Let me now report on the outcome of today 's meeting. As regards economic growth, while some uncertainty has recently arisen concerning the expected strengthening of activity, the economic recovery in the euro area is ongoing. Looking at price developments, high oil prices have had a visible direct impact on inflation rates this year. However, the risk of second-round effects still seems to be contained, and the overall outlook remains consistent with price stability over the medium term. Accordingly, we have left the key ECB interest rates unchanged. This means that the level of interest rates continues to be very low by historical standards, in both nominal and real terms. Strong vigilance is warranted with regard to all developments which could imply risks to price stability over the medium term.
I shall now explain our assessment in more detail, turning first to the economic analysis.
The information available to date indicates that the economic recovery in the euro area is continuing. In particular, survey indicators up to September point to ongoing growth in industrial production and the services sector. Moreover, the gradual recovery in consumer confidence is proceeding, and there are some tentative signs of an improvement in the prospects for employment, although available indicators for household spending do not yet point to an immediate strengthening of consumption growth.
All in all, the growth momentum seen in the euro area in the first half of 2004 should be broadly maintained in the coming quarters, in line with available forecasts from international organisations. On the external side, euro area exports should continue to benefit from favourable global demand conditions, not least from trade with the new EU Member States, where import demand has been strengthening. On the domestic side, investment should benefit from the positive global environment and the very favourable financing conditions in the euro area. As companies restructure, improvements in corporate efficiency and higher profits are also supporting business investment. Moreover, there is scope for a recovery in euro area private consumption, in line with growth in real disposable income.
Any central scenario for future developments is surrounded by a good deal of uncertainty, which at present is particularly related to oil prices. If oil prices were to remain high, or even increase further, it could dampen the strength of the recovery, both inside and outside the euro area, even though the oil intensity of production has fallen significantly since the 1970s and 1980s. All in all, while the burden resulting from higher oil prices can not be avoided, its medium-term impact should be of a more limited magnitude than in the past. Obviously, for this outcome to materialise, all parties concerned must live up to their responsibilities.
Turning to consumer prices, the oil market developments have had a direct impact on the euro area HICP. Following an annual rate of inflation of 1.7% in the first quarter of 2004, inflation reached 2.3% in the second quarter and remained at that level in July and August. According to Eurostat 's flash estimate, annual HICP inflation seems to have fallen slightly in September, to 2.2%. Higher energy prices may have been more than compensated by lower food prices, partly due to base effects resulting from last year 's strong increases in this sub-category. Still, on the basis of current market expectations for oil prices, it appears unlikely that annual inflation rates will return to levels below 2% in the remainder of this year.
Nevertheless, looking further ahead, the available information does not indicate that stronger underlying inflationary pressures are building up domestically. Recent wage developments have remained moderate, and this trend should continue. On the basis of this assumption, and provided that there are no further significant shocks to prices, annual inflation rates should drop below 2% in 2005.
Several upward risks to the outlook for price stability continue to exist. Concerns again relate to oil price developments, in particular to the extent that second-round effects stemming from wage and price-setting behaviour materialise. It is therefore of the utmost importance to avoid inappropriate reactions, as observed in past episodes of strong oil price increases. A further upward risk relates to the future development of indirect taxes and administered prices. These upside risks call for ongoing vigilance, which is a necessary condition for keeping medium to long-term inflation expectations in line with our definition of price stability.
As regards the monetary analysis, M3 growth remains resilient. The downward trend in annual M3 growth from mid-2003 appears to have halted over the summer months, and the shorter-term dynamics of M3 have strengthened. This reflects the fact that the historically low level of interest rates in the euro area continues to support monetary expansion, especially of the most liquid assets included in the narrow aggregate M1.
The low level of interest rates also fuels the growth of MFI credit. The annual growth rate of loans to the private sector remains robust, largely driven by the dynamism of mortgage loans. These are also supported by strong house price increases in several euro area countries.
There remains substantially more liquidity in the euro area than is needed to finance non-inflationary growth. At present, it is not clear how this excess liquidity, which is mainly the result of past portfolio shifts, will be used in the future. If significant parts of these liquid holdings were to be transformed into transaction balances, particularly at a time when confidence and economic activity were strengthening, inflationary risks would rise. In addition, high excess liquidity and strong credit growth could become a source of substantial asset price increases.
To sum up, annual inflation rates should fall below 2% in 2005, but a number of medium-term upside risks to price stability need to be carefully monitored. Cross-checking with the monetary analysis also supports the case for strong vigilance with regard to the materialisation of risks to price stability.
Let me also address the current evidence on fiscal developments, where the latest budgetary notifications are a source of concern. While some countries will maintain a sound budgetary position, a significant number of euro area countries are expected to record deficits near to or above 3%. The aggregate euro area fiscal deficit-to-GDP ratio is expected to increase somewhat, as is the debt-to-GDP ratio. In the coming years, important challenges for the consolidation of public finances will have to be faced. Member States need to renew their consolidation efforts and should not rely on one-off measures, so as to comply with their commitments under the Stability and Growth Pact and to foster confidence. They must also set the right priorities in public finances, towards structural reform, innovation and competitiveness. This would very much support the Lisbon agenda and thereby promote economic growth, foster job creation and reduce unemployment.
Concerning the European fiscal framework, the Governing Council is convinced that substantial improvements in the implementation of the Stability and Growth Pact are possible and would be beneficial, while we would warn against a change to the text of the Treaty or the Regulations which form the basis of the Pact. We consider the Pact as key to ensuring macroeconomic stability on a sustainable basis. It is a framework which is necessary to preserve sound fiscal policies in the euro area, for which strict surveillance and effective peer pressure on national budget policies are indispensable.
It is of vital importance to the credibility of the budgetary surveillance that the reliable compilation and timely reporting of government finance statistics is ensured. The European accounting rules must be fully respected when recording all types of expenditure and revenue. This should be done in a manner that is consistent and stable over time and homogeneous across countries. The procedures must not be vulnerable to political and electoral cycles, as stated by the ECOFIN Council. Countries should consider the quality and integrity of their statistics as a priority matter.
Finally, let me report on the detailed discussion we had today on employment and unemployment developments in the euro area. Two observations stand out when we look at the period of relatively slow real GDP expansion since early 2001. First, after an initial rise, the euro area unemployment rate has remained broadly unchanged since early 2003. And second, there seems to have been a relatively limited negative impact on employment growth over the past few years. The following factors might help to explain this pattern. While the period of slow growth has been relatively long from a historical perspective, the cyclical amplitudes have been smaller and have not therefore triggered very sharp reactions of employment and unemployment. In addition, wage developments have been more favourable than in previous episodes, and firms may have -- to a greater extent than previously -- adjusted labour input downwards in term of hours, rather than in terms of employees. This in turn might indicate that firms have gained an element of flexibility to adjust costs.
Looking forward, from a cyclical point of view, employment should recover and unemployment could start falling in the course of next year if overall demand develops as expected. This should support economic growth through an increase in labour income and a positive impact on consumer confidence, and thus on consumption. However, structural problems remain large. This is highlighted, for example, by the fact that over 40% of all unemployed people in the euro area have been without a job for more than a year. In order to decisively overcome the obstacles towards more employment growth and to reduce the trend or structural level of unemployment, further comprehensive labour market reforms are of the essence.
Question: I was wondering if the further increase in oil prices, which we have seen since the last Governing Council meeting, has increased your vigilance on the inflation risks facing the euro area? And, secondly, on the Stability and Growth Pact: are you becoming more reconciled to the main elements of the Commission 's proposals?
Trichet: On the first question, I would say that we are, of course, observing the increase in prices. We can not react on a day-to-day basis, and we have exactly the same posture of vigilance that we had before. I would add that, when I was in Washington on the occasion of the recent annual meetings of the International Monetary Fund and World Bank, I participated on behalf of the ECB in the deliberations and discussions of the G7, and you may have seen that in the G7 Communiqué we called upon oil producers to be as responsible as possible. We also called upon the consumer countries to embark on energy conservation. But, again, on the first question, our vigilance -- as I have stressed earlier -- remains strong. Again, we are calling for responsibility by all parties, for them to fulfil their responsibilities. As regards the Stability and Growth Pact, I have already been very clear on what our position was. I do not want to elaborate too much on that again, because we still have the same position and because I have reiterated on behalf of the Governing Council that very same position, namely that we are on board for improvement and implementation as regards, in particular, the preventive arm of the Pact, depending, of course, on careful examination of the very precise orientations that would be retained by the Council of Ministers of Finance, which is the responsible body. And, as regards the corrective arm of the Pact, we have said clearly both that we would call for the Treaty and the Regulations not to be changed and that we believe it to be extremely important to retain the nominal anchor of 3%.
Question: Mr Trichet, you spoke a lot about the inflation risks powered by high oil prices, but I would also like to ask you: how concerned are you about other increases in other raw materials? I think copper and aluminium futures rose today to a nine-year high. That was the first question. And the second question: how concerned are you also that housing prices in the euro area could become a domestic source of inflation in the euro area?
Trichet: On the first point, as you know, we are as comprehensive as possible in our economic analysis. So we take all parameters into account, including, of course, what could come from commodities in general. It is also true that the oil price increases are so important and visible that they perhaps have a tendency to hide other commodity increases a little, elements that are there and that we have to take into account. But, that having been said, I would not confirm that our sentiments in that respect have changed since the last meeting of the Governing Council. As regards house price increases, I have already mentioned the fact that we look carefully at the counterparts of M3, in particular at household credit. And, in general, within the scope of household credit, the development of which is quite rapid, there is an element to be underlined, which is that housing credit, housing loans, are very dynamic, and that is obviously something that we have to look at.
Question: Did the Governing Council discuss cutting or raising rates today ; and the second question, turning to the Greek budget deficit situation: given the fact that the initial numbers did not turn out to be correct, should Greece have been allowed to enter the euro area? What does the ECB propose to do to avoid other similar cases in the future?
Trichet: The first point: I would say that there was a very wide and general feeling amongst the Governing Council that to maintain rates at the present level was in line with our analysis. On the second point: I said what we had to say as regards the position of the Governing Council and I do not want to read again the paragraph which deals with the reliability of the figures. As you know, I read it and it will be available of course as part of our overall introductory remarks, but I could nevertheless read it again:" It is of vital importance to the credibility of the budgetary surveillance that the reliable compilation and timely reporting of government finance statistics is ensured. The European accounting rules must be fully respected when recording all types of expenditure and revenue. This should be done in a manner that is consistent and stable over time and homogeneous across countries. The procedures must not be vulnerable to political and electoral cycles, as stated by the ECOFIN Council. Countries should consider the quality and integrity of their statistics as a priority matter ''. On the very precise questions you had on Greece and the checking of figures at the moment of that country 's entry into the euro area I would say the following: if I refer to the present Greek Government and the Minister of Finance, who has questioned a number of figures, he had mentioned that this did not put in question the entry of Greece into the euro area, so I refer to that particular point. The information that we have today when I look at everything would confirm that sentiment, but I remain of course cautious because we are expecting the full report of Eurostat to definitely clarify the situation.
Papademos: Let me further clarify the revisions of the budget deficit in previous years, for the period 2000 to 2002, which have been recently reported. As some of you know, these are explained by two factors: the first is more information about the surpluses of social security funds and the second factor is a change in the methodology for the recording of government expenditures on military equipment. According to the new methodology, these expenditures are being recorded on the basis of cash payments, while in the past they were estimated on the basis of deliveries. Now, as I have also mentioned on another occasion, the Bank of Greece in the past systematically every year provided estimates of the budget deficit employing different methodologies -- on a national accounting basis, on an accrual basis and on a cash basis. And these figures are available but it was understood and it had been accepted that the appropriate concept for judging the convergence criteria or for the excessive deficit procedure is the one calculated on a national accounting basis, which in turn records military spending on the basis of deliveries. The change has taken place because, as it has been stated, there were questions concerning the reliability of the application of the appropriate methodology. The Bank of Greece provided all the figures which could be estimated on the basis of the information available. Now on the specific issue about the magnitude of the budget deficit before the year 2000 -- the Bank of Greece has no information about deliveries. I also refer to the statement of the Minister of Finance, who knows the available data and who recently stated that there is no doubt that the country fulfilled at the time the criteria. But, as the President said, there will be a further analysis of this by Eurostat and we will see the outcome of this study. I should add that the criteria at that time -LSB- 1999 -RSB- were fully met not only on the national accounting basis but also on an accrual basis. Another interesting remark is that all these changes regarding the magnitude of the budget deficit as estimated by different approaches have no implications for the level of the debt because the debt has always taken into account credits and cash payments for the purchase of the relevant military equipment.
Question: Mr Trichet, you mentioned towards the end of your prepared remarks about unemployment, and you actually thought that the picture looked a little bit better. I was wondering where you see improvements, if you can name some specific countries. It looks like things are quite grim around the EU, around the euro zone. And if you may, just a second question, often the bank makes comments about international imbalances. Would you have any advice for the incoming US President regarding the current account deficit or the budget deficit?
Trichet: On the first question, namely employment, we have observed, as you have observed, that there has been a very steady level of employment and unemployment figures by way of consequence over the cycle, which we explained in the introductory remarks. But it is also true that we have recently seen signs in the right direction. We have noted that. We expect this phenomenon to be confirmed in the quarters to come. But we remain cautious. What is clear is that we have the feeling that the adjustment in the difficult period of time was made very much by reducing working hours in a number of firms in the productive sector without diminishing overall employment. We are expecting that, in the better times in which we are living right now, the reverse will be done, namely increasing the number of hours worked per worker, and thereby less buoyant recruiting because there have not been buoyant lay-offs. So that is a consideration we have to take into account. We are also of the sentiment that further comprehensive labour market reforms could help considerably to improve job creation. This is not new ; this is an analysis that we have been doing for a long period of time. I take it that it is also a joint analysis with the Commission and with the Council. It is part of the Lisbon agenda and the Lisbon diagnostic. However, we know that it is easy to talk about these labour market reforms and more difficult to embark on them. And that is why we are backing governments and parliaments that are embarking on those reforms.
Trichet: On the second question I would only say that there was a consensus in the last G7 meeting on the occasion of the annual meetings of the International Monetary Fund and World Bank, that, if we take only those two very big economies -- US and Europe -- we both have assets and liabilities. The assets of Europe are that we are balanced and we are financing our investments with our own savings. We have also a number of other assets. But we have a liability which is important: our economy should be more flexible, and calls for structural reforms, which are of the essence in Europe. In the United States it is clearly the reverse. They have assets like suppleness and flexibility of the economy, which is undoubtedly a big asset. They also have other assets. And they have an important liability, which is their lack of savings. This lack of savings materialises in their current account deficit. So, we both have to work hard to redress our weak points.
Question: Mr Trichet, the International Energy Agency estimates that the current high level of oil prices could shave off 0.5% off economic growth and could boost inflation by 0.5%. Does the ECB 's own analysis support or contradict that estimate?
Trichet: What we have seen when looking at the different modelling of the global economy and of our own economy is that, undoubtedly, there is a very large dispersion of results on growth in particular when you put the same input as regards the price of oil. And that, of course, is a confirmation of what you know is our sentiment -- namely that you can not rely upon one single model or one single system of equation, but that the representation of reality is much more complex. We look always for robustness. So, I will certainly not give you one figure. I would say that we have quite a number of different figures. What is absolutely clear is that if oil remains at the present level, we will have an impact on global growth which will certainly not be negligible and we will have a direct impact on inflation which will also not be negligible. And I said that very clearly in the introductory remarks. But what is extremely important for the central banks all over the world and for us, the ECB, in particular, is that we must prevent what we call the" second round effects '' of this oil shock or of any inflationary shocks. We have the feeling that our vigilant stance is extremely important because all economic agents have to know that we are vigilant to prevent those second round effects from materialising. We are very keen to maintain inflationary expectations in the medium run at the present level, namely in line with our definition of price stability. This is our duty. This is, of course, very important because price stability is our mandate. It is also important for the sake of growth and job creation in Europe because, as you know, those low, medium, and long-term inflationary expectations are enshrined in the medium and long-term market rates that we are enjoying today in the euro area and that are conducive, we trust, to growth.
Question: I have a quick question regarding the Introductory Statement. You said that some uncertainty has recently arisen concerning the expected strengthening of activity. Is that uncertainty within the Governing Council or uncertainty outside the Governing Council, in the public, or is it both?
Trichet: It is uncertainty in the eyes of the full body of the Governing Council, the reflection of our understanding of the situation. And, of course, it is directly linked to what we have observed, particularly as regards the price of oil. That is something which we must bear fully in mind. The difficulty of foreseeing the future in this regard is clear. As you know, most of the institutions and forecasters rely very much on the futures market for assessing the future price of oil. It appears that this has led to some underestimations compared to what we were really observing. So, uncertainty is certainly a major issue for central bankers. And that uncertainty has certainly increased somewhat in line with what we have observed in this domain. So, it is the judgement of the Governing Council.
Question: You said you called upon countries to consider the quality and integrity of figures. Did you see a risk of further cases of flow statistics appearing in countries other than Greece? I would then like to ask Mr Papademos a question regarding the new premises of the ECB. I remember a Press Conference in March at the Museum of Architecture in Frankfurt where you awarded the prize for this project to" Coop Himmelb -LRB- l -RRB- au ''. Now some local politicians in Frankfurt fear the ECB might change its mind or its bias. Did you change your mind regarding this project? And could you give us an update on the timetable for the final decision?
Trichet: As regards the first question, I would reiterate that the compilation of reporting of reliable government statistics is, for us, of vital importance to the credibility of the budgetary surveillance exercise. The European accounting rules must be fully respected when recording all kinds of expenditure and revenue, and this should be done in a manner which is consistent and stable over time and homogeneous throughout Member States. That, for us, is very important and we would certainly consider that countries must make the quality and integrity of their statistics a priority. Countries should respect high standards which would reinforce the independence, integrity and accountability of national statistical institutions and one would, therefore, have full confidence in the quality of government financial statistics. I would certainly insist on these standards being reviewed regularly. We have an absolute need for a system which would be fully reliable, both at the level of the national institutions that have to provide the statistics and at the level of the full body of the European Union. So, again, I would not express anything on any particular country but I would say -- as it was mentioned by ECOFIN -- that we must have stable figures which are not dependent on electoral or political cycles. I am quoting what has already been said by the governments concerned when they discussed this at the informal ECOFIN meeting in The Hague. Again, we must rely on a fully reliable system and I take it that it is the view of the Commission and the view of the Council ; it is also what should be done from now on at the level of Eurostat and we are confident that this necessary improvement will be put into action.
Papademos: Over the last few months the three prize-winning architects from the architectural design competition that was completed in the spring have been preparing revised plans which aim to meet fully the requirements of the ECB and to address certain recommendations of the jury of the architectural design competition. No decision has been taken either by the Governing Council or the Executive Board concerning these revised plans, which have not yet been submitted to the decision-making bodies. The Governing Council is expected to discuss and evaluate the revised designs of the three prize-winning competitors in the middle of November. So these are the facts, and any speculation concerning possible choices is unfounded because decisions have not yet been taken and the revised plans have not yet been assessed.
Question: Two questions: firstly, going back to the case of Greece where some of the members of the Governing Council have already expressed concern that the extent of the revisions to the Greek statistics send a very bad signal for" would-be members of the euro zone ''. I wonder if you agree with that and I wonder if Mr Papademos would like to comment on that point as well. And, secondly, I wonder whether you wanted to show us your view on the decision yesterday about starting negotiations for the entry of Turkey into the European Union. How do you see that from your perspective?
Trichet: On the second question first: there has not, to my knowledge, been a decision, but indeed a Recommendation of the Commission to the Council. And I have no particular comment on that. It is the responsibility of the Commission and the Council. On the first point, I feel that we have been very precise both on what the position of the Governing Council was and on the fact that we have an absolute need for reliable, coherent, stable and timely sets of statistics as regards public finance. I have also mentioned what was said on the occasion of the informal ECOFIN meeting by the governments concerned. I have already said that several times, so I take it that there is no point in mentioning anything else. Of course, it applies to the newcomers as well as to the present members, that goes without saying.
Question: Three short questions on the Introductory Statement. In the Introductory Statement you did not mention that the risks to growth are balanced, as you have done during the last months. Does that mean that you have changed your position towards the risk to price stability? Could you comment on that? Is this a change in your perspective? Second question: do you see that there is a slight bubble building up on the bond market, coming out of the liquidity in the euro zone? Third question: in your speech on Tuesday you mentioned that there is a stable money demand velocity in the euro zone. Does this mean that the outcome of the monetary studies you are going to publish next week will show that the monetary demand in the euro zone is still stable?
Trichet: As regards the risks to growth -- upward or downward -- I would not say that we have changed our judgement substantially or significantly. To sum up our view in the best fashion possible, it is clear that we still have upward risks, that is absolutely clear. In French I would say" chance '', the chance of there being upward risks to growth, but we will have to see whether they materialise. We also have downward risks, to the extent that the new environment that we have had since the two meetings is clearly influenced by the fact that we have had a bad evolution as regards the price of oil. It is clear that there is a nuance there and that, if we had the price of oil remaining at this level, it would confirm that we have a downward risk that would be perhaps more tangible. That having been said, we are also making the working assumption that the present price figures will not necessarily last for long. I refer also to the G7 Communiqué from Washington which is calling for all partners to be as responsible as possible. So, we have to be realistic and, I would say, totally lucid, practical and pragmatic as regards our own actions and be vigilant -- that is absolutely decisive. On the other hand, we call upon all partners to be responsible.
Trichet: As regards liquidity, if I have understood your question correctly, I can find nothing to add to what I have already said. You know that it is from our constant analysis that we know that a part of this extra liquidity we are observing came from portfolio shifts, and we are looking at what is happening now in this same portfolio with great attention. You know to which extent we are attached to our two-pillar approach. It is an analysis that is very important for us. Seen from the perspective of the medium and long-term inflationary expectations, we trust that, in the long run, inflation is a monetary phenomenon and we trust that our two-pillar approach is precisely what permits us perhaps to be more assured that our medium and long-term inflationary expectations are fully in line with our definition of price stability.
Trichet: Regarding your third point if my memory is correct, you are referring to the speech I delivered in Philadelphia where I was referring clearly to what we had observed in the past, in the" long-ago '' past, in Europe in comparison with the United States. I referred to the relative stability of the figures that we had observed in the past, while they were far more volatile in the United States. It has nothing to do with the coming publication. And it does not signal anything at all.
Question: I was intrigued by your comments about house prices and the mortgage market. How widespread is this phenomenon throughout the euro zone? You talked about it being very dynamic. Is there any fear that it could get overheated or excessive, as it did in the United Kingdom? What implication does this have for inflation as a whole and for rates?
Trichet: I would certainly not say that we think that something like what has been observed in other economies is likely at the level of the euro area as whole. Nevertheless, in some economies in the euro area, this phenomenon is undoubtedly very dynamic. But, for the euro area as a whole, there is a need for a thorough examination -- this is what we do at each meeting -- and for vigilance. To sum up the situation as cautiously as possible, I would say that there is no need for alarm at this stage. But again we have to remain very vigilant, because this is a strongly dynamic phenomenon.
Question: In the informal ECOFIN there was talk of interpreting the Stability Pact, specifically with regard to making debts more sustainable. Some countries spoke about pensions, others spoke about investments. Has your position changed and can you please remind us of your position on this particular issue?
Trichet: Again, I do not want to elaborate further on the Stability and Growth Pact ; I have said very clearly what our current attitude is. We consider that these criteria are of great importance and must certainly be looked at carefully. We would not subscribe to the idea that if you have less debt you should be encouraged to have more deficit. It is not something which, in our opinion, fits with the idea of encouraging the best behaviour possible. But I do not want to elaborate on the economic reasoning behind this, namely that if you have less debt then you are at an advantage because you have less service of the debt and more room for manoeuvre than other countries ; and why encourage a country to go on piling up debt until it reaches 60% when that particular country could be much better off with less debt?