FRANKFURT (MNI) – The following is the first part of a verbatim
text of the introductory statement by European Central Bank President
Jean-Claude Trichet before the Committee on Economic and Monetary
Affairs of the European Parliament in Brussels on Monday:
Dear Madam Chair,
Dear Honourable Members,
Since our last meeting on 22 March, the euro area has faced one of
the most challenging periods since the beginning of Economic and
Monetary Union. To address the unprecedented pressures in financial
markets, public authorities in the European Union, including the
European Central Bank, have taken bold and courageous steps.
Die wichtigen Entscheidungen, die in jngster Zeit getroffen
wurden, erfordern fundierte Erklrungen und Antworten auf Fragen, die
sicherlich auch in diesem Hohen Hause gestellt werden. Daher begre ich
die Mglichkeit zum Austausch anllich der heutigen Anhrung ganz
Je commencerai donc mon intervention par une valuation de la
situation conomique. Je reviendrai ensuite sur la dcision annonce le
10 mai dernier de procder des interventions sur les marchs
obligataires de la zone euro. Dans une troisime partie, je me pencherai
sur les mcanismes de coordination conomique de la zone euro et les
changements que la situation actuelle appelle. 1. Economic and monetary
Since the previous hearing in March, incoming data have confirmed a
continuing recovery in the euro area in the first half of 2010.
According to the latest estimates, the economy grew by 0.2% quarter on
quarter in the first three months of this year. Looking ahead, our
earlier expectations that the euro area economy would expand at a
moderate rate this year and next have been confirmed.
The latest projections by Eurosystem staff are broadly in line with
this assessment. In our view, the risks to this outlook are broadly
balanced. Nevertheless, the recovery is likely to remain uneven over
time and across economies and sectors, in an environment of continued
uncertainty and with tensions in some segments of the financial markets.
The annual rate of inflation in the euro area stood at 1.6% in May,
up slightly from 1.5% in April, mostly because of higher energy prices.
We may see some further slight increases in inflation in the second half
of this year. Looking further ahead, we continue to expect price
developments to remain moderate over the policy relevant medium-term
Our monetary analysis confirms that inflationary pressures over the
medium term should be well contained. This is reflected in particular in
the overall weak growth of money and credit. The annual growth rate of
loans to households is continuing to strengthen, but the growth rate of
loans to enterprises has remained negative, as expected in the current
phase of the cycle. Suggestions that inflation might be unanchored are
entirely unfounded. On the contrary, euro area inflation expectations
appear to be remarkably well anchored, in line with our definition of
Given the outlook for price stability and the solid anchoring of
longer-term inflation expectations, the Governing Council regards our
monetary policy stance and the current level of key ECB interest rates
as appropriate. In order to cope with tensions on the money markets, the
Governing Council has decided to reintroduce some of our previous
non-standard measures. In particular, we have gone back to full
allotment in 3-month and 6-month operations, so as to facilitate the
liquidity planning of banks. And we have reactivated operations that
provide liquidity in US dollars, in coordination with the Federal
Reserve and a number of other central banks, to prevent possible
liquidity tensions. II. The ECBs Securities Markets Programme
Let me now turn to the Governing Councils decision to intervene in
euro area debt securities markets, announced on 10 May following abrupt
and very severe increases in financial market tensions throughout the
world, but especially in Europe. Those tensions were spreading to a wide
range of financial market segments, including the stock market, the
interbank market and the foreign exchange market. It was observed that
the epicentre of these tensions lay in European debt markets, in
particular those for government debt.
Although the composition of the shocks that triggered the
intensification of those tensions was different from that observed in
October 2008 after the collapse of Lehman Brothers in the United States,
this situation was comparable in terms of the suddenness of the change
in sentiment and the abruptness of the flight to safety by international
Overall volatility in markets increased sharply and liquidity
conditions deteriorated significantly, not only in sovereign bond
markets, but also to a critical degree in the money markets.
Transactions within the interbank market declined rapidly and
uncertainty among banks about counterparties creditworthiness
There was therefore a risk that the normal functioning of markets
and the first link in the transmission mechanism of monetary policy
between the central bank and credit institutions could become impaired.
This would have meant that the ability of banks, which are the primary
source of financing in the euro area, to provide credit to the real
economy could have been seriously harmed.
It is against this background that the ECB announced on 10 May not
only the reactivation of previous non-standard measures, as well as the
reactivation of the swap agreements with the Federal Reserve, but also
its intervention in debt markets with the launch of the Securities
Markets Programme. The single reason for acting is that it is crucial
for the effective conduct of monetary policy that government bond
markets function as properly as possible.
The government bond markets are very important for three reasons.
1. First, interest rates on government bonds usually set a floor
for the interest rates that firms and banks have to pay when issuing
their bonds. In circumstances of highly disrupted bond markets, the
short-term interest rates of the central bank would no longer be passed
on to households and firms, and thereby to prices, to the appropriate
degree. This is what we call the price channel.
2. Second, sharply lower bond prices implied by the much higher
interest rates associated with disrupted bond markets would cause
significant losses in the portfolios of financial and non-financial
sectors; for banks, this would reduce their ability to provide loans to
the economy. This is what we call the balance sheet channel.
3. Third, abnormally low liquidity for government bonds would
reduce their role as collateral in refinancing operations, thereby also
hindering banks supply of loans. This is what we call the liquidity
The decision to start intervening in bond markets was therefore
taken in order to help maintain the appropriate transmission of monetary
policy to the real economy in the euro area by addressing the
malfunctioning of some segments of the securities markets.
As the aim of the programme is not to inject additional liquidity
into the banking system, we fully neutralise the bond purchases by means
of specific reabsorption operations. As a result, the prevailing level
of liquidity and the money market rates are not affected by the
programme. In other words, our monetary policy stance is not affected,
and there are no inflationary risks related to this programme.
Let me emphasise that we took the decision to introduce the
Securities Markets Programme fully in line with the provisions of the
Treaty, only operating in the secondary markets for government bonds. We
also took the decision in complete independence.
We were aware of the commitments made by euro area governments
prior to that weekend, on the evening of Friday 7 May. In particular,
the Governing Council took note of the statement by euro area
governments that they will take all measures needed to meet [their]
fiscal targets this year and the years ahead in line with excessive
deficit procedures and of the precise additional commitments taken by
some euro area governments to accelerate fiscal consolidation and ensure
the sustainability of their public finances. (Quotes from statement by
euro area Heads of State or Government, Brussels, 7 May 2010)
This brings me to the third issue I would like to discuss.