On the basis of our regular economic and monetary analyses, we decided at today 's meeting to leave the key ECB interest rates unchanged. This decision reflects our assessment that risks to price stability over the medium term are on the upside, in a context of very vigorous money and credit growth. The current short-term upward pressure on inflation must not spill over to the medium term. The firm anchoring of inflation expectations over the medium and long term is of the highest priority to the Governing Council, reflecting its mandate. Against this background, the Governing Council remains committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy. While the economic fundamentals of the euro area are sound, incoming data have confirmed that the risks surrounding the outlook for economic activity lie on the downside. We will continue to monitor very closely all developments over the coming weeks.
Allow me to explain our assessment in greater detail, starting with the economic analysis.
The latest information on economic activity around the turn of the year points to a more moderate pace of growth in the euro area than the quarter-on-quarter rate of 0.8% observed in the third quarter of 2007. This assessment is in line with indicators for business and consumer confidence which, while having declined over the past few months, overall remain consistent with ongoing growth.
Looking ahead, while the slowdown in the economies of some of the euro area 's major trading partners is likely to have an impact on euro area real GDP growth in 2008, both domestic and foreign demand are expected to support ongoing growth. This assessment is broadly in line with available forecasts from private and public-sector sources. The fundamentals of the euro area economy remain sound. The euro area economy does not have major imbalances Profitability has been sustained and unemployment rates have fallen to levels not seen for 25 years. As a result of the improved economic conditions and wage moderation, the number of people employed and labour force participation have increased significantly. Consumption growth should therefore continue to contribute to economic expansion, in line with real disposable income, and investment growth should provide ongoing support.
That said, uncertainty about the prospects for economic growth is unusually high and the risks surrounding the outlook for economic activity have been confirmed to lie on the downside. Risks relate mainly to a potentially broader than currently expected impact of financial market developments on financing conditions and economic sentiment, with negative effects on world and euro area growth. Further downside risks stem from the scope for additional oil and other commodity price rises, concerns about protectionist pressures and the possibility of disorderly developments due to global imbalances.
With regard to price developments, according to Eurostat 's flash estimate the annual HICP inflation rate was 3.2% in January 2008, compared with 3.1% in December 2007. This confirms the continued strong upward pressure on inflation in the short term, stemming mainly from strong increases in commodity prices, in particular oil and food prices, in recent months.
Looking ahead, the annual HICP inflation rate will most likely remain significantly above 2% in the coming months and moderate only gradually in the further course of 2008. This confirms our expectation of a protracted period of temporarily high rates of inflation. Moreover, it is important to stress that the moderation in the rate of inflation which is embedded in the December 2007 Eurosystem staff macroeconomic projections is based on the assumption that the recent rises in commodity prices will be partly reversed, in line with futures prices. More fundamentally, the projections assume that recent oil and food price dynamics and their impact on HICP inflation do not have broadly-based second-round effects on wage and price-setting behaviour.
Risks to this medium-term outlook for price developments are confirmed to lie on the upside. These risks include the possibility that stronger than currently expected wage growth may emerge, taking into account high capacity utilisation and tight labour market conditions. Furthermore, the pricing power of firms, notably in market segments with low competition, could be stronger than expected. At this juncture, it is therefore imperative that all parties concerned meet their responsibilities and that second-round effects on wage and price-setting stemming from current inflation rates be avoided. In the view of the Governing Council, this is of key importance in order to preserve price stability in the medium run and thereby the purchasing power of all euro area citizens. The Governing Council is monitoring wage negotiations in the euro area with particular attention. Indexation of nominal wages to the consumer price index should be avoided. Finally, further rises in oil and agricultural prices, continuing the strong upward trend observed in recent months, as well as increases in administered prices and indirect taxes beyond those foreseen thus far pose upside risks to the inflation outlook.
The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. Annual M3 growth, although declining somewhat in December, remained very vigorous at 11.5%, whereas M1 growth continues to moderate, reflecting the dampening impact of higher interest rates. Broad money dynamics in recent quarters are likely to have been influenced by a number of temporary factors, notably the flattening of the yield curve, which may have supported some substitution into monetary assets. Overall, taking these special factors into account, a broad-based assessment of the latest data confirms that the underlying rate of monetary expansion remains strong.
This conclusion is supported by the sustained expansion of loans to the domestic private sector, which grew at an annual rate of 11.1% in December. Although the growth of household borrowing has moderated further over the past few quarters, reflecting the impact of higher key ECB interest rates since December 2005 and cooling housing markets in several parts of the euro area, the growth of loans to non-financial corporations has remained very robust. Bank borrowing by euro area non-financial corporations was 14.4% higher at the end of December 2007 than a year earlier.
For the time being, there is little evidence that the financial market turbulence since early August 2007 has strongly influenced the dynamics of broad money and credit aggregates. In particular, according to the available data, increased financial market volatility has not led to substantial portfolio shifts into monetary assets, as was the case between 2001 and 2003. Notwithstanding the tightening of credit standards reported in the bank lending survey for the euro area, continued strong loan growth suggests that the supply of bank credit in the euro area has not been significantly impaired by the financial turmoil thus far. Further data and analysis will be required in order to obtain a more complete picture of the impact of the financial market developments on banks ' balance sheets, financing conditions and money and credit growth.
To sum up, a cross-check of the outcome of the economic analysis with that of the monetary analysis confirms the assessment that there are upside risks to price stability over the medium term, in a context of very vigorous money and credit growth and sound economic fundamentals in the euro area. The impact of the ongoing reappraisal of risk in financial markets on the real economy is still surrounded by unusually high uncertainty. Incoming data have confirmed that the risks surrounding the outlook for economic activity lie on the downside. Accordingly, we will monitor very closely all developments. The Governing Council remains committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. It is paramount that medium and long-term inflation expectations remain firmly anchored in line with price stability. Reflecting its mandate, such anchoring is of the highest priority to the Governing Council.
With respect to fiscal policies, a discretionary fiscal loosening in EU countries should be avoided. There is ample evidence that activist fiscal policies were not effective in stabilising European economies but rather led to sustained increases in the ratios of government expenditure and debt to GDP. Allowing the free operation of automatic stabilisers in countries with strong fiscal positions and safeguarding the long-term sustainability of public finances are the best contributions that fiscal policy can make to macroeconomic stability. Countries with fiscal imbalances are urged to make further progress with consolidation, in line with the requirements of the Stability and Growth Pact. There is a clear risk that some countries will fail to comply with the provisions of the preventive arm of the Pact, thereby undermining its credibility.
Structural reforms help economies to adjust to adverse shocks, foster productivity growth and increase employment and competition, thereby also helping to reduce inflationary pressures. In particular, enhancing competition in the services sectors and network industries, as well as applying adequate measures in the EU agricultural market, would be conducive to price stability in the euro area.
Question: Given the various clues you have given us in the opening statement, I wo n't go into them. If we were to write that the ECB has changed its main scenario of growth being broadly in line with trend, would we be correct in saying that you had changed your main scenario?
Question: My second question is: what options did you deduce regarding interest rates, whether there were voices for an interest rate increase or decrease?
Question: And my third question concerns how the Governing Council interprets the Federal Reserve 's actions over the last few weeks, and the key here is, by the way, not what the Fed did, but your interpretation which is: do you interpret this as an effort to stop an economic contraction that is already underway or a highly proactive effort to add risk management in the future in the United States, because I think that this has some bearing on how you would see the future as related to the euro zone.
Trichet: As regards the first question: as you know, it is in one month 's time that we will have the new staff projections, and thus a new base-line scenario. I would only mention that we said -- and I said on behalf of the Governing Council at the last press conference -- that the risks that we were perceiving were on the downside. And if you compare the introductory statement with that presented at the previous press conference, you will see we insisted much more on the risks, risks which were mentioned in the important paragraph at the very beginning of the introductory statement. So, what I said today on behalf of the Governing Council is that incoming data have confirmed that the risks to the outlook for economic activity lie on the downside. But I will not, at this stage, make any other reference to the so-called base-line scenario. I did not mention base-line scenario in the introductory statement, and I will only say that we will, of course, have the staff projections next month.
Trichet: As regards your second question on the options, I will say that we were unanimous in deciding to maintain rates at 4%, which was our decision today -- certainly an important decision. And there was no call for an increase of rates and no call for a decrease of rates. So, we were unanimous, but that does not mean that we did not discuss very thoroughly all the elements that are making up the situation we are facing at the global level and at the European level. In the euro area, we live in a multi-dimensional universe which is demanding a thorough analysis. And at the end of this very thorough analysis, we were unanimous and there was no call for an increase or a decrease in rates.
Trichet: As regards your third question I have always told you that all of my colleagues -- in the Governing Council, or in the Monetary Policy Council, or in the Open Market Committee -- take decisions on the basis of their respective mandate and responsibilities that are very important and heavy, taking into account different economies and different situations, the various features, including structural features, of their economies and the different shocks they have to cope with. So, I take it that the Fed has taken its decision on the basis of its analysis which is clear. I have always told you that, where the US economy is concerned, I have always stuck to the analysis of the Fed, and this has proved to be a wise position in the past. My understanding is that, in taking the decision it has taken, the Fed has considered the evolution of the various parameters, including the risk of a strong slowdown of economic activity, and the alleviation of inflationary pressures that would be associated with this strong slowdown of the US economy. Remember, on both sides of the Atlantic, we say that price stability is a prerequisite for sustainable growth and job creation. We say that ourselves, because it is the underlying reasoning of the European democracies: it is our mandate to maintain price stability, our primary goal. On the other side of the Atlantic, you will find this understanding of price stability being a prerequisite for sustainable long-term growth and job creation embedded in speeches of both the Chairman and the members of the Open Market Committee.
Question: You 've pointed out that the first paragraph of the opening statement is important. Last month you mentioned in that paragraph that you were prepared to act pre-emptively to counter second-round effects. Would you repeat that this month?
Question: Secondly, you 've said you confirm that the growth risks are to the downside. Would you say those risks have materialised?
Question: And third, in the past you 've acknowledged that the word" vigilance '' has a certain predictive power, notwithstanding the Governing Council 's non-pre-committal stance. Does that word have the same predictive power when rates might be going down as it did when they were going up?
Trichet: On the first question: again, what the Governing Council says today by my voice is that we remain committed to preventing second-round effects and the materialisation of upside risks to price stability over the medium term. This issue is a very important one. You know that our main message is that we do not want second-round effects, and when we say second-round effects, we are addressing two major possible destabilisations. One is price-setting, and we are observing in some parts of the euro area economy a level of price-setting which is not in line with what we should observe in an economy with a high level of competition. And I 'm speaking in particular of food prices, for instance, in some parts of the euro area economy. And we also mention the social partners deciding on wage-setting. So this is extraordinarily important because it is the only way we have to avoid the disanchoring of inflation expectations, the only way we have to be able to deliver price stability in the medium run, which is our mandate, our primary goal.
Trichet: As regards your third question I will not comment on vigilance in the other direction. No comment. You had another question?
Question: You said the risks to growth on the downside have been confirmed. Have those risks materialised?
Trichet: I said that incoming data that we had, even if mixed in some domains -- we had data that were more positive than expected by economists, including the Ifo institute for instance, or data as regards industrial production that on a month to month basis might be better than expected -- but if I take all the data and all the surveys that have been made, I would say that they confirm that risks lie on the downside. And of course we have the international environment and the analysis of the Federal Reserve I just mentioned.
Question: I have three short questions. Just to confirm something, using the terms of unusually high risks surrounding the growth outlook, does that mean the monetary policy stance of the ECB has shifted? Because you said in the last press conference that you were certainly not neutral and basically confirmed that you had a tightening bias. Has that shifted?
Question: Secondly, could you give us your assessment of the credit conditions in the euro area at the moment and the impact it might have on growth and investment.
Question: And thirdly, are you worried about the increasing amount of mortgage-backed securities that some European banks are posting as collateral at the ECB and how do you see these stocks as being unwound?
Trichet: On the first question, as you know, we have a very clear concept, which is that we are never pre-committed and we are always alert at any time and always ready to take the decision that would permit price stability to be delivered. That 's as simple as that. And I think it is something which has characterised our actions since the setting-up of the ECB in all periods. We had periods when we were increasing rates, periods when we were going in the other direction, and we had periods when we maintained rates for quite a long period of time. But even when we maintained rates, for instance, for a long period of time, we always said, '' we are alert and we can move any time ''. We never said we are pre-committing to whatever monetary policy stance in the medium term or in two months ' time, three months ' time or four months ' time. So, again, we remain constantly alert to make sure that we deliver price stability.
Trichet: As regards your second question as you know, because we published it -- and we were very prompt to publish it because we wanted to have this bank lending survey as soon as possible -- we observed that there was a tightening of credit conditions. So this is an element that we have clearly in mind. On the other hand, and I am speaking very carefully, up to now, when we look at all data that are available, what we are observing on the credit side, and I mentioned that in the introductory statement, is that we continue to have very, very dynamic credit as regards in particular non-financial corporations. It has increased from month to month to culminate at the moment I am speaking at a level which is higher than 14%. 14% is very, very dynamic credit outstanding, obviously. We are observing a slowing down of other components, other counterparts of M3, which is fully in line with the decisions we have taken as regards interest rates since December 2005, particularly as regards credit to households and credit for house purchase. This is fully in line with the decisions we have been taking. It does n't seem to be directly associated with the financial turbulence, so for the present moment what we have in front of us, which calls as I said for further analysis -- very deep analysis, are data that are not reflecting what we have observed since June/July and certainly August, which was the start of the turbulent episode on the financial markets and credit market.
Trichet: As regards your third question as you know, there is a difference between the ECB and a number of other central banks, not all central banks but a number of other central banks, which is that because we had merged at the origin the concepts of a large number of national central banks, we had from the very beginning, as regards the instruments of monetary policy implementation and the refinancing of commercial banks, more tools than others that were available to the Governing Council. For instance, since the very beginning we have had not only the weekly main refinancing operations but also the three-month longer-term refinancing operations. We have been since the beginning open to collateral that is not only Treasuries but also private paper. Since the very beginning we have accepted -- of course provided certain conditions are met -- private paper such as ABSs or bank loans. So we did n't change anything. When we had to cope with the financial turbulence we utilised the concepts and the instruments that had been decided at the very beginning and we did not invent any new tools or any new instruments. So what has been observed -- and I do n't want to speak for all the central banks, but I think that on the other side of the Atlantic you would probably observe more or less the same evolution in the turbulent episode which started in August and that we still are experiencing -- I would say is that Treasuries were less utilised by banks as collateral, and other paper, including private paper, were more utilised. And we have observed that on both sides of the Atlantic. But as far as we are concerned, we have changed nothing ; we have maintained exactly the same concept and the same rules
Question: And are you not concerned about the falling value of some of these ABSs?
Trichet: We will certainly continue to apply our rules. As you know, we have rules as regards the ratings of these instruments, we have rules as regards the quality of the instruments. For instance, if I take the asset-backed security, we ask for true sale, we ask for bankruptcy remoteness so that they would not be trapped if there was a problem in the bank in question, and so forth. So we have our rules, we apply our rules and we of course stick to our rules.
Question: There is something I did not quite understand. Is monetary policy still accommodative? This is my first question. And then, can we infer from the fact that you did not mention that growth was around potential that you already consider growth to be below potential? And if so, could it be that monetary policy is tending to be restrictive?
Trichet: I said what I said. And I also said that we were unanimous in considering that keeping rates unchanged today, which is -- as I have said -- an important decision, will allow us to deliver price stability in the medium run. And that is the point because it is our mandate.
Trichet: As regards monetary policy, I will let you be the judge of what the appropriate qualification is. Again, what we have always done, since the very beginning, has been to take decisions which will allow us to deliver price stability in the medium term in constantly changing circumstances. And as I have said, we are in a multi-dimensional situation which requires all elements to be taken into account. As regards the other questions that you had?
Question: Is growth still around potential, or is it below potential? And if it is below potential, with a strong euro and so on, does monetary policy start to be restrictive?
Trichet: Again, I do not comment on the exchange rate here, as you know. What I would say is that we have no reason to change our perception of growth potential, and there is general agreement on that. I do not want to say that we have, at the moment, a clear view on what the present medium-term trend is. I would say, however, that the information and data we have -- including those data which are, I would say, less flattering than had perhaps been expected -- certainly confirm that growth is ongoing. And how does this ongoing growth compare with growth potential? I would say that it is close to potential, but perhaps at the lower end of growth potential. I would say that it seems to me that I am in line with what is presently being said by a large number of observers and public and private institutions. For instance, if I take the OECD, or if I take the Consensus forecasts which have been published recently, even in mid-January, I see a number of forecasts of around 1.8% growth for this year. We will see what our staff will suggest.
Question: Markets are now expecting -- or are pretty certain that they are going to see -- a rate cut by the ECB by April and possibly two more quarter-point cuts by the end of the year. Would you like to comment on whether those market expectations are reasonable or wishful thinking?
Question: And my second question, picking up on the point about the use of residential mortgage-backed securities, is: Can you give us some idea -- figures if possible, and a qualitative feel if not -- of how much more is being used as collateral in ECB market operations? Is this not a case of the ECB bailing out banks facing problems? That seems to be the accusation that 's floating around the markets. Would you like to comment on that?
Question: And one final thing, just going back to monetary policy: Since the end of 2005 you have won lots of plaudits for being predictable, for we always knew a month in advance when rates were going to change. Is that going to remain the case?
Trichet: On your first question: As I have just said, we are constantly alert and we never pre-commit in the medium term. So I will only say that in the months to come, which will be characterised by a very high level -- an unusually high level -- of uncertainty, we will continue to do all that is necessary in order to deliver price stability in the medium term and solidly anchor inflation expectations. We will see what happens. A lot of things can happen on all sides. We could have new developments in this ongoing turbulent episode. We could have bad or good surprises coming from the rest of the world. The question of whether or not, and to what extent, the emerging world will offset the slowdown in the US economy is still open. We will have the evolution of the wage negotiations I was talking about, which are important. We will have the evolution of the price-setting that we are observing. And we are in a universe where it would be very naive to claim that you knew in advance everything that could happen. What is certain is that we have an anchor. We have only one needle in our compass, as I have always said, which is that we have to deliver price stability in the medium term. And we measure very carefully by all means -- and they are numerous -- the anchoring of inflation expectations, which we consider to be absolutely essential not only in order to deliver price stability in the medium run, but also in order to contribute to the calming down of the financial turbulence, and I have said that many times. So, we will do whatever is necessary. Today, as I have told you, we considered, looking at all the information available to us, that the appropriate decision was to keep rates unchanged at 4%, and there were no calls inside the Governing Council for increases or decreases in rates. We were unanimous. And this is something that you will certainly have noticed, because I said that when responding to the very first question of today.
Trichet: As regards asset-backed securities, again we have not changed our rules. We have kept the rules as they were. Other central bankers have changed their rules because they had, perhaps, fewer instruments and fewer tools available than they would have liked, taking into account their own traditional practices. I would say that it is clear that all of us, on both sides of the Atlantic, have noted a relative increase in the use of collateral in the form of private paper and a relative decrease in the use of paper in the form of treasuries bills. I would not say in any respect, on either side of the Atlantic, that institutions are being bailed out. Institutions are regularly making losses, as you can see. So they have their losses and they take their losses, and we are certainly not bailing everybody out. I have responded to that remark before. You had a third question?
Question: I had two questions on monetary policy. One was on market expectations, and the other was on whether you were going to be as predictable as you had been in the past.
Trichet: Again, predictability for us lies in the fact that, at the moment of the decision of the Governing Council, surprises have been extremely rare -- and that will certainly continue in my opinion. We are very clear on our own strategy, we are clear on our goal, and we are clear on our monetary policy concept. Everybody knows that we have only one needle in our compass. We have an arithmetic definition of price stability which is clear. And so, there are a lot of good reasons why we are predictable. We have been predictable in the past, and we will continue to be predictable in the future. But again, predictability does not mean that we will pre-commit in the medium run. On the contrary, I would make the point again that we do not pre-commit in the medium run. And we believe that, if we have been exceptionally successful to date in the anchoring of inflation expectations in line with our definition of price stability, and we have been exceptionally successful in achieving very low volatility in these inflation expectations in the medium and long run, it has been precisely because we have been constantly alert, and observers, market participants and economic agents have known that we were constantly alert.
Question: I wondered if you could comment on what you expect from the G7 this weekend in terms of its foreign exchange statement. Do you expect that message to remain the same, or are there new concerns that you will be raising in terms of currencies?
Question: And a second question related to fiscal policy, do you think the European Commission ought to take firmer steps against countries related to their budget deficits, and related to that, is an early warning for France appropriate in your view?
Trichet: On the G7 you know, because I always say that I do not comment myself in advance on the meeting of the G7, I will have a press briefing after the meeting of the G7 in Tokyo and then I will say what we will have discussed and decided in terms of a communiqué wording, so, at this stage, no comment.
Trichet: On fiscal policy the sentiment of the Governing Council is very clear -- it is essential for Europe to stick to the rules. We have a Stability and Growth Pact. The Stability and Growth Pact has been designed, I would say, both to address the long-term, medium/long-term soundness of the various economies that make up the euro area and Europe as a whole. As you know, the Stability and Growth Pact is for the 27, and we are in a universe where it is very important not to lose sight of the long-term conditions for sustainable growth and job creation, in particular as regards the level of public spending as a proportion of GDP, the level of deficit and so forth. We also have the possibility, when things are run correctly in good times of the automatic stabilisers able to function. If we were all in Europe behaving as properly as possible according to the rules, then the functioning of the automatic stabilisers would be very substantial. So, again, you could see that the Governing Council is very firm on that and it calls for all countries to strictly implement the Stability and Growth Pact. And I have to say that we fully support the Commission, which is the guardian of the Stability and Growth Pact in this respect.
Question: Actually, I wanted to ask something concerning the G7. Now, I can not do that, you said you are not answering that.
Trichet: I do n't want to say in advance what would be the communiqué of the G7, but on other issues, I can
Question: I reformulate my question. What does this code of conduct that the big international private banks have announced mean for the supervisors of the public sector? We learned from some ministry of finance, we heard a sentence like" Now let 's be careful in Tokyo and just wait to see what the private international banks are presenting ''. Would you share that opinion or do you think they are independent? Will you, as a public sector supervisor, proceed without taking their plans into account?
Trichet: At the level of the international community and certainly of the G7, as you know, we have agreed on the methodology. We will have a provisional report, a progress report, which will be made and presented by the Financial Stability Forum to the G7. The Financial Stability Forum itself is the pool of a large number of workshops and committees that are working very actively to draw the lessons from the present episode of financial turbulence. So it 's really a very large number of workshops and committees, including the Basel Committee, you were speaking of banks, that is working actively to permit the Financial Stability Forum to advance its work. We will have the report of the Financial Stability Forum to the ministers and governors in Tokyo. Then there is the definitive report based on work to continue very actively in a number of domains and that would be presented at the following meeting of the G7 which will take place in Washington on the occasion of the IMF/World Bank spring meetings. As regards the question on the private sector, I would say that my own position, is that, in a number of domains, it is very good that you ask the private sector to work out what would be the code of appropriate conduct, or whatever you call it, set of principles, benchmark principles that would be considered by the industry as being the appropriate, fit and proper conduct in a number of domains. We utilised this methodology after the Asian crisis, and it worked well in a number of domains. We have utilised this methodology recently in the domain of the sovereign risks to prevent or tackle a crisis, e.g. we have the possibility of debt risk scheduling and so forth, and it worked well and we have principles that are agreed upon by a very large number of countries and private sector participants. So, it 's a good methodology -- that does not exclude that if it is impossible for the private sector to deliver, or if the delivery is not convincing or if, again, it is impossible to have a consensus of the market participants and of the private sector entities, then, of course, it is always possible, and in some cases, very important and useful, to embark on regulation, that 's clear. Now, of course, regulations themselves, which exist in terms of banking prudentials, of insurance prudentials, of market prudentials and market surveillance and so forth, have to be permanently updated and upgraded themselves, and we did that after the Asian crisis, we certainly have to do that taking into account the present turbulences and it is a work in progress., So, again, we have to progress on a very large front, the rules and regulations have to be improved to be up to date with our observations. The experience that we have today shows that we are certainly not at the optimum and because of that we have to make progress on a large front also with the private sector and again, not excluding regulation, give the private sector a chance to work out itself what would be in its view its own self-regulation. That 's my sentiment.
Question: I would just like to follow up on what you just said on banking regulation. Would you subscribe to the view that a possible route might be to increase capital requirements for banks as the German Finance Ministry and also Alan Greenspan have indeed suggested?
Question: And the second question is on fiscal policy. You have been very categorical in rejecting the usefulness of discretionary fiscal policy. The US is just about to implement a discretionary fiscal package which was supported by a large number of economists, international institutions, and even the Fed. Does your rejection of this instrument have to do with the fact that the European economy might react differently from the US economy to such packages or is it that you have a different view of how the economy operates?
Trichet: On the first question, I do not want to launch into the discussions that take place in the Basel Committee chaired by Nout Wellink, the governor of the central bank of the Netherlands, and the work of the Financial Stability Forum, which is also examining the report of the Basel Committee. So I think that we have to be very careful in this respect and see what would be the provisional and, when the time comes, definitive conclusion of these discussions. What is clear, in my opinion, is that we have -- through the banking prudentials as well as through all other possible grids -- to look at what is procyclical in the present set of rules and behaviour and try to avoid procyclicality, because one of the lessons of the present observations is that there is probably a tendency for parts of global finance to be much too procyclical. So I do not exclude the possibility that some changes will be proposed in order to be less procyclical. We will see what happens. But, as you know, under the present Basel II Agreement there is certainly always a possibility for the banking surveillance authority to augment the capital requirement -- according to Pillar 2 -- on top of what would be suggested by Pillar 1, which is the computation of the appropriate capital requirement -- whether you use a sophisticated methodology or a more standard methodology. But, in any case, you always have the possibility, on the basis of an assessment made by the surveillance authority, to increase the capital requirements. So this particular point is already embedded in the present methodology of Basel II.
Trichet: As regards our fiscal position, again, I said that for monetary policy we have different economies, different features, structural features of the economy and different shocks that we have to cope with. One important difference between the US and Europe which I have to underline -- at least at the level of the single economy, with a single currency, the 320 million people that are making up the euro area -- is that we are balanced. We are financing our investment with our savings and we have no domestic or external imbalances. We are balanced. In the US, as you know, you have a big level of imbalance. That makes a difference on the two sides of the Atlantic. I mention that en passant but it is something which deserves to be underlined. Let me also say that when I look at the level of public spending as a proportion of GDP, we are very significantly higher in the euro area in comparison with the US. So when I say" let the automatic stabilisers do their work '', it means something much more important as a proportion of GDP in our own case than in the United States of America. So, again, when you look at the precise situation on both sides of the Atlantic, you see that you have to take everything into account. We have to take into account the Stability and Growth Pact. It is not just a matter of the Commission, which is the guardian of the Stability and Growth Pact. The Stability and Growth Pact has been decided by the governments themselves. We did not sign the Stability and Growth Pact. It is not the Commission that signed the Stability and Growth Pact. It has been signed by the governments: the unanimous governments of the European Union and, of course, the euro area.
Question: I have a question regarding the dollar. Of course, I do n't ask you regarding the level, you will not comment on that, rather the fact that for roughly two months the dollar has maintained its position, despite worst-case scenarios, despite the fact that the difference in key interest rates between Fed and the ECB reversed from +1.25 points to -1 and despite downwards signals from the US economy that begin to materialise. So how do you interpret this stabilisation? What 's your overall analysis of the policy of the ECB?
Trichet: I will say that I have enormously appreciated the fact that the Secretary of the Treasury and Ben Bernanke said that a strong dollar was in the interests of the United States of America.
Question: Just a quick question picking up on something that you said earlier. You seemed a lot less convinced that emerging markets ' growth would offset the declining growth in the US. Does that mean you 've sort of stopped believing in the theory of decoupling?
Question: And my other question would basically be -- it 's just something that 's just popped up -- bond insurers and re-ratings of bond insurers seem to be a big issue at the moment and Deutsche Bank CEO Josef Ackermann just said, if I read it correctly, that the rating downgrades of bond insurers could be a tsunami-like event comparable to sub-prime. So is that something that you 're concerned with?
Trichet: I never subscribe myself to the theory of decoupling. I always said that we were in a world which was interdependent and that, all things being equal of course, if any component of the world goes up or down it has an influence on all the other components. We are ourselves influencing the rest of the world very much ; the European Union is the first commercial entity of the world. The euro area is a very important commercial entity and from that standpoint we are very much at the level of the United States of America, so through the trade channel we have both, I would say, a great influence. I think that those who were speaking of decoupling had in mind that you could have simultaneously in the world for instance a business cycle which would be very much on the downside in the United States and a business cycle which would continue to be on the upside in the emerging world, particularly in emerging Asia., But that in my opinion does n't mean decoupling because it 's clear that, all things being equal, if the US had not gone down quite strongly, then of course the emerging Asia would have gone up even more. It is clear that all elements that we have in mind are confirming that the downside evolution of the real economy in the US is likely even if we have to be totally pragmatic and depending on facts and figurs. And we will see what happens and what we have today is that China, India and the Asian countries continue to have very significant dynamism, and the offsetting of the US slowdown could be partially or more than partially be done by Asia. But at this stage I really think that decoupling is not an appropriate word. We have to take absolutely all elements into account.
Trichet: As regards your second question on the insurers again, you remember we always considered in this press conference that what we were observing was an ongoing market correction with episodes of turbulence and episodes of high levels of volatility and that it was an ongoing correction across a very large array of different markets. In line with the diagnosis that we made a long time ago, before the start of the turbulences and that I reported to you concerning the fact that we had in a large array of different markets an underpricing of risks, a level of volatility, a level of spreads, a level of risk premia, which were too low. So the fact that this correction continues in various markets is not something which should surprise us, it 's an ongoing process again, and I will certainly not call it a tsunami or anything of that sort, but I would say that we have to remain very alert. I said myself that we were continuing to observe this market correction. Let me say, also for your information, that we have decided today that we would renew the supplementary long-term refinancing operations of 23 November 07 and 12 December 07. You might remember it 's the additional long-term refinancing that we had decided on last year that were of the level of $ 60 billion each and we are renewing those operations. So there is no change but when they reach maturity they will be renewed. You will have a press release providing further information on this decision of the Governing Council today.
Question: Just two quick things: first of all, a lot of critics -- some of whom are self-appointed and some of whom are not -- have spent a lot of time saying that the ECB is behind the curve. You will have heard plenty of this having been in Davos. I wondered if you had some response, some observation on this subject, particularly in light of the fact that it is conceivable that the ECB could be moving in the future. I 'm not asking you to comment on that. And then second on the refinancing operation: my understanding is that the term" money market '' has been relaxed considerably. Did you see this in line with the strategy of progressively encouraging this trend? I would be interested in your observation as to whether you have seen this as a positive trend.
Trichet: On your first remark I must confess that central banks are used to hearing that from time to time and, if I measured the level of decibels on behind the curve and ahead of the curve and so forth, I would say that, perhaps on this side of the Atlantic, we had slightly fewer decibels than what I could observe on the other side. But what I can say is that we are doing our job. Our job is very important and we take our decisions on the basis of our mandate. And our mandate -- price stability -- permits us very clearly to contribute -- precisely through price stability, which is our primary goal -- to long-term sustainable growth and job creation. And let me only mention that one of the biggest successes of the euro area in the real economy, which is absolutely remarkable since the setting-up of the euro, is that we have created a huge number of jobs -- more than in the US, to be clear -- and that the first nine years of the euro have been, from that standpoint, remarkably successful. And I want to insist on that, because it is not a well-known fact.
Trichet: I would say that, on both sides of the Atlantic, again, we are used to observers and remarks and so forth. I trust that we are doing what is necessary. There is a good criteria, which is to see exactly what you do in terms of anchoring medium term inflationary expectations, and from that standpoint it seems to me that our own results are solid. As regards the money market evolution it is true, and we are very satisfied with this on both sides of the Atlantic, that the tensions, as far as we measured them, have undoubtedly diminished and, depending on the measure, you could say that they progressively came down from a very high level and now we are -- as regards the spread between the three-month rate and the overnight rate in three months ' time, which is a good measure, perhaps, of the tension -- we are probably around 40 basis points now. However, having said that, we considered that we had to consolidate and to accompany this progressive improvement of the situation. We judged it to be appropriate to renew these long-term refinancing operations.
Question: I wonder if you could give us a little bit more insight into the Governing Council 's thinking on discontinuing the SWAP arrangement with the Fed?
Trichet: We have mentioned already publicly that we were extremely satisfied with the cooperation we had with the Fed in December ; that it worked very well and it contributed certainly very significantly to the improvement of the situation of the money market and the appeasement of tensions. We were also very satisfied with what we were doing with the Fed and with the Swiss National Bank in January. We said that, at the present moment -- after the good results we obtained with this dollar supply on this side of the Atlantic -- taking into account the need of our own market, it was not necessary to continue, and the Swiss National Bank made the same observation. We will see what happens and, again, we are totally pragmatic. If, at any time, it appears that it is opportune to reactivate such a concept, we will do it, but at this stage it looked unnecessary, both for us and for the Swiss National Bank. Thank you very much for your attention.