On the basis of the regular economic and monetary analyses, we have confirmed our assessment of last month. While somewhat stronger inflationary pressure is likely to persist over the short term, the outlook still remains in line with price stability over the medium term. Therefore, the Governing Council decided to retain its monetary policy stance, leaving the key ECB interest rates unchanged. By historical standards, interest rates are low, both in nominal and in real terms, also lending support to economic activity. The Governing Council will remain vigilant with regard to all developments which could affect the risks to price stability over the medium term.
Let me now explain our assessment in more detail, turning first to the economic analysis.
Following quarterly real GDP growth of 0.6% in the first quarter of this year, the latest data releases confirm that the economic recovery in the euro area is continuing. All in all, the latest indicators of output and expenditure, as well as the most recent survey data, remain consistent with ongoing growth in real activity during the second quarter.
Looking ahead, we remain confident that the recovery of economic activity will continue. The conditions for a broadening and strengthening of the recovery are in place. On the external side, economic growth outside the euro area remains strong, which should promote euro area exports. On the domestic side, investment should benefit from the positive external environment and the favourable financing conditions within the euro area. As corporate restructuring gathers pace and business efficiency advances, the resulting improvements in profits should further underpin business investment. Moreover, the recovery of private consumption should proceed in line with increases in real disposable income and the anticipated subsequent strengthening of employment growth. Available forecasts from international and private organisations paint a broadly similar picture of the outlook for the euro area. The expectation of a continued economic recovery is also in line with recent developments in financial markets.
Of course, this scenario of an ongoing economic recovery may be influenced by a number of factors working in opposite directions. On the upside, euro area growth in the first quarter was stronger than anticipated and this momentum may strengthen shorter-term dynamics. Ongoing robust growth in the global economy could also lead to stronger than expected activity in the euro area. On the downside, despite having declined somewhat, oil prices remain at high levels and may, largely through their impact on the euro area 's terms of trade, dampen growth. Furthermore, over longer horizons, there are concerns relating to the persistence of global imbalances.
Turning to price developments, there is a need to distinguish between short-term developments and the medium-term trend when assessing risks to price stability. Over the short term, oil prices continue to exert upward pressure on the general price level. According to Eurostat 's flash estimate, annual HICP inflation was 2.4% in June, having stood at 2.5% in May. Although oil prices have fallen over the last weeks, markets expect them to remain high for some time. Were this to occur, inflation rates would most likely remain above 2% for longer than previously expected.
Looking beyond the short term, however, the outlook remains consistent with price stability, provided that wages develop moderately, in line with the latest evidence available. Nevertheless, there are some upside risks to price stability. The strength of global economic dynamism may continue to exert upward pressure on commodity prices, including oil prices. Moreover, following rather strong increases in the past, the further evolution of indirect taxes and administered prices is difficult to incorporate into any forward-looking assessment at this point in time, because such information usually becomes available only later in the year. Against this background, the potential risk of second-round effects via wage and pricing behaviour needs to be monitored closely. Social partners can make an important contribution to facilitating the maintenance of price stability by focusing on the medium-term outlook for price developments rather than on currently observed rates of inflation. This would also be conducive to fostering employment growth. Finally, measures of long-term inflation expectations derived from financial market indicators remain relatively high. While these indicators should be interpreted with caution, their development calls for particular vigilance.
Moving to the monetary analysis, the overall picture remains unchanged from our previous assessment. Annual M3 growth rates have fallen over recent months. While this decline partly reflects base effects, the portfolio decisions of firms and households are also returning to normal as financial uncertainties have receded. Indeed, there are signs that savings are increasingly being allocated to long-term assets outside M3 rather than to liquid monetary assets. However, despite the recent moderation of annual M3 growth, there remains substantially more liquidity in the euro area than is needed to finance non-inflationary growth. While a significant part of the excess liquidity has accumulated as a result of past portfolio shifts, low interest rates have also fuelled the build-up of liquid assets. The low level of interest rates also supports credit growth. The stock of excess liquidity, if it persists, may pose an upside risk to price stability over the medium term.
To sum up, the economic analysis indicates that the medium-term outlook for price developments remains in line with price stability, while ongoing close monitoring is necessary. Cross-checking with the monetary analysis supports this conclusion, including the case for continued vigilance with regard to the materialisation of upside risks to price stability.
The Governing Council also discussed a number of issues relating to economic policies in the euro area. First, as regards fiscal policies, it is now of the highest priority that all countries concerned re-establish their commitment to consolidation in order to avoid past mistakes of unbalanced policies in a recovery period. Indeed, the recovery offers the opportunity to put public finances on a sounder track. This requires a strict control of expenditure in the implementation of this year 's budget and a comprehensive reform strategy as a basis for next year 's fiscal planning. Credible expenditure-based reforms are needed to sustain budgetary consolidation and promote the soundness of social security systems, thereby strengthening confidence in the short term and economic growth prospects in the medium term.
Maintaining the existing institutional framework and implementing it consistently is essential to safeguard the soundness of public finances and the macroeconomic environment. In the view of the Governing Council, the Stability and Growth Pact should not be changed, even though its implementation within the current framework could be improved further.
A second issue we have discussed in depth over recent weeks has been the need to clearly step up the pace of structural reforms in the labour and product markets. In this connection, the Governing Council expressed concern about growth in euro area labour productivity having been on a downward trend since the mid-1990s. While this partly reflects improvements in employment, it is also the consequence of sub-optimal progress in fostering overall economic efficiency. Reaping the benefits of the technological advances and efficiency gains associated with producing and using new information and communication technologies requires, in particular, the removal of structural rigidities. In this respect, stimulating further product market competition, particularly in the services sectors, and facilitating industrial restructuring could speed up innovation and the adoption of the new technologies. At the same time, strengthening and spreading technological advances across the individual sectors of the euro area economy must go hand in hand with increased efforts to enhance human capital and adjust educational systems to the changing needs of the labour market.
Since the mid-1990s, somewhat stronger average employment growth has partly compensated for the negative impact of lower productivity gains on overall output growth. However, despite past improvements in employment, the labour supply and its utilisation in the euro area remain low on international comparison. A relatively smaller proportion of the working-age population participates in the labour market, a higher proportion of those participating is unemployed and those who are employed work, on average, far fewer hours per year than elsewhere. Hence, there is a need for further policy changes in the euro area that underpin the labour supply and its utilisation and thereby raise the medium-term growth prospects, so as to preserve average living standards in the face of an ageing population.
Question: You talk quite a lot about productivity and labour costs and also about the need for restraint among social partners later in the year on inflation. I was wondering whether you thought that the various moves in Germany were having any impact: the move to increase working hours in the public sectors and in a lot of areas to 42 hours a week and also now some private companies from 35 hours to 40 hours a week, which seems to be a bit of a trend which is now starting. And I wonder whether you believe what appears to be a move towards longer working hours in Germany is going to have any impact on the way you assess inflation and your calculations as to the way you think inflation is going?
Trichet: We have not judged particularly the situation of any particular member economy of the euro area, so I have no particular judgement on Germany. Of course, everything that goes in the direction of flexibility, everything that goes in the direction of reinforcing the overall productivity in the euro area goes in the right direction. Part of the difference that has been observed in terms of growth potential between the euro area economy and other economies in the world is clearly associated with the fact that progress in labour productivity was less substantial than has been observed elsewhere. So, again, if those reforms are going in the direction of more productivity, more efficiency, more competitiveness, they are going in the right direction.
Question: Two questions. First, it seems to me that you outlined both the risks to the economic recovery and to inflation. But on balance it seems to me that you are more concerned about the inflationary risks at the moment. Is this correct or is it still the case that you have absolutely no bias at this point? And the second question: when do you see the recovery feeding through into the labour market? Do you have a time frame for that?
Trichet: First, again, I repeat -- and you will pardon me if I say something I said already here -- we have an economic analysis and then a monetary analysis, and then we have a judgement on the balance of risks for price stability. The judgement we have on the gradual recovery proceeding is something which is part of our own economic analysis, which again has an impact on the balance of risks for price stability. So, on the judgement we have on growth, I would say that what we are observing now and what we have observed during the last months, goes in the direction of a confirmation of our working assumption of a gradual recovery. And we have a number of elements to substantiate that, particularly the fact that the private sector, private observers, have more or less revised upwards their overall judgement on growth in this economy, and particularly in the present year 2004. That being said, our judgement on the balance of risks for price stability is -- for all the reasons I have explained -- balanced. We do not change our monetary policy stance because our judgement is that it is balanced and that for the medium term we are in line with our definition of price stability. We have no bias and we are vigilant. And that would be my best summing-up of the mood of this Governing Council meeting: we have no bias, we are vigilant.
Question: Mr Trichet, does the move of the Federal Reserve yesterday to raise interest rates influence or effect the ECB 's decision-making in any way?
Trichet: We all have responsibility, all over the world. Certainly across the Atlantic the Federal Reserve has a very important responsibility, and it is not my responsibility to elaborate on that. We have our own responsibility: the US is the US and the euro area is the euro area ! We are in different universes with different fundamentals and different episodes in the business cycle. Furthermore, we are both responsible for price stability in these different universes. So we are not influenced in any way by what has been decided across the Atlantic or what has been decided in the past across the Channel, or what has been decided elsewhere in the world. Because of our own analysis of the present situation in the euro area, we have not changed our monetary policy stance. Again, on the basis of European judgement and diagnosis we have no bias and we remain vigilant. Do not forget that we are responsible for inflationary expectations in the medium and long run. These inflationary expectations in the medium and long run are anchored by us, by our credibility. They are priced in the various market interest rates -- both medium and long term -- and the very good financial environment that we are providing to the European economy relies crucially much on our own credibility to deliver price stability.
Question: In the statement on risks to price stability you only point to upside risks. For my first question, I was wondering if there are any downside risks. My next question is if you did have a bias, would you tell us?
Trichet: I hope so ; transparency is the rule of the game. If we had a bias we would say that we had a bias. It is clear that there are risks: you have exactly the same figures, the same data, you know the environment, you see that the present level of CPI is 2.4 when it was 2.5 last month, you know our definition of price stability of less than but close to 2%. Everything we have as far as our own analysis is concerned is telling us that all things being equal -- and, of course, do not forget that we are living in a universe where there is a lot of uncertainty -- in the short term inflation will probably be higher than 2% until the end of the year and even higher than 2% for part of the first semester of next year. So we have to take that into account and that is part of the situation. We also have to say that in the medium term we consider that price stability will be in line with our own definition, but it is obvious that we have to take into account a number of risks and that is the reason why vigilance is warranted. But I repeat: we have no bias.
Question: Two questions. You have said that we have no bias and we are vigilant. Last month you still said" keeping all our options open ''. Have you deliberately dropped that bit of your statement? My second question is that you have been urging wage negotiators not to settle on high wage agreements. Are you seeing any sign that this is happening right now across Europe? I am thinking of a pay deal that has just been struck here in Germany at Siemens, where workers agreed to no pay rises so that they could have secure jobs.
Trichet: Again, we have to follow the situation very carefully, because as you know the evolution of unit labour costs is absolutely decisive as regards the evolution of inflation. It is the combination of labour productivity and nominal increases in wages and salaries which make up the unit labour costs. I would like to insist on that: it is absolutely clear that unit labour costs are a crucial indicator of future inflation and a crucial indicator of competitiveness. We are in a universe where market economies function on the basis of comparisons between the competitiveness of corporate businesses and economies in general. So, to conclude I would say that I have no particular concerns but that vigilance in this area is warranted. As regards the monetary policy stance and the overall attitude of the Governing Council, I would say again: no bias -- vigilance.
Question: What is your comment on the suggestion from the French finance minister that the Eurogroup should be strengthened by having a chairman for two and a half periods, and by having a research group to make the economic analysis and draft reports on currency and inflation etc.. It seems that this could be a kind of counterweight to the ECB.
Trichet: I will not comment on that, I do not see how there could be a counterweight to the ECB. The ECB is independent, as you know, and the independence of the ECB is warranted by the present Treaty and by the Constitution. So I would interpret such ideas as aiming at having the best functioning possible of the executive branches within their own constituencies and of the Commission itself. The Commission has a very close association with the executive branches and with the Council, as well as other institutions, such as the Parliament. We are in the realm of responsibility of the Council, the Commission. For obvious reasons, namely because we have an extremely clear Treaty, it does not infringe, in any respect, on the ECB 's own realm of responsibility and independence.
Question: Just one thing I did not understand so well: theoretically, is it still possible for you to cut rates if you have no bias? I also have a similar question to my colleague: I was in Basel and I think the good news which emerged about inflation there and which is different from other economic cycles, after a downturn, was that inflation does not take off as quickly after the recovery as it does in other cycles. Do you agree with this and it is particularly true also for Europe? Because with labour markets opening up, for instance, to India or China, which have very big labour markets, are very cheap and have a very good labour force, inflation is dampened at the global level more than it was in previous cycles, where the dynamics of salaries took off much quicker.
Trichet: On the first point, again, I have to be extremely clear: we have no bias, full stop. What does that mean? That means that we look at the situation regularly, every month, we have our own sequencing of analysis and I do not signal to you that we are likely to do anything in the future. It is as simple as that. Every month we look at the situation and we will see what happens. Nobody is master of the future. But as this stage, clearly, we do not signal anything. As regards the labour market changes, globalisation and the impact on global inflation, it is clear that the forces of globalisation have played a very important role in keeping inflation low globally over the last few years. It is also true that we have had some indications, at the global level, of some inflationary pressure: you have the price of oil and you have the price of commodities in general. So you have a number of signals that we are going in the direction of the upside risks for price stability. I do not want to elaborate more on that but it is extremely visible and it is clear that the world is very complex and that you have a combination of forces that are pushing inflation at a global level down and others that are pushing inflation up. It is very fortunate that we have a global recovery. This is quite buoyant and therefore exerts pressure upwards.
Question: Mr Trichet, I would like to refer to the annual report of the BIS. They raise more general questions and I would be interested in your opinion. One thing is that the BIS says there is an asymmetry in the reaction of central banks: they loosen in the downswing but they do not tighten in the upswing in the same way. So they say that you can do that once, but then you have no room for manoeuvre left and that is dangerous. What is your opinion on that?
Trichet: First of all, the BIS is an international institution which is important, with a close relationship, as you know, with central banks and which is there precisely to ask pertinent questions or to suggest further deliberations in important areas at the global level because it is a fully international institution. And I am very happy myself to participate in meetings in Basel under the auspices of the BIS, in particular the G10 meeting, the global economy meeting which we organise every two months. That being said, the question is stimulating. I trust that the question is not too much addressed to the ECB in your mind. But it is a theoretical question of great importance. Are we symmetric? Are we asymmetric? How do you deal with this very important question of asset inflation? What kind of responsibility do we have ourselves as central bankers when taking account of asset inflation? You know that we are reflecting a lot on that, that this institution has developed a special understanding and vision, and that we are a little bit original in the constituency of central banks the world over. We consider that on top of the possible interaction between asset inflation and possible bubbles and the monetary policy oriented towards price stability, which is the rule of the game for all central banks, we are keen ourselves on having a monetary analysis. And we trust that it is a way not only to better anchor inflationary expectations, because in the long run inflation is a monetary phenomenon, but also a way of perhaps taking more closely into account phenomena like asset inflation and bubbles because they are fed by monetary expansion. So we trust that perhaps -- I say perhaps, I am cautious, I am prudent -- our monetary policy concept is well-suited to this particular responsibility that is part of the overall BIS remark.
Question: One country that is credited with an excellent record of restructuring the economy is the United Kingdom. The successive governments since Margaret Thatcher have reorganised the economy, loosened labour laws and that trickled down to corporations. That took place over a period of 20 years. In April you called on governments, countries, to pay greater attention to restructuring the economies. You repeated the same message in Helsinki. You have now again mentioned this question of structural reforms regarding tax and labour. Do you have the impression that policy-makers are listening to what you are saying?
Trichet: It is a direct question. Only three comments. First comment: there is a consensus in Europe, as extraordinary as it might appear, on what you said, on the fact that it would be extremely opportune to embark on structural reforms and to do things that some other economies have already been doing over the past years. That consensus crystallised in 2000 in the so-called Lisbon diagnosis and Lisbon agenda, so the problem is not whether we are being listened to or not being listened to. We all agree on the necessity of these structural reforms and the problem is to implement those structural reforms, which is being done in some countries before your eyes, and before the eyes of the Governing Council, but which is obviously not very easy because of the sentiment of perhaps part of the population because of the fact that public opinion in general probably has yet to understand why it would be extremely important to make those reforms if we want growth, job creation and diminishing unemployment. It is certainly our collective duty to explain better, but there is no doubt that we all agree on the direction to be taken. You mentioned one particular country. I could have mentioned other countries myself. For instance, I could have mentioned Ireland, which is in the euro zone and is certainly a success story in terms of growth, in terms of GDP per capita and in terms of job creation, and again it is in the euro zone. Outside Europe, I could have mentioned Australia, which is a country that has introduced a lot of structural reforms on the basis very largely of a political consensus, and also of a social consensus, and these reforms are paying off also very well. There is a growing number of examples which prove that it is true that those structural reforms are delivering.
Question: Mr Trichet, the Centre for European Policy Studies in its annual macroeconomic report this week had a number of criticisms of the ECB. One of them was that transparency had actually reduced because under your predecessor at these press conferences we had a feel for how the debate was evolving within your rate-setting meetings. It also suggested that you should have a bias. I wonder how you respond to these criticisms and whether you could, perhaps, fill us in on how the debate is evolving or has evolved in the meetings?
Trichet: Frankly speaking, it seems to me that all the criticism about the absence of transparency of the ECB can be taken with a grain of salt. Do you know another central bank that holds a press conference immediately after the decision of the monetary policy council? Do you know another central bank that produces four or five full pages assessing the situation, expressing the diagnosis, not in two paragraphs but in a more detailed way? Do you remember that, when we launched the single monetary policy concept of the euro at the start of 1999, the state of the art of central banking was to say absolutely nothing at the moment of the decision and to wait for five weeks before giving an indication of the reason why a decision had been taken? So, not only do we try to be as transparent as possible but also we, more or less, contributed to changing, for the sake of transparency, the state of the art of communication in central banking. So, all that being said, I can not invent a bias where we have none, and change for your pleasure the assessment of my colleagues in the Governing Council. We try to do our best. We are under the control of public opinion. We are under the control of markets. We are under the control of savers and investors, and not only in Europe but the world over. On the basis of our credibility they are managing trillions of euro, and we try our best to maintain the credibility that we have in their eyes. And I mention this again because it is very important: we shipped to the euro area the yield curve that was the best yield curve available before the euro area was set up. That has made it possible to generalise for 306 million inhabitants a level of market interest rates that was previously the privilege of only a fraction of those 306 million inhabitants. To the extent that we started from scratch, this relied entirely upon the credit of stability that was given to us on the basis of our credibility. The credibility of the institution. The credibility, perhaps, of the transparent interaction with you and, through you, with the full body of observers, savers and investors. And also the credibility of our monetary policy concept, which -- at the beginning -- was perhaps criticised a little but it is now less and less criticised, it seems to me.
Question: I noticed that you said that more and more Europeans should work more and more. Could you say how much? 40 hours a week? Because you did not answer the question on the case of Siemens. Second question, you enter more and more into the social debate because of inflation worries, so you repeated today your stance on wage negotiations and I wanted to know if, this year, you will have negotiations at home, in the ECB. Because I do not think you have such negotiations at the ECB.
Trichet: First of all, on the particular cases which were mentioned previously, I avoided mentioning any particular economy -- we are looking at the 306 million citizens -- but I said that anything that goes in the direction of more flexibility, more adaptability to an environment which is extraordinarily demanding in terms of competitiveness, also goes in the direction of growth and job creation, of prosperity and diminishing unemployment. So we would strongly support across the entire euro area anything that goes in the direction of more flexibility. As regards unit labour costs they are a combination of productivity progress on the one hand, and of nominal wage and salary increases on the other hand. Having highly competitive unit labour costs is extremely important. As regards this institution, I will only mention that we have recently had social elections and we have a new staff committee with whom we will enter into discussion.
Question: Monsieur Trichet, if you have any bias at all, it seems to be towards a non-bias, and this non-bias seems to have been around for some time. But two of the elements that we heard about earlier this year were the risk from high oil prices and the strength of the euro. Both of those seem to have subsided, or come off the boil to some extent. Would you share the view that this may be less of a concern now for the ECB in helping in its decision-making as far as whether to have established a bias, or is this set for the time being?
Trichet: It is perfectly legitimate for you to ask a series of questions which have a tendency to identify one element taken out of context to see whether it plays an important role or not -- I take it that this is the aim of your question? What we do is to integrate all elements. We are in a very, very complex system and we have to take account of absolutely all elements. I used to say that we are not the prisoner of an equation, whether this equation relates our policy to exchange rates or whether it relates our policy to fiscal position or to wage and salary increases. We operate in a universe where we have to take account of everything and make a synthesis out of everything we have, to be sure that our decisions are robust and that they really take account of everything, including the uncertainty, which is part of our very comprehensive deliberations. And then we take a decision, which has to be explained to you as well as possible. I would not say at all that there are elements that were important in the past but are no longer important now. All elements have to be taken into account and, as you know, at any time there might be changes. We know today what the price of oil is and how we can judge the situation. We will see what happens as time elapses. All I can say is, again, that our judgement is made on the basis of the euro area, we judge the situation here on the basis of all data and figures that are here and we are not under any influence. We are in a symmetrical position -- I assume that the Federal Reserve would not respond by saying" Yes, we are under the influence of the ECB, if they do this, we would do that ''. We really have to live up to our responsibilities on both sides of the Atlantic, and this is what we try to do here.