FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet, in his last regular quarterly appearance before European
Parliament, made the following introductory remarks. The first of two
installments is below:

“Today, I appear before your committee with particular emotion.
This is the last of my 35 immensely fruitful dialogues with you.

Members of the European Parliament, you are the heart of the living
democracy in Europe. We at the ECB are the guardians of the currency of
our fellow citizens. And we are fully independent in our actions to
protect the currency whilst you ask us to report to you.

Let me first reflect on the ECB’s actions since its creation. With
current discussions sharply focused on how to deal with the financial
and sovereign debt crisis, it is sometimes forgotten that our primary
objective is to maintain price stability in the euro area.

More precisely, we aim to maintain inflation rates in the euro area
below, but close to, 2% over the medium term.

This is what the Treaty demands from us. This is what the citizens
of the euro area expect from us. And this is what we have delivered.

Price stability is a necessary condition to foster sustainable
economic growth, job creation and to ensure the well-being of Europe’s

One fundamental indicator is medium and long term inflation
expectations. Inflation expectations that are in line with our
definition of price stability help employers and employees in the euro
area to agree fair wages. They help businesses small and large to make
longer-term investments. They ensure, all things being equal, a more
favourable financial environment because market medium and long term
interest rates incorporate stable price expectations. And they help
governments to play their role in macroeconomic stabilisation.

Preserving inflation expectations in line with price stability has
been far from easy. Let me remind you of a few of the many shocks to the
economy since 1999.

The early 2000s saw the bursting of the ‘dot-com’ bubble. Medium
and long term inflation expectations remained stable. Then came the
terrorist attacks of 9/11. Inflation expectations remained stable. We
saw dramatic surges in oil prices. Once again, medium and long term
inflation expectations remained stable.

Then, in 2007, there were the first signs of an unprecedented
financial crisis, the repercussions of which continue to this day. What
happened in late 2008 in particular could have resulted in an economic
catastrophe not seen since 1929. Authorities across the world took
action to avoid another Great Depression. We at the ECB responded by
lowering interest rates and introducing our non-standard measures. We
experienced a very short period of negative inflation, with some
commentators expecting a long period of deflation. Yet medium and long
term inflation expectations remained stable.

As you know, 2010 and 2011 have been extraordinary years for the
economy, with parts of the euro area confronting serious problems in
sovereign debt markets. But I can say once again: inflation expectations
remain stable.

Dealing with these diverse shocks has required constant alertness,
resolute action and fierce independence.

Permanent and credible alertness in 2004, when the ECB kept
interest rates at 2% while governments and international institutions
were calling for more cuts.

Fierce independence in 2005 when the ECB started increasing its
policy rates despite, again, the strong opposition of many governments
and against the advice of international financial organisations. The ECB
was criticised for that decision; with hindsight, that criticism turned
into respect.

Alertness in August 2007, at the very start of global money market
turbulences, when the ECB was the first central bank to take non
standard measures to ensure the smooth transmission of monetary policy.

At the very beginning of the financial crisis the ECB decided to
stick to a strict separation principle between the “standard measures”
and the non-standard measures. The standard measures are designed to
deliver price stability in the medium term: they are the interest rate
decisions. The non-standard measures are designed to help restore a
better transmission of our standard monetary policy decisions at times
when the crisis is disrupting markets or segments of markets: the
non-standard measures include the supply of liquidity at full allotment
and fixed rates and the interventions in private and public securities

This separation principle permits us to preserve, including in the
present deep crisis, a strong sense of our direction in the medium term
price stability whilst taking into account the reality of the disruption
of markets due to the crisis.

Like actions, numbers speak louder than words. Let me mention one
number: 2.01%, the average inflation rate in the euro area since 1999
until today, over a period of almost 13 years during which oil prices
have soared.

This number has become so deeply embedded in our society that
people have almost forgotten it.

But this number reflects the lowest annual average change in prices
that any large euro area country has experienced since the beginning of
the European project, over 50 years ago. Price stability is now so
self-evident to the citizens of Europe, and so much expected from their
central bank, that achieving it is taken for granted.

Even our regular exchanges of views have sometimes dealt less with
the M than with the E of EMU!

Achieving price stability through alertness and fierce independence
sets the framework for our day-to-day actions. In this context, let me
report on recent economic and monetary developments. Note that as we
have entered the Purdah-period, nothing I say has any bearing on
upcoming monetary policy decisions.

We expect real GDP growth in the euro area to be very moderate in
the second half of this year. Growth is dampened by a slowing pace of
global growth, by declines in equity prices and business confidence, and
by continuing tensions in segments of financial markets as well as in
some sovereign debt markets. The more moderate economic outlook is
confirmed in the ECB’s September projections. The risks to the economic
outlook, which previously were balanced, are now on the downside, mainly
relating to tensions in some financial markets.

Turning to prices, inflation was 2.5% in August, and rose to 3% in
September according to the Eurostat flash estimate, almost exclusively
as a result of oil price developments. We expect inflation to stay above
2% over the coming months. Next year, it should fall below that level,
depending on commodity price and wage developments. This pattern is also
reflected in the latest ECB projections of inflation ranging between
1.2% and 2.2% next year. The risks to the medium-term outlook for
inflation were broadly balanced in the eyes of the Governing Council in
its last meeting, whereas before they were seen as being on the upside.

Our monetary analysis indicates that the underlying pace of
monetary expansion remains moderate. Liquidity accumulated prior to the
period of financial market tensions continues to be ample but recent
data indicate that part of it may be held more for precautionary reasons
than for spending.

Finally, in the context of our continuing analysis of the euro area
economy, let me draw your attention to today’s release of the 2011
Structural Issues Report. This deals with structural features of
distributive wholesale and retail trade and their impact on prices in
the euro area. The distributive trade sectors are not only economically
important in their own right, but also relevant to monetary policy.
Ultimately, it is retailers who set the prices of most consumer goods
and they are a key interface between producers and consumers. I very
much ask you to take note of the report. It suggests ample scope for
further improving effective competition and removal of unwarranted
barriers to cross-border trade.”


–Frankfurt newsroom, +49-69-720-142;

[TOPICS: M$$EC$,M$X$$$,MGX$$$,MT$$$$,M$$CR$]