MARIO DRAGHI, PRESIDENT, EUROPEAN CENTRAL BANK: So, ladies and gentlemen, the vice president and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the president of the Eurogroup, Finance Minister Dijsselbloem.
Based on our regular economic and monetary analysis, we decided to keep the key ECB interest rates unchanged. Incoming information has confirmed our assessment which led to the cut in interest rates in early May. The underlying price pressure in the euro area is expected to remain subdued over the medium term. In keeping with this picture, monetary and in particular credit dynamics remains subdued.
Medium-term inflation expectations for the euro area continue to be firmly anchored, in line with our aim of maintaining inflation rates below but close to 2 percent. At the same time, recent economic sentiment survey data have shown some improvement from low levels. The accommodative stance of our monetary policy, together with the significant improvement in financial - in financial markets since mid-2012, should contribute to support prospects for an economic recovery later in the year.
Against this overall background, our monetary policy stance will remain accommodative for as long as necessary. In the period ahead, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.
Let me now explain our assessment in greater detail, starting with our economic analysis. Real GDP contracted by 0.2 percent in the first quarter of 2013, following a decline of 0.6 percent in the fourth quarter of 2012. Output has thus declined for six consecutive quarters, with labor market conditions remaining weak. Recent developments in economic sentiment survey data have shown some improvement from low levels.
Looking ahead to later in the year and to 2014, euro area export growth should benefit from a recovery in global demand, while domestic demand should be supported by the accommodative stance of our monetary policy and by the recent real income gains due to lower oil prices and generally lower inflation.
Furthermore, the significant improvement - improvements in financial markets seen since last summer should work that way through to the real economy, as should the progress made in fiscal consolidation. At the same time, the remaining necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity. Overall, euro area economic activity should stabilize and recover in the course of the year, albeit at subdued pace.
This assessment is also reflected in the June 2013 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP declining by 0.6 percent in 2013 and increasing by 1.1 percent in 2014. Compared with the March 2013, ECB staff macroeconomic projections, the projection for 2013 has been revised marginally downwards, largely reflecting the incorporation of the latest GDP data releases. For 2014, there has been a marginal upward revision.
The Governing Council continues to see downside risks surrounding the economic outlook for the euro area. They include the possibility of weaker-than-expected domestic and global demand and slow or insufficient implementation of structural reforms in euro area countries.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.4 percent in May, up from 1.2 percent in April. This increase was in particular accounted for by a rebound in services prices related to the unwinding of the Easter effect and an increase in food prices. More generally, as stated last month, annual inflation rates are expected to be subject to some volatility throughout the year, due particularly to base effects relating to energy and food price developments 12 months earlier.
Looking through this volatility, the underlying price pressure over the medium term is expected to remain subdued, reflecting low capacity utilization and a modest pace of economic recovery. Over the medium term, inflation expectations remain firmly anchored in line with price stability. This assessment is also reflected in the June 2013 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.4 percent and 1.3 percent in 2013 and 2014, respectively.
In comparison with the March 2013 ECB staff macroeconomic projections, the projection for inflation for 2013 has been revised downwards, mainly reflecting the fall in oil prices, while the projection for 2014 remains unchanged.
In the Governing Council’s assessment, risks to the outlook for price developments are broadly balanced over the medium term, with upside risks relating to stronger-than-expected increases in administered prices and indirect taxes, as well as higher commodity prices and downside risks stemming from weaker economic activity.
Turning to the monetary analysis, recent data confirm that the underlying pace of monetary and, in particular, credit expansion continues to be subdued. Annual growth in broad money, M3, increased in April to 3.2 percent, from 2.6 percent in March, mainly due to a base effect and special factors. The same factors impacted on the annual growth rate of narrow money - narrow monetary aggregate, M1, which increased from 7.1 percent in March to 8.7 percent in April.
The growth of loans to the private sector continued to be weak. The annual growth rates of loans to households remained at 0.3 percent in April, broadly unchanged since the turn of the year. The annual negative growth of loans to non-financial corporations increased from minus 1.3 percent in March to minus 1.9 percent in April. This development stemmed, in particular, from net redemptions in short-term loans, which could reflect reduced demand for working capital against the background of weak order books in early spring. More generally, weak loan dynamics continue to reflect primarily the current stage of the business cycle, heightened credit risk, and the ongoing adjustment of financial and non-financial sector balance sheets.
In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding condition of banks, in strengthening the domestic deposit base in stressed countries, and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs. Further decisive steps for establishing a banking union will help to accomplish this objective. In particular, the Governing Council emphasizes that the future Single Supervisory Mechanism and the Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and, therefore, require swift implementation.
To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.
With regard to fiscal consolidation and structural reforms, the Governing Council welcomes the progress made and encourages governments to continue with determined efforts. It is essential that euro area countries do not unravel their efforts to reduce government budget deficits. The new European governance framework for fiscal and economic policies should be applied in a steadfast manner.
In this respect, the Governing Council considers it very important that decisions by the European Council to extend the timeframe for the correction of excessive fiscal deficits should remain reserved for exceptional circumstances. At the same time, it is necessary to continue, where needed, to take legislative action or otherwise promptly implement structural reforms.
Structural reforms should, in particular, target competitiveness and adjustment capacities in labor and product markets, thereby helping to generate employment opportunities in an environment of unacceptably high unemployment levels, especially among young workers, prevailing in several countries. Combined action on the fiscal and structural front should mutually reinforce fiscal sustainability and economic growth potential and thereby foster sustainable job creation.
And we are now at your disposal for questions.
QUESTION: Alessandro Merli with Sole 24 Ore from Italy. You mentioned in several - on several occasions the need to provide more credit to small and medium enterprises. And in the last press conference in Bratislava, you also mentioned the possibility of doing something to restart the securitization market and ABSs. Could you give us a progress report on the work on that front? Have you scale down your ambitions there? I think the vice president mentioned in a speech that maybe expectations were a bit excessive on that - in that regard.
And the other question about interest rates, have you discussed the possibility of cutting them? Was your decision unanimous on that respect?
DRAGHI: Now, we had an ample discussion of the various measures - say, nonstandard measures - that could be utilized to repair the transmission channels of monetary policy. In this context, we’ve discussed ABS, we discussed VLTROs (ph), we discussed the inherence (ph) in the ACC, the additional credit claims framework, we discussed our collateral policies. And so we will continue discussing seeing the oldest measures have - most of these measures actually address the funding problems, first and foremost. First, let’s consider this.
Second, some measures are easier to implement and clear in their consequences. We know, for example, the VLTROs (ph) measures. Some other measures, like we have - I just want to remind you that we also discussed the possibility of a negative rate on the deposit facility and we discussed that, as well. And we are now technically ready for that.
We see - and I said on several other occasions - there are several unintended consequences, and as well as with other measures, at this present point in time, we see no reason to act on all these fronts, but these are all measures we keep on the shelves, really.
The ABS issue is more complicated than the others, however. You have to consider that - and I think I did say this in the past - that the ABS market’s been dead for many years. And - and it’s been dead for several reasons. Some of them had to do with the problems that the ABS caused during the crisis and before the crisis. Other reasons have to do with the liquidity and the capital regulatory framework for these - for these ABSs.
But even - I mean, once you analyze this and you go back and you see, here we’re talking about specific ABS for SMEs’ loans. Even before the crisis, ABS for SME loans were very, very little, probably the smallest component of ABS, if I’m not mistaken. Why is that? Because it’s very difficult to put SME loans in an ABS to - and to correctly rate and price it so that it can be traded like - like other forms of ABS. It’s containing much more standardized products.
Having said that, there is - there is a task force that continues its work, together with EIB, and we’ll certainly look at the possibility of taking - if they produce something, it will be collateralized. It will be guaranteed by other institutions. We’ll certainly look at the possibility of taking it as collateral. But this is something not for in the short term, anyway. It does require a prolonged period of time. First of all, to make the whole ABS thing functioning, we have to overcome the liquidity and the capital - overcome - change the liquidity and the capital regulatory framework for these types of ABS, which is - which is, I think - anyway, it’s a long-term - medium-, long-term proposition.
On - on the - on the second question, the last time we said that the Governing Council would look at all the incoming data, we’ll monitor closely all the developments and we will stand ready to act. So we had - we had a full discussion, a very rich discussion on the incoming data since last time, on the changes that have taken place, and some changes are for the better. Some survey data are - have come out better than expected. We had a flash estimate of the inflation rate in May, which is 1.4 higher than the month before. Other data concerning credit developments are not - not as good.
But, by and large, the Governing Council agreed that there wasn’t any directional change that would justify taking action at this point in time. And having said that, I can only repeat what I said last time. We will monitor very closely all the incoming developments, and we stand ready to act.
STAFF: Brian Blackstone, please.
QUESTION: Brian Blackstone with the Wall Street Journal. You mentioned that these various instruments are on the shelf. Is this adding to the volatility in the financial markets, not just the ECB kind of dangling these things out there for people to - to look at and then see what various officials make comments on? Also, other central banks - the Federal Reserve, when they talk about tapering or not tapering, it seems like the central banks are now a source of volatility in the financial markets. What role is the ECB playing in that? And what can be done to limit that?
And my second question is on unemployment. You mentioned again that it’s unacceptably high. Do you see anything that the governments have done in the past year or 18 months that you’ve been talking about this that you would say, hey, that’s a - that’s a good thing that this country did and it should be replicated elsewhere? Thank you.
DRAGHI: OK, I think - I would answer the first question saying that, frankly, the ECB hasn’t done anything to increase volatility in the markets. I mean, if you think that the ECB has done anything comparable to what’s happened in the other central banks, we wouldn’t agree about this perception. I think we are, all in all, at the present time, in a much more, I would say, conservative stance, although our monetary policy remains accommodative and, as I said, it will stay accommodative as long as needed.
But certainly, we have observed an increase in global volatility coming for major, major monetary policy decisions or announcements of decisions that may be taken in the coming months. And - but I don’t think the ECB has been in any event the source of this. I can’t really find any data supporting this - this consequence.
Now, the second point is about unemployment. The persuasion in - in the Governing Council is that the - the present levels of unemployment are a combination of cyclical factors, but also structural factors. There’s no - there’s no question, as far as the first are concerned, that we - we had the labor market - and general economic activity in the labor market are experiencing the effects of a combined credit crunch and the effects of the unavoidable fiscal consolidation that many of these countries had to undertake.
It’s also true that there are some structural factors that are blocking the labor markets in several countries. And as I said several times, it seems like the flexibility of the labor market has been placed squarely only on the shoulders of the young population. And that is one of the major reasons for the youth unemployment being so - so high in some countries.
We should also add another reason, however, that a fast-changing world - that is to say, globalization - does require new skills, does require investments in human capital, and so youth unemployment can be explained also - also on this - on this basis, on a mismatch of - of skills and human capital.
So what the governments should do, I think, as well, they should repair the structural weaknesses of these markets, and - and the - as far as the ECB is concerned, we see a gradual recovery, albeit, as I say, at low levels, taking ground in the second part of this year.
STAFF: Reuters, Eva Kuehnen?
QUESTION: Eva Kuehnen from Reuters. Hello, Mr. Draghi. You reiterated twice now that the monetary policy would remain accommodative for as long as needed or as long as necessary. Now, I was wondering, would issuing a more formal forward guidance be a way to ease monetary policy further?
And my second question is concerning the banking union, which you also refer to in your opening statement, and you said a swift implementation of the SSM and the SRM was - was needed. So my question is, would a so-called resolution board, as it was put forward recently by a Franco-German deal, be adequate for the ECB to start banking supervision on time and properly? Thank you.
DRAGHI: Thank you. On the first question, we - we already gave some forward guidance in terms of liquidity availability. When - I think it was last time or the time before, I said that the fixed rate full allotment would be maintained in - for the whole of next year, until July 2014, at least and as long as it needed. That is to say, if it’s needed to prolong beyond that date, it would be prolonged.
We haven’t addressed yet other types of forward guidance as other central banks are - are - have done. And we’re reflecting on it, like it’s one of the other arguments, topics that I mentioned before. We have a range of different instruments. One - this would be more in the standard size and the others would be more on the non-standard.
On the - yes, we are - we are - we are optimistic about - well, optimistic is perhaps too much of a word - but confident that the Single Resolution Mechanism will be in place by the time the single supervisor will take over. We are not unaware of the many difficulties not so much in establishing - well, establishing a Single Supervisory Mechanism - I’m sorry, Single Resolution Mechanism. There are diverging views about what is the right pecking order, whether there should be depositor preference. You all know about these differing views about that. But I - we’re relatively confident that this can be overcome in time.
A different - a different thing would be the existence of a single resolution authority, where the divergences are whether it should be - should require a treaty change or not, but certainly the Single Resolution Mechanism already would be significant progress and would help the single supervisor to take over with great confidence.
QUESTION: French daily (inaudible) maybe I repeat the question, first one, about the decision of today, if it was unanimous or not. I didn’t hear yes or no, in your words. And were there may be some members voicing for next rate cut or not?
And, secondly, yeah, no, at the time, the ECB is 15 years old. And what we see in the press are some - a lot of diverging opinions from board members on what to do at that time. You underscored it’s difficult to act on some topics, but it seems that there are some divisions and no agreement on rates or on buying or not IBS or negative deposit facility and so on. So there is not - is there a moment where your authority maybe could be at stake?
DRAGHI: Well, on - on the first point, the - there was a consensus by the Governing Council in the assessment that changes were not enough to grant immediate action. So it was more a discussion based on the analysis than on the decision, really.
The - I think much has been - too much has been done, in terms of dramatization of differing views. You have differing views in all central banks, and at a period of such a great uncertainty, obviously you have a variety of opinions. That’s good. It’s actually very good.
And on the - but we have to distinguish. You can have disagreements about - about certain measures, but differing perceptions about the other measures I mentioned - namely ABS, VLTROs (ph), enhancement of additional credit claims, collateral, and so on and so forth - these are all - all sort of topics in the course of exploration, when people don’t have definite views yet, because these are - as I said before - very complex.
So we are starting them together. And of this - while you study and explore ideas, obviously, you may have changes of views, and you - your own view may change during the discussion. So to depict a dramatization of contrasts on these measures is certainly a vast exaggeration.
I think there was some sort of - can’t remember now - at some point, there was a rumor that we would use ABS to buy the credit claims of Italian companies towards the government. I still wonder who had this idea. I really don’t know. Who put this idea into mind? Of course, it’s impossible, but - but that was - just lasted for one week. Then it disappeared, and so on. So I don’t think there is anything to be - to be dramatic about that.
STAFF: Michael Steen (inaudible)
QUESTION: Michael Steen, Financial Times. Mr. Draghi, I guess the weather’s turned a bit better, at least in Frankfurt, people starting to go on their summer holidays. There are still capital controls in Cyprus throughout this period. Do you have a view on how long those should last? And is it damaging that they’re going on so long? And is - are capital controls something that you could ever envisage happening again inside the eurozone?
And a second question on OMT. Obviously, we have the Karlsruhe court next week discussing that. Can you just confirm that the legal documentation for that is actually all ready, but you’re not going to publish it until you actually need to use it? And does that help when you have things like the German Constitutional Court holding hearings on it? Thanks.
DRAGHI: Yeah, on the first thing, capital controls, the - as you know, the ECB is not competent for capital controls. Capital controls are under the domain of the commission. And the commission is working actively with the national bank, with the national bank of Cyprus, with the - with the supervisors there to assess when it would be the time to lift capital controls.
We - the ECB is aware that capital controls distort profoundly the markets in the euro area. And we made clear our view at the time, and certainly compatibly with the stability of the - of the financial flows of the island, the capital controls - the sooner be lifted, the better. But it’s not - it’s not our responsibility. The second point about the legal documentation of that is ready and it’s about to come out. So it’s -
DRAGHI: Not today, no.
QUESTION: Not today.
DRAGHI: Not today. But there is no - frankly, you ask me this question any time, but, I mean, I can’t really see the issue, where - what is - what is the issue about that? So, anyway, but - if it becomes an issue, it’s ready to come out. If it has to be an issue, it will come out. We never thought it would be an issue.
QUESTION: Yes, thank you. Can you hear me? Yeah, thanks (inaudible) I also have - my first question is also on OMT and Karlsruhe next week. You have emphasized in the past the importance of OMT for calming down the markets and the euro crisis. So I just wanted to know what you think - at least if the - if the court might put in - put in question the OMT, let’s say, at least politically, what could be the consequences for markets?
And the second question is on fiscal policy. In your statement, you extended the paragraph on fiscal policy, and you also mentioned the new framework, saying that it’s necessary to limit the extension of the timeframes to exceptional circumstances. I just wanted to know, do we have such circumstances at the moment, for example, if we look at France? Thank you.
DRAGHI: Just my chance (ph) - the - let me say about OMT, because when I - now, of course, it’s time when we all look back at what - at what OMT has produced, and, frankly, when you look at the data, it’s really very hard not to state that OMT’s been probably the most successful monetary policy measure undertaken in recent time.
Look at that. We - before OMT, we had some expectations of deflationary risks. I think I see that as the - one of the greatest achievement of this monetary policy measure, and that’s over. That’s over. You have the stock prices, which went up everywhere, from, say, 30 percent in Germany to 39 percent in Spain, which means that the cost of capital has gone down, creating a much more favorable environment for investments.
You see that TARGET2 balances - I just received the data an hour ago - TARGET2 balances today are at the level they were in December - early December, before of 2011, before the first LTRO had been undertaken. And within the TARGET2 balances, you would see that, for Germany, the TARGET2 balances declined by 160 billion euros since then.
And there are people who are convinced the TARGET2 balances are a big risk for countries. To these people, they should admit that now the risks are lower after OMT. The 10-year sovereign bond yields declined spectacularly in several countries, but went up in Germany. And that’s very important for the saver, for the German saver, and for the insurance companies and the pension funds.
So I can only - and then I can continue on this - volatility, and this is - so the OMT has brought stability not only to the markets in Europe, but also to the markets worldwide. Same thing if you look at U.S. stock prices, but, of course, in other - in other jurisdictions, other things have happened at the same time. So I’m saying this, that looking - looking backward, one can only be quite satisfied by the results obtained by this - by this operation.
Now, about - about Karlsruhe, the Constitutional Court, I’m absolutely confident that the court will decide in total independence and will - will analyze, will consider with thoroughness, fairness and competence all the advice from all the sides.
Your second question was about fiscal measures. Well, yeah, I mean - yes, you’re right. The position of the ECB is that these extensions, two-year extensions should be - should be given in exceptional circumstances and, more importantly, should be coupled with the commitment to undertake structural reforms. And I’m saying this because very often these fiscal adjustments are combined with a lack of competitiveness in the countries concerned.
So if one - if one country just gets two years of extension, and then in two years’ time comes back with a higher deficit, higher level of debt, and the same degree of competitiveness - that is to say, very little - I don’t think the markets will be happy and will - will punish very soon this country or other countries like that.
So the - the - I would say the plea here is, don’t get too optimistic about the present market condition. Don’t interpret the present market condition as one that would allow any protracted relaxation of fiscal standards without undertaking structural reforms at the same time, without increasing competitiveness. That’s the message that I would - I would have, and that’s the message that in the introductory statement, that’s what it meant.
STAFF: Over there in the middle, the gentleman, yeah.
QUESTION: (inaudible) I’ve got two questions. First question, could you give us some date on the development of the bank deposits at the European Central Bank during the last four weeks? Have deposits been reduced?
And the second question is, why aren’t you willing to speak at the hearings in the German Constitutional Court? Thank you.
DRAGHI: OK. Well, I’ll answer the second question first. It’s not that I’m not willing. The fact is that we thought it would be the best - the most suitable person, and we convened - all of us - that it would be Mr. Rasmussen who’s in charge of the legal department, the legal affairs in the board, and he’s close to the German legal system. He knows much better the German legal system. So that’s what we have concluded. Incidentally, the ECB did not receive a request for me to go there, but just for the institution to be represented.
Having said that, you know that I don’t shy away from making my ideas and my views clear. So I would certainly find plenty of opportunities, as I’ve started today in a sense to make my views clear. So it was really a choice of - of who would be the best person for the court.
The second point is, we continue to experience a decrease in the excess liquidity. We continue to experience repayments in our LTRO. And right now, these repayments have reached something like 60 percent about - perhaps slightly below 60 percent of the net injection that took place in the early months of 2012.
Now, this is a positive sign, because basically it shows that the financial conditions continue to normalize and that banks don’t need to rely only on the ECB for their funding. They can get funding from other sources, namely deposits in the stressed countries have become again a source of funding. Interbank market in the non-stressed countries is returning to be again a source of funding and so on and so forth.
It’s also a sign, however, that this liquidity is - doesn’t find its use in - in the system. So it’s a good sign from a financial market stabilization, and it’s also - I wouldn’t say it’s a sign - it’s a symptom of the underlying credit weakness, the fact that it’s returning, and that is - that’s to be considered.
All in all, all in all, the ECB is the only central bank where the - I would say the M1 component of the money creation is shrinking in - I would say - not the M1, the - the liquidity component of the money creation is - is shrinking. And that is also a good thing, because we downsize, we gradually downsized the balance sheet of the bank, of the central bank, without - differently from other central banks, without having to decide anything that would or could create volatility.
It’s an automatic process of downsizing the balance sheet without this process being deflationary, because it’s not that it’s been cut - credit has been cut. Credit is not there yet. So that’s the - finally, I would say that you - you certainly for - you certainly don’t - have not forgotten in - in the early months of 2012 how some people were saying how big, immense were the risks that we were undertaking with these measures. Have we seen any of that?
STAFF: Bloomberg and then Market News, please.
QUESTION: Hello? Jeff Black from Bloomberg News. I’d like to go back to the economic outlook for a second. At what point, Mr. Draghi, do you think that the economy needs to have bottomed out this year for your scenario of a recovery later on to still materialize? I mean, we’re already in June, so I’m wondering how long you think we’ve got in that respect.
And, secondly, which goes back to the - the idea of SME lending, I think if I understand correctly, you’re saying that there’s very little that the central bank can do about the short-term cyclical fragmentation in the lending market because of the recessions that are going on around the euro area. But over the long term, it seems as if the only logical way to deal with this is that the banks are properly recapitalized first.
So going into summits - for example, the one at the end of this month - are you going to ask for a quid pro quo from governments to commit to making recapitalizations or restructurings before the central bank will commit to unveiling a plan on SMEs? Thanks.
DRAGHI: On your first question, it’s clearly - the question you’re asking is the key question we are asking ourselves every time, and not only when we meet. The one answer is to ask yourself, what are the drivers of this recovery, which is going to be gradual, as I said many times?
And, well, the drivers certainly are being - right now are the experts. Experts have increased in almost all countries, especially, I would say, in Germany, in Spain, and in Italy. So the - the first - the first - the first driver is that.
And the second driver is our - our own accommodative monetary policy, which gradually will find its way through the economy. When - when - well, let me finish with the drivers. The other thing is that, frankly, the low inflation has - is increasing the purchasing power of the incomes of the people. The very low price - very low - the low price of oil, the lower price of oil is also a factor that - that - that would work in this - in this direction.
Finally, although less than in other countries like the United States or U.K., you have a wealth effect coming from the improvement in financial markets. And you have, as I said before, lower cost of capital for investment. Against this, you have a quite broad weakness in domestic demand and in consumption especially due to the high unemployment. So you have these two forces, really.
On the second question - but before I answer the second question, there is one - one - one aspect of this which is linked. When you - when you talk to - when you talk to banks that are healthy and don’t need recapitalization, you ask them, but why don’t you lend more? The answer you get is - the answer you get is that, look, the net rate of return adjusted for risk from lending is not enough for us to lend. We - we have done a lot in reducing - in increasing the net rate of return, because the net rate of return includes the funding rates, and they have gone down. But the perception of risk of macroeconomic risk is still there. So - and that is a question of time.
Coming to this - to the second point, the - so one reason why banks don’t lend is really a risk aversion, and the risk aversion which is both micro, with respect to their clients, and the macro, with respect to the general economic environment and the high uncertainty that still prevails in some parts of the euro area.
Where I’m saying this, of course, I take for granted that there are sectors of the economic activity in certain countries, like the construction in Spain, that needed to be downsized anyway. So you have a certain amount of deleveraging taking place in various parts - for one reason or another, in various parts of the euro area. And that’s positive.
The second point is about banks being recapitalized. We - we envisage this - the following sequence. We don’t want to repeat the mistakes that have been made in 2011, when we had the EBA running stress tests without the countries having agreed - the governments having agreed about having a backstop.
You certainly remember, in the United States, was just the other way around. First, they determined the backstop, and then they made the - the asset quality of the balance sheet review, and miraculously, the capital needs of these banks came out exactly equal to the backstop that had been allotted.
Now, we don’t have these magic powers, but at least we want to make sure that there is an explicit commitment by the governments, by the ESM, by the Eurogroup to provide a backstop in case the asset quality review undertaken by the ECB, conjunctly by the ECB, the national supervisors, the third-party private-sector assessor, and by other national supervisors, which will exert peer pressure, just in case there were a capital shortfall, there would be a backstop.
Let me quickly add two things. First, I think the situation’s changed very much in the last two or three years for the better. Banks have raised capital. They are - they have deleveraged a lot. So the expectation is nothing as we had expected three, four years ago, as we had actually found out two, three, four years ago.
And, second, before you use a backstop, there are many ways that the bank can recapitalize itself. Of course, they can go - you have supervisory action, first of all. Second, you can go to the markets. Third, you can merge. You can do lots of other things before you use the backstop, but it’s psychologically so important to know that if you have a capital shortfall that cannot be addressed by all these measures, it can be addressed by the backstop. It’s very, very important. So we will ask - we have already asked that.
QUESTION: (OFF-MIKE) I would like to go back to the topic of interest rates. Can we deduce from your description of your discussion today that fewer members called for an interest rate cut today than had called for a 50 basis point cut last month?
DRAGHI: I’m sorry. I don’t get it. What did you say? This is complicated.
QUESTION: Last month - last month, you told us that a number of Governing Council members had actually pushed for more aggressive easing. And I wonder whether the number of council members who called for a rate cut today were fewer than those who had hoped for more aggressive easing in the previous month. That’s my first question.
My second question is, you repeatedly said that the ECB is technically ready for negative interest rates. Are you equally technically ready to move both the main refinancing rate and the deposit rate to (inaudible) and do you see any non-technical obstacles to having both rates at the same level? Thank you very much.
DRAGHI: Thank you. The - the first question, frankly, the discussion was not on whether to cut rates or not. The discussion was on whether we had enough of a change since last time to grant action now. And the consensus - the prevailing consensus, the vastly prevailing consensus, if you want - or I can go on and on with adding adjectives to this - was that - that basically there was a common assessment that the changes that have taken place are not sufficiently one directional as to grant action. Now, having said that, I said - as I said before - we stand ready to act. And we will continue monitoring closely all incoming data.
On the second point, I told you, we are technically ready. We looked at that. We don’t precommit. I’m not going to tell you that what we will do next month or in two months’ time or in six months’ time exactly, but I just want to know that - want to tell that all the preparation for venturing into the negative territory for the interest rate on the deposit facility is there. Whether this will be combined with other measures or not, I’m not in a position to tell you now.
QUESTION: But my question was (OFF-MIKE) technically ready to have the deposit rate and the main refinancing rate both at zero or whether that presents a problem?
DRAGHI: And I’m saying that this question implies a possibility that I’m going to tell you exactly what we’re going to do about the MRO. And we don’t do it. We don’t do it in the sense we don’t tell you this now.
STAFF: Marica Defeo (ph)?
QUESTION: Marica Defeo (ph), Correa de la Sera (ph). There was a report yesterday about radical cure that the ECB is preparing for banks. And the - in autumn (ph) just in preparation of the SSM competencies. And there was also some - there was a talk of the opposition of some France, of some countries like France and Italy to this radical cure. I would - I’m asking you if it is true at all.
And, second, which influence has the - the possible change in the monetary policy of the Fed for your rate decision today? Of course, I know that you say that it’s another central bank and it’s - you are in another cycle, but some people say this was also very important. Can you maybe -
DRAGHI: Well, the first - in answering the first question, I would - I would certainly not use the word “radical cure.” What we are going to do is - and I think we did say it clearly - we are going to have an asset quality or a balance sheet review of the banks that are going to be taken under the Single Supervisory Mechanism. This review - we have agreed about having this review being done by - conjunctly by the ECB, by the national bank - the national supervisor, by also other national supervisors working in - working in a joint form, like - in other words, that way, we will increase peer pressure. We would increase reciprocal disclosure, mutual disclosure. And, fourth, a private-sector assessor.
That is - that’s been agreed. I don’t think - I don’t think I know that there isn’t any - any disagreement about that. So I don’t know where these reports were coming from.
On the second point, the - what’s happening in the rest of the world is - as someone said before, is - is producing consequences on volatility, on interest rates, all along the yield curves, and we’ll certainly look at that in our monetary policy decisions in the discussion of the monetary policy decisions, but our monetary policy is completely independent. So it does pursue price stability as an objective, price stability in the euro area and in the medium term.
So we - we take into account all incoming information in taking our decisions, but in terms of having any direct influence, no, I would say absolutely not.
STAFF: (OFF-MIKE) please?
QUESTION: Yes, do you hear me? (inaudible) I have two questions. The first one is for you - is if you see any risk of deflation in some countries of the euro zone? And the second question is, yesterday there was - the IMF summed another mea culpa on the austerity measures, which were imposed on Greece. I wonder if the ECB has some mea culpa to do? Thank you.
DRAGHI: Well, not really.
On - on - on deflation, on deflation, the price - the price path that’s been - that’s been foresee by the staff projections is lower than the price path that was foreseen in previous staff projections, both for this year and for the next year. This is mostly due to a decrease in the price of oil. If you see - if you take oil and food outside, you would see that the decline - the difference between the two price path - the ones that are before projections and the ones today (ph) projections is much, much smaller.
Second, what - is there deflation? Now, let’s ask ourselves what deflation is. Deflation is a protracted fall in prices across different commodities, sectors and countries - let’s say a generalized protracted fall in prices, with self-fulfilling expectations. So it has explosive dynamics downward. We don’t see anything like that.
DRAGHI: Yeah, no, we don’t see anything like that in any country.
Also, when we look at which prices are falling, we see that this fall in - this fall in - this fall in prices is actually restricted to certain categories of goods, as I said, regardless of oil and food, but in other occasions, it has to do with falls due to more - less regulation, for example, or the introduction of technologies which would increase productivity.
And, of course, you - the fall in price in the price of oil is very important, because we - we really have to understand now what is a structural fall in the price of oil - namely, that it’s going to stay, because of the shale gas in the United States and elsewhere - apparently, it’s - it’s not only in the United States, or it’s something transitory. So, basically, we don’t see that.
Also, when monetary policy has to look through volatility, which I think as the introductory statement says, is going to stay in the price path. So don’t be surprised if you will see bumps in the price paths in the months ahead, because there is going to be volatility there.
But you want to look through volatility. And you ask yourself the question, how are inflation expectations behaving? And there you see that inflation expectations remain firmly anchored. Whether you take the inflation expectations derived from the financial markets or from - or from the surveys, the - the SBF, the - the - shows that inflation expectations have been anchored at 1.9 percent for 15 years, since the beginning of the ECB.
So all in all, we cannot see deflation. And we would certainly consider that very seriously, because it’s a threat to our capacity to pursue the objective of price stability, so if we were to see deflation, we would have to sit down and think deeply about that. But we don’t see it.
By the way, some of these changes that I made - that I hinted at are actually changes in relative prices. So they’re positive. They mean that there is real adjustment taking place in the countries, and you see this from the export levels which have gone up in some of the stressed countries, showing exactly that the adjustment is taking place.
On - on your second point, yeah, we have this mea culpa. No, I don’t think we do - we do - in fact, one good thing - as far as I can understand - one good thing about this - this IMF’s paper is that the ECB is not being criticized. So that’s one thing.
There has been a statement by the commission incidentally this morning which responds to - to this IMF paper. The statement of the commission makes several points, and I don’t want to go back on these points. But I would want to say - want to say something different.
Now, let’s look at the present. Greece has undertaken an extraordinary adjustment. There is ownership of this adjustment by the government. And it’s - really, we have to acknowledge the progress that this country has undertaken, has achieved. And if we look at a few years ago, it would have been unthinkable.
So my suggestion is that of course we have to - if this paper by the IMF, which I haven’t read, besides doing mea culpa, identifies the reasons for mistakes that have been made and other things, we’ll certainly have to take them into account in the future.
But often, this mea culpa are, in fact, a - I would call a mistake or projection of historical - a mistake of historical projection, namely that you tend to judge things that happened yesterday with today’s eyes. We have - we can’t - we can’t forget that four or five years ago, when the discussions about the adjustment in Greece were taking place, the climate situation in - in general was - was much, much worse. You remember the fear of contagion there and the very, very high volatility. That’s, in a sense, where fragmentation of the euro area really started, began to start. So it’s always very hard to pass ex post judgments on what’s happened four years ago.
But having said that, more than going back with your - with your - and looking backward, why don’t you look forward and just take stock of the extraordinary progress and the positive thing of a route that’s been undertaken? Thank you.
STAFF: Last question, El Pais, I think? Yeah.
QUESTION: Mr. Draghi, this is (inaudible) from El Pais. You have talked about dramatism a few minutes ago, and I’m afraid I will be a little bit dramatic, because I’m from a country that has an unemployment rate of 27 percent - that is a number of a great depression - and fiscal policy that is contractionary. And the monetary policy in Spain and also in other countries are also contractionary, because new credit is not available for little- and medium-sized companies. Are you telling Spaniards or Portuguese or Irish people, or even Italian people, that the ECB can’t do anything else with - with inflation nicely lower than 2 percent?
DRAGHI: I’m sorry.
QUESTION: Are you - are you telling us that you can’t do anything else with inflation - with the inflation nicely lower than 2 percent?
DRAGHI: Well, I am not sure I get the point, but I think I get. The fact that inflation is low by itself doesn’t mean that it’s bad. With low inflation, you buy more stuff.
Second - and we say we don’t see deflation - that’s what we have to fear. We don’t see that yet. Second, fiscal consolidation is and remains unavoidable. It should be clear I think to everybody that you can’t have growth on an endless debt creation. Sooner or later, you’re going to be punished, and the whole thing stops, and that’s exactly what’s happened after the financial crisis in many countries.
Third, are there ways to make fiscal consolidation growth-friendly? The answer is yes. Fiscal consolidation in most countries has taken the shape of increasing taxes. And there are many reasons for that, often because this was done under an emergency situation or, unfortunately, because that’s the easier thing to do - the easiest thing to do. You raise taxes. Now, that’s not growth-friendly, and it’s not growth-friendly because this happens in part of the world where taxes are already very, very high.
So what is the - what would be a better way? A better way would be the difficult way, namely reduce unproductive government expenditure and reduce taxes together. But once you - and, in a sense, I hinted at that before - once you’ve done that, you also have to ask yourself why these countries were not competitive, why they had to rely for growth in the good times - so-called good times or (inaudible) times - why they had to rely for growth on the protected sectors, on the sectors that were sheltered, shielded from the international competition.
And then you ask yourself, what should it change? And these countries should change and should become more competitive. And then what adjustments are needed in order to achieve this objective?
And - and the encouraging thing is that we see that most countries, if not all of them, have done this process, are in this process, which, of course, it’s very painful, very painful. And I always - I don’t think I miss - I miss one occasion, one opportunity to say - to - to make sure that you all know how aware of this we all are in the ECB.
STAFF: OK. Thank you very much. Bye-bye.
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