: Two very quick questions. Was there any talk today among any of the Council members of actually cutting interest rates? And the second question I have: do you still expect potential growth to return to trend in the second half of next year?
Trichet: To the first question I will say only that there is a consensus that the situation is not to be changed. On the second question I would say that we consider -- as I said -- that the strength of the recovery that we see operating since the start of the second half -- and has been confirmed by the first estimates for growth in the third quarter, will continue, and I would say that we are not -- as I said -- prisoners of any kind of figures, forecasts or equations. My own sentiment is that it is quite likely that growth will accelerate over the next year and I certainly would hope that we will reach the level of our growth potential -- but I will certainly not say when.
Question: Some analysts are going to say now that the ECOFIN Council was right to do what it did -- looking at the exchange rates. The euro is going to be stronger and there is also confirmation that the European economy has a much greater possibility of developing following the decision of ECOFIN. What is your opinion about that? And, also, the development of the economy about which you also spoke in your introductory statement: what will be the target to reach in the near future? Could there be a stronger development, like in the United States, or will there be a bigger difference with the United States?
Trichet: Well, on the first point. We have not changed our diagnosis and, as I have said, we stick to the diagnosis we produced in real time. We have taken note, as I said, of the commitments made by the countries concerned. And we will continue, in our domain, to do all that is needed to fulfil our mandate and to preserve and reinforce confidence. And our judgement is that confidence is perhaps the most important ingredient at the present juncture, if I may say so. Because we have a lot of elements that are positive in the overall European economy and in the euro area economy. We have savings, we have capital, we have human resources, we have women and men who are qualified, and we also have an external environment which is more conducive to growth than before. So, what we would consider a key element would be confidence. And we are responsible for a part of this confidence, of course. And the part for which we are responsible we try to deliver in the best fashion possible. As regards the growth differential between the United States and Europe, I will not elaborate too much on that. I will only say that in the analysis of the ECB, of the Governing Council of the ECB, of the full body of the Eurosystem, and of -- to my knowledge and I am speaking with the Vice-President here -- all institutions, observers and academics analysing the situation, we could improve the growth potential if we were to embark as actively as possible on the structural reforms we have mentioned. We have said that we are backing the structural reforms. Some reforms have been carried out already, and we are very happy that they have been, and we have backed the governments and the parliaments that embarked on these reforms. Others have still to be implemented, and we have backed the process of reform which is now on its way. But of course there remains a lot to be done if we want to achieve a better growth potential, better growth, and better job creation.
Question: Mr President, does the discussion about the Stability Pact have a direct effect on your decision-making on interest rates?
Trichet: I have already said that we encompass absolutely all data, all information, all elements that are of importance, so I would say that we have taken everything into consideration and we made a working assumption, as I said, that the commitments that were made by the countries concerned and the commitments that were made by the qualified majority of the Council are to be met 100%... that is of course our working assumption.
Question: Sir, you said on Monday that the Stability and Growth Pact is not dead. Today you repeated again that it should be fully respected and you specifically referred to the reference values of 3% and 60%. The politicians, however, are actively discussing making changes. Is it the ECB 's position that you would oppose, actively oppose, any changes at all to the Pact?
Trichet: Again, we all have our own responsibilities. We call on all partners to live up to their responsibilities. We say what we believe we have to say and everybody will take responsibility for his own actions. We have the Commission, we have the Council, we have parliaments, we have the European Parliament and we have the ECB -- with our own responsibilities -- all of which are important in certain domains and which are of course under the scrutiny of everybody, yourself and the full body of public opinion. We say what we believe we have to say, and you are right in saying that we will not change our own vision. It is perhaps the particular responsibility of central banks always to say more or less the same thing. I know that it might be a little bit boring for you when you hear us repeating ourselves but it is perhaps better to repeat when you really believe that it is important. And, after all, communication is also about repeating things.
Question: Mr Trichet, I have two questions. The first is: Did you come to the conclusion that the factors which are responsible for the inertia of inflation rates are mainly of a temporary nature and not of a structural nature? And my second question is: How do you assess the chances of progress with your project TARGET 2?
Trichet: On the first point, I would say that we consider that this inertia of inflation over the next months -- and" next months '' might in fact mean several months -- is, as you have suggested, due to factors that would not necessarily be there were a certain period of time to elapse, and we consider that over the longer run we are in line with our definition of price stability. That is clearly our analysis today. That being said, of course, we remain vigilant for all the reasons that have been expressed, and again our vigilance is the best recipe for the confidence that I mentioned earlier, and that confidence in turn is giving rise to a better level of confidence among savers, investors, consumers and so forth. For that is important for growth and for job creation. As regards TARGET 2, I will only mention that we are following very, very carefully, of course, the evolution of this project and I am very optimistic that we will be able to deliver a system which will be both on time and very good.
Question: Mr Trichet, given the uncertainties in the currency market, the main fear these days could be a dollar crash. If that were to happen, it would certainly have a substantial impact on your policy. Do you see any danger at all that the dollar could devalue so quickly that it would become a danger to the global and European upswing?
Trichet: I have already said what I wanted to say on the euro-dollar relationship, and have nothing to add to this.
Question: Mr President, in the European Parliament on Monday you said that neither the words nor the spirit of the Stability Pact should be changed. Knowing that countries which did not support France and Germany, such as Austria, advocate a reform of the pact and that Mr Prodi spoke about this yesterday, do you feel a little isolated sticking to the letter and spirit of the Pact?
Trichet: You have seen what we said today, which is completely in line with what we had said before, as has already been mentioned, and we are sticking to our own analysis, where we have been as level-headed as possible and where we have stated that we indeed believe that what is in the Treaty and what is in the Stability and Growth Pact is very important for all the reasons that I have already mentioned.
Trichet: I only mentioned the fact that we had already said that the Stability and Growth Pact was important, as was the Treaty, and today we are reiterating that. We will stick to this position, as was discussed by my colleagues this morning. Furthermore, I should once again like to say that it is up to all partners to assume their responsibility and we firmly believe that it is important to have this concept and this Treaty and Stability and Growth Pact framework. As we have said today in the Governing Council, these are the foundations for trust and confidence in EMU.