FRANKFURT (MNI) – The following is the first part of a verbatim
text of the introductory statement by European Central Bank President
Jean-Claude Trichet at the hearing before the Committee on Economic and
Monetary Affairs of the European Parliament:

Dear Madam Chair,

Dear Honourable Members,

As on a number of occasions before, our regular meeting takes place
in extraordinary times. The tragic developments in Japan with the
deplorable loss of human lives, but also their potential global economic
and financial implications have galvanised the international community
into action.

Here in Europe, our hearing today comes at a time between two
meetings at the level of Heads of State or Government. And it comes at a
time when the very important decisions on the economic governance reform
in this Parliament are coming closer. Before focusing on the economic
outlook and topics for today, let me therefore say a few words on the
economic governance reform.

Comme vous le savez, le conseil Ecofin a adopte la semaine derniere
une ‘approche generale’ sur ce dossier. Cette approche contient
diverses ameliorations. Pourtant, plusieurs des propositions tres
importantes pour renforcer suffisamment le cadre de gouvernance ne sont
pas encore prises en compte. Ceci est necessaire pour tirer toutes les
lecons de la crise. Nos concitoyens europeens, qui ont le souci de notre
avenir a long terme, demandent aux autorites de faire tout ce qui est
necessaire pour empecher une repetition des developpements que nous
avons vcus ces dernires annes. Ainsi, selon un ‘Eurobaromtre’
rcent, presque 80% des citoyens dans les pays de la zone euro
considerent quune plus grande coordination des politiques economiques
entre les Etats membres – c’est-a-dire une gouvernance effective et
efficace – serait necessaire pour combattre la crise financiere et
economique.

Vor zehn Tagen haben die Mitgliedsstaaten eine Erklrung zur
verstrkten Abstimmung der Wirtschaftspolitik im Eurogebiet gegeben.
Diese Erklrung berhrt inhaltlich viele Punkte der vorliegenden sechs
Gesetzesvorschlge. Besser noch als diese Erklaerung parallel stehen zu
lassen, waere es, ihre Kernpunkte in das gegenwaertige
Gesetzgebungsverfahren einzubringen. Dies wrde der Absichtserklrung
ihre volle Glaubwrdigkeit zukommen lassen.

I. Economic and Monetary Developments

Let me turn to the euro area economic and monetary developments
since our previous meeting last November. I will concentrate on the
analysis of the Governing Council on the occasion of its meeting of 3
March.

Incoming data have confirmed our view that the underlying momentum
of economic activity remains positive. Looking ahead, we expect the
economy to further benefit from the ongoing recovery in the world
economy, the very accommodative monetary policy stance and the measures
adopted to improve the functioning of the financial system.

As regards price developments, inflation in the euro area is on the
rise. In February HICP inflation stood at 2.4%, after 2.3% in January.
This increase largely reflects higher commodity prices. In particular,
sharp increases in energy prices have led to upward price pressures in
the earlier stages of the production process. It is crucial at this
stage to avoid that the recent rise in inflation translates into
broad-based second-round effects, for instance via price-setting or
higher wages. Such effects would give rise to broad-based inflationary
pressures over the medium term.

In the view of the Governing Council, as expressed on 3 March,
risks to the price outlook are on the upside. Commodity prices could
increase more than expected. Also, indirect taxes and administered
prices could turn out higher given the need for fiscal consolidation in
the coming years. Finally, the ongoing recovery in activity could result
in stronger than expected domestic price pressures.

As regards our future monetary policy stance, I have nothing to add
to what I said, on behalf of the Governing Council, on the occasion of
our last monetary policy decision meeting earlier this month.

As regards liquidity-providing operations, the Governing Council
decided to conduct them in the second quarter of 2011 on the same
conditions as in the first quarter of 2011. This means that we will
continue to apply fixed-rate tender procedures with full allotment in
all our refinancing operations at least until mid-July.

II. Interaction between banks and sovereign debt

Let me now turn to the specific topics you have asked me to address
and start with sovereign debt. I should like to emphasise once again
that the right way to avoid the risk of sovereign debt crises in an
economic and monetary union is through sound national macroeconomic
policies and strengthened economic governance.

At the same time, the governments have considered that a permanent
crisis management mechanism would be useful. From the side of the
European Central Bank, the design of such a mechanism is essential for
it to provide a positive contribution to financial stability in the euro
area as a whole. I would like to highlight two aspects: first, the
mechanism may in no way weaken the incentives for sound fiscal and
macroeconomic policies pursued in all member states. It must in
particular not weaken incentives for preemptive fiscal and macroeconomic
adjustment by countries concerned, thereby avoiding moral hazard.
Second, given that the euro area is characterised by an exceptionally
high degree of economic and financial integration among countries, the
mechanism should be able to employ a range of instruments to be
effective in stemming against contagion in situations of acute market
instability. If indispensable, supporting countries while still keeping
some market access, may be an appropriate way and would imply a prudent
use of funds. In this context, I continue to consider secondary market
interventions as a helpful tool in this context.

Regarding the institutional method to set up the ESM, the ECB, like
the Parliament, supports the largest possible recourse to the Union
method. It would welcome that, on the basis of the experience gained,
the ESM could become a Union mechanism at the appropriate point in time.
In the meantime, the ECB encourages that the assessment of circumstances
leading to the activation of the ESM and the conditions on financial
assistance entail an appropriate involvement of Union institutions, thus
benefiting from their expertise and their Union-wide perspective.

Turning to the issue of bank resolution, the presence of sound bank
resolution mechanisms, limiting the costs associated to a bank failure
in the case of a cross-border group, is likely to facilitate the
negotiations to share the public costs incurred if and when required.
Therefore, we support the overriding policy objective of the new EU
framework for bank recovery and resolution proposed by the Commission.

Although the implementation of the new resolution regime in the EU
could already reduce the fiscal costs of bank failures, I believe that
explicit arrangements should also be put in place to ensure that in the
future the financial sector bears the burden of possible crises to come.
As part of a credible resolution framework, bank levies (possibly
accumulated in resolution funds) could possibly be considered.

However, a levy on banks should be seen as a complementary tool in
the set of instruments aiming at increasing the loss absorbency of
systematically important banks – notably capital and liquidity
surcharges, contingent capital. The Financial Stability Board is
currently exploring several options, in particular on contingent
convertible capital and bail-in debt instruments.

To this end, I welcome the fact that the European Commission is
considering bank levies and bail-in in its plans for the future EU
crisis management framework. The ECB stands ready to further contribute
to the challenging work that is still ahead of us in the development of
this framework.

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