Following is a transcript of European Central Bank President Mario Draghi’s comments from his monthly news conference in Brussels today.
DRAGHI: 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 commission vice president, Mr. Rehn.
In pursuing our price stability mandate, today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy.
This package includes further reductions in the key ECB interest rates, targeted longer-term refinancing operations, preparatory work related to outright purchases of asset-backed securities, and a prolongation of the fixed-rate, full allotment tender procedures. In addition, we have decided to suspend the weekly fine-tuning operation sterilizing the liquidity injected under the Securities Markets Programme.
The decisions are based on our economic analysis, taking into account the latest macroeconomic projections by Eurosystem staff and the signals coming from the monetary analysis. Together, the measures will contribute to a return of inflation rates to levels closer to 2 percent.
Inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent. Looking ahead, the Governing Council is strongly determined to safeguard this anchoring.
Concerning our forward guidance, the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation. This expectation is further underpinned by our decisions today. Moreover, if required, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation.
Let me now briefly describe the individual measures decided today. Further details will be published at 3:30 p.m. on the ECB website.
First, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 10 basis points to 0.15 percent and the rate on the marginal lending facility by 35 basis points to 0.40 percent. The rate on the deposit facility was lowered by 10 basis points to minus 0.10 percent. These changes will come into effect on June 11, 2014. The negative rate will also apply to reserve holdings in excess of the minimum reserve requirements and certain other deposits held with the Eurosystem.
Second, in order to support bank lending to households and non-financial corporations, excluding loans to households for house purchases, we will be conducting a series of targeted longer-term refinancing operations, TLTROs. All TLTROs will mature in September 2018, that is to say, in around four years.
Counterparties will be entitled to borrow, initially, 7 percent of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014.
Lending to the public sector will not be considered in this calculation. The combined initial entitlement amounts to some 400 billion euros. To that effect, two successive TLTROs will be conducted in September and December 2014. In addition, from March 2015 to June 2016, all counterparties will be able to borrow, quarterly, up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a specific period in excess of a specified benchmark.
Net lending will be measured in terms of new loans minus redemptions. Loan sales, securitizations, and write-downs do not affect the net lending measure. The interest rate on the TLTROs will be fixed over the life of each operation, at the rate on the Eurosystem’s main refinancing operations, that is to say, the MRO, rate prevailing at the time of the take-up, plus a fixed spread of 10 basis points.
Starting 24 months after each TLTRO, counterparties will have the option to make repayments. A number of provisions will aim to ensure that the funds support the real economy. Those counterparties that have not fulfilled certain conditions regarding the volume of their net lending to the real economy will be required to pay back borrowings in September 2016.
In addition, the Governing Council decided to extend the existing eligibility of additional assets as collateral, notably under the additional credit claims framework, at least until September 2018.
Third, the Governing Council decided to intensify preparatory work related to the outright purchases in the ABS market to enhance the functioning of the monetary policy transmission mechanism. Under this initiative, the Eurosystem will consider purchasing simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector, taking into account the desirable changes in the regulatory environment, and will work with other relevant institutions to that effect.
Fourth, in line with our forward guidance and our determination to maintain a high degree of monetary accommodation, as well as to contain volatility in money markets, we decided to continue conducting the MROs as fixed-rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period ending in December 2016.
Furthermore, we decided to conduct the three-month longer-term refinancing operations to be allotted before the end of the reserve maintenance period ending in December 2016 as fixed-rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO. In addition, we decided to suspend the weekly fine-tuning operation sterilizing the liquidity injected under the Securities Markets Programme.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.2 percent, quarter on quarter, in the first quarter of this year. This confirmed the ongoing gradual recovery, while the outcome was somewhat weaker than expected. Most recent survey results signal moderate growth also in the second quarter of 2014.
Looking ahead, domestic demand should continue to be supported by a number of factors, including the accommodative monetary policy stance, ongoing improvements in the financing conditions working their way through to the real economy, the progress made in fiscal consolidation and structural reforms, and gains in real disposable income resulting from falls in energy prices.
At the same time, although labor markets have shown some further signs of improvement, unemployment remains high in the euro area and overall unutilized capacity continues to be sizeable. Moreover, the annual rate of change of MFI loans to the private sector remained negative in April and the necessary balance sheet adjustments in the public and private sectors are likely to continue to weigh on the pace of the economic recovery.
This assessment of a moderate recovery is also reflected in the June 2014 Eurosystem staff macroeconomic projections for the euro area, which foresees annual real GDP increasing by 1.0 percent in 2014, 1.7 percent in 2015, and 1.8 percent in 2016. Compared with the March 2014 ECB staff macroeconomic projections, the projection for real GDP growth for 2014 has been revised downwards and the projection for 2015 has been revised upwards.
The risks surrounding the economic outlook for the euro area continue to be on the downside. Geopolitical risks, as well as developments in emerging market economies and global financial markets, may have the potential to affect economic conditions negatively. Other downside risks include weaker-than-expected economic demand, domestic demand, and insufficient implementation of structural reforms in the euro area countries, as well as weaker export growth.
According to Eurostat’s flash estimate, euro area HICP inflation was 0.5 percent in May 2014, after 0.7 percent in April. This outcome was lower than expected. On the basis of the information available to us at today’s meeting, annual HICP inflation is expected to remain at low levels over the coming months, before increasing only gradually during 2015 and 2016, thereby underpinning the case for today’s decisions. Meanwhile, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent. Looking ahead, the Governing Council is strongly determined to safeguard this anchoring.
Our assessment has been supported by the June 2014 Eurosystem staff macroeconomic projections for the euro area. They foresee annual HICP inflation at 0.7 percent in 2014, 1.1 percent in 2015, and 1.4 percent in 2016. In the last quarter of 2016, annual HICP inflation is projected to be at 1.5 percent.
In comparison with the March 2014 ECB staff macroeconomic projections, the projections for inflation for 2014, ’15 and ’16 have been revised downwards. It should be stressed that the projections are conditional on a number of technical assumptions, including exchange rates and oil prices, and that the uncertainty surrounding each projection increases with the length of the projection horizon.
The Governing Council sees upside and downside risks to the outlook for price developments as limited and broadly balanced over the medium term. In this context, we will closely monitor the possible repercussions of geopolitical risks and exchange rate developments.
Turning to the monetary analysis, data for April 2014 continue to point to subdued underlying growth in broad money, M3. Annual growth in M3 moderated further to 0.8 percent in April from 1.0 percent in March. The growth of the narrow monetary aggregate, M1, moderated to 5.2 percent in April, after 5.6 percent in March. In the recent past, the increase in the MFI net external asset position, reflecting in part the continued interest of international investors in euro area assets, has been the main factor supporting annual M3 growth.
The annual rate of change of loans to non-financial corporations was minus 2.7 percent in April 2014, compared with minus 3.1 percent in March. Weak loan dynamics for non-financial corporations continue to reflect their lagged relationship with the business cycle, credit risk, and the ongoing adjustment of financial and non-financial-sector balance sheets. The annual growth rate of loans to households was 0.4 percent in April 2014, broadly unchanged since the beginning of 2013.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis led the Governing Council to decide on a combination of measures to provide further monetary policy accommodation and to support lending to the real economy.
In order to strengthen the economic recovery, banks and policymakers in the euro area must step up their efforts. Against the background of weak credit growth, the ongoing comprehensive assessment of banks’ balance sheets is of key importance. Banks should take full advantage of this exercise to improve their capital and solvency positions, thereby contributing to overcome any existing credit supply restriction that could hamper the recovery. At the same time, policymakers in the euro area should push ahead in the areas of fiscal policies and structural reforms.
As regards fiscal policies, the Eurosystem staff macroeconomic projections indicate continued progress in restoring sound public finances in the euro area. The aggregate euro area general government deficit is projected to decline gradually from 3.0 percent of GDP in 2013 to 2.5 percent of GDP in 2014. For 2015 and ’16, a further decline to 2.3 percent and 1.9 percent, respectively, is projected. General government debt is projected to peak at 93.4 percent of GDP this year. Thereafter, it’s projected to decline, reaching around 91 percent in 2016.
As regards structural reforms, important steps have been taken to increase the competitiveness and the adjustment capacity of countries’ labor and product markets, although progress has been uneven and is far from complete. In this context, the Governing Council takes note of the European Commission’s recommendations on fiscal and structural policies, published on June 2, 2014, to continue the path of reducing budgetary and macroeconomic imbalances.
The recommendation to the council to abrogate the excessive deficit procedures for four euro area countries indicates continued progress in restoring sound public finances. However, euro area countries should not unravel progress made with fiscal consolidation. A full and consistent implementation of the euro area’s macroeconomic surveillance framework, together with the necessary policy actions by euro area countries, will help to raise potential growth, increase the euro area’s resilience to shocks and facilitate job creation.
And we are now at your disposal for questions.
STAFF: Stefan Riecher, Bloomberg, please.
QUESTION: Good afternoon, Mr. President. Stefan Riecher, Bloomberg News. I think I need 27 questions after all you -- just joking. I’ll pick two to please everybody else. First question on forward guidance. I noticed you dropped the lower part of the interest rates, and does that mean you can exclude any further interest rate cuts, no matter what? And the second question, on the targeted LTROs, how exactly will you make sure that banks will use the money in a way you would like them to use it? Will there be any extra reporting standards introduced that you can actually see the money will lend at the real economy and not somewhere else?
And if I may follow up on a second question on the LTROs related to this, the 7 percent number, I was wondering if that’s based somehow on the Bank of England’s funding-for-lending scheme and if you could elaborate very briefly to what extent it is related or not.
STAFF: Stefan, before we start, can I please make clear that two questions for everyone? So pick two of your three.
QUESTION: The first two. I apologize.
STAFF: First two, OK.
DRAGHI: OK. On the first question, I would say that for all the practical purposes, we have reached the lower bound. However, this doesn’t exclude some little technical adjustments and -- which could lead to somewhat lower -- some lower interest rates in one or the other or both parts (inaudible) but for more practical purposes, I would consider having reached the lower bound today.
The second question is about the -- how we make sure that this credit-enhancing measure is actually going to be used to lend to the real economy. Yes, the answer is yes, you’re absolutely right. There are going to be additional reporting requirements.
And the whole -- I mean, if I may spend just a few words on the sort of spirit underlying this measure, is the following, really. First of all, we want to improve credit with the view - - the ultimate view, don’t forget, is always price stability, to ensure the transmission from the sort of financial monetary economy to the real economy, with the objective of improving -- with the objective of achieving price stability.
The underlying spirit is that we want this to -- we want to enhance lending to the non-financial companies private sector. And we don’t want to -- also, there are several provisions here that would require enhanced reporting on the use of the initial allocation and on the use of the quarterly allocations. So there will be checks.
There will also be, as I said, a press statement at 3:30 going through various details like that, and there will also be debriefings in -- by the ECB staff on this, but there will be checks. The second point was -- the second intention is not to interfere with the AQR and the comprehensive assessment and (inaudible) is not to incentivize the -- with banks, so that’s how this has been conceived.
Certainly, we -- I mean, you asked, I can answer the third question is part of the second, in a sense. We certainly looked at the other central banks’ experiences with this, and especially Bank of England. No, of course the final result is fairly different from the Bank of England’s.
STAFF: Brian Blackstone, Wall Street Journal.
QUESTION: Brian Blackstone with the Wall Street Journal. Given the weakening in your inflation outlook, why didn’t you go ahead and do a broad-based asset purchase program today? Because you’ve -- you’ve mentioned that as one of the options if you have a weakening in the medium-term inflation outlook. Why didn’t you just go ahead and do QE?
My second question is, on the SMP sterilization suspension, you said you’d sterilize these purchases and now you’re not going to do it anymore. What does this say about how iron clad your commitment is to sterilize purchases under OMT? Thank you.
DRAGHI: Now, let me -- let me say that the -- we’ve done this. We think it’s a significant package. Are we finished? The answer is no. We aren’t finished here. If need be, within our mandate, we aren’t finished here.
The second point is, is actually quite a good question. Let me answer this way. The main reason to commit to sterilization by my predecessor first and by myself later was based on the effects, on the potential effects that this additional liquidity might have on inflation, when inflation -- when the inflation rate was close, below, and sometimes above 2 percent. When the SMP -- if I’m not mistaken, when the SMP started, the inflation rate was above 2 percent. Now, now we are in a completely different world. So that now this decision actually takes place in a background characterized by low inflation and weak recovery, weak monetary and credit dynamics. So that’s the reason for suspending this commitment.
DRAGHI: OMT has nothing to do with this. It’s a different -- completely different program.
STAFF: Johanna Treeck, Market News?
DRAGHI: Oh, but the vice president -- the vice president points out to me that we never said that we would sterilize with OMT. But, anyway, it’s a completely different product. Please?
QUESTION: Johanna Treeck, Market News. Thank you very much. I also have two questions for you. You announced a big package of measures. How long do you -- do you expect it will take for the full effect of these measures to develop? In other words, how soon will you have a good sense of whether this will be enough for you to achieve your aim of returning to the close to 2 percent target?
The second question pertains to the preparatory work for the ABS. Did you already discuss a potential scope of such a program? And if so, could you give us an indication? Thank you very much.
DRAGHI: Thank you. Well, the first question is actually - - is important and it’s also difficult to answer. Let me say, why is this? The package has basically three parts. The first part is to ease the monetary policy stance. The second part is to enhance the transmission to the real economy. And the third part is the reaffirmation that we’ll also use unconventional instruments if needed, if further easing is needed.
Let me just discuss in -- because this will give you an idea of how long it might take to -- to this. First of all, the first part namely is the stance of monetary policy. We -- there we lowered the corridor and we reinforced our forward guidance.
The reinforcement of our forward guidance was based on two facts, first of all, the extension of the fixed-rate full allotment until the end of 2016 and, second, the fixed-rate on the TLTRO. So this will say that interest rates will stay low for long, possibly longer than previously foreseen, and this will feed into the money market conditions via the yield curves and the exchange rate. This is the first block.
The second is, we want to make sure that these improved conditions in the money markets would be transmitted to the real economy. And that’s where the TLTRO comes in. So that’s why we want to make sure that this feeds into the bank-lending channel, because our economy is 80 percent based on banks, so it lowers the cost of term funding for banks, but only for loans to the real economy, so only for the non-financial company -- companies of the private sector.
So how -- when do we foresee we’ll see some outcome? It’s very difficult to say, but most likely it will -- we’ll all see immediate effects on the money markets and we will see delayed effects on the real economy of this -- attributable to this -- I’m not saying that in the meantime the real economy couldn’t actually recover more, but attributable to this program, it will probably take three, four quarters.
The -- on the ABS, we did not discuss the scope of the ABS, other than, again, reaffirming that it should be real economy oriented, oriented towards non-financial companies of the private sector, and on ABS, let me say that -- you know that last Friday -- last Friday, we published a paper with the Bank of England. And if I have to summarize what the ideal ABS we are looking, we are striving for, should have three features.
It should be simple, so no complex CDOs, cubes, or squares, just -- it should be real, so ABS based on real loans, not based on derivatives, and should be transparent, namely there should be information available for ABS underwriters, whoever trades ABS. They should understand what they trade, what they’re trading on. And that’s why, for example, one of the initiatives that the ECB has decided some time ago, namely to build a book of loan-level data comes very handy now. Other initiatives like credit registers that some countries have also are important for this. So, basically, simple, real, transparent.
STAFF: Claire Jones, Financial Times?
QUESTION: Claire Jones, Financial Times. I think (inaudible) to a degree that the European Central Bank has been very good in providing the eurozone financial system with a chief and plentiful supply of liquidity. So what is it, exactly, about this targeted LTRO that makes you think that you’ll get a lot of demand from the banks for the liquidity you’re putting on offer here, given that we have seen a reduction in excess liquidity?
For my second question, the inflation projections, I’d assume, would not take into account the May figure, given that that was released after the cutoff point. How -- how much does the May figure of 0.5 percent concern you? How much closer does it take you to thinking that there’s a real threat of what you referred to as a pernicious, negative spiral?
DRAGHI: Yeah. Well, let me -- first of all, let me correct what we -- what we said before in answering to Brian’s question. Yes, there was a commitment for OMT to sterilize, but -- so I’m correcting this. But having said that, it’s a different program, completely different program.
The -- now, let me say something I haven’t said. You always ask -- the first question you ask when -- when these press conferences, was it unanimous? I mean, now, this time -- this time, it was unanimous. And I just want to really -- I’m really very grateful to all my colleagues in the Governing Council, because being able to agree to have unanimity on such a complex set of instruments means a very, very extraordinary, unusual degree of consensus.
And you can imagine -- I mean, we had -- we had a very deep, prolonged discussion because, of course, there were different ideas about different components, although it was pretty clear there was a great consensus emerging immediately, and in the end, I think the Governing Council was capable to reach unanimity around one concept, which is the one I have illustrated to you.
Now, what is in this LTRO, in this TLTRO that is -- makes it different? Several things. I mean, the cost, obviously, it’s very low. The term maturity is four years. And the determination that this money not be spent for sovereigns on sovereigns and on sectors that are already experiencing or have just coming out of a kind of bubblish (ph) -- you say that, bubblish (ph) situation? So that’s what is in it.
Now on the threat. When -- when I’ve been asked in the past about whether we see deflation -- whether I was seeing deflation. The answer was -- and still is, by the way -- we don’t see deflation. We don’t see that typical feature of -- of a self-fulfilling negative spiral of self-fulfilling expectations. We don’t see households postponing their spending plans and -- and we don’t see the various features of this phenomenon that I -- that I have mentioned on other occasions.
Let me also say that we -- in the past, we said that the main factors of this low inflation, where the low -- the basically low growth rates of prices for food and energy and the exchange rate and also, to some extent, the persistent weak demand.
Now, not much has changed in terms of the causes of inflation. But what is changing and is in the process of changing is what I often said, the longer it lasts, the higher are the risks. And that’s what we are reacting to. We are reacting to a risk of a too prolonged period of low inflation.
The other course we mentioned, for example, was the relative price adjustment that was needed and is needed in some countries, the idea being that relative price adjustment is a once-and-for-all phenomenon. It stops and then inflation goes back.
Now, the longer the inflation doesn’t go back, without denying the need for the relative price adjustment, which is essential to restore competitiveness and growth and job creation in these countries, but the longer the inflation doesn’t go back, the more the Governing Council is in a, say, watchful -- watchful position. Thank you.
STAFF: Jack Ewing, please.
QUESTION: Jack Ewing, New York Times. You said a few minutes ago that you’re not finished. Is it safe to assume that the next step, given the comprehensiveness of the measures that you’ve announced today, that the next step would have to be some form of large-scale asset purchases or QE? And if so, can you give us any idea of how that would work in the European context, given the structure of the capital markets here? Thank you.
DRAGHI: Thank you. The -- when -- let me ask you, when we lower interest rates, are you going to ask when you lower interest rates again? Not. Not so. So we’ve just taken a decision which, as you can see, it’s fairly articulated and certainly (inaudible) of different aspects and certainly very significant. So let’s -- what I said before, it’s quite clear that we haven’t -- we are not finished if need of further reason is going to come out, is going to be needed.
If such a need were to come, the introductory statement says that the Governing Council would be using -- is ready to use also unconventional instruments. The broad-based asset purchase program that you mentioned is certainly one of these unconventional instruments.
QUESTION: (inaudible) German television (inaudible) Mr. Draghi, the president of the German Saving Banks Association is accusing the ECB of an expropriation of savers. What is your response to that criticism?
And, secondly, more generally asks what is your message today to the German savers who suffer from very low interest rates?
DRAGHI: Yeah. The -- let me address the first question. I think there is a deep misunderstanding here. This -- the rates that we’ve changed are for the banks, not for the people. Of course, commercial banks may react to our decision by choosing to lower their rates, if they think they should do so. And this would be then transmitted to savers, but it’s not us. It’s a decision taken by the banks. So it’s completely wrong to suggest that we want to expropriate savers.
Our package of measures actually is -- means exactly the opposite. It’s meant to restore growth, to promote the recovery, and this will allow interest rates to return to higher level. And this is -- this is, in a sense, is -- it’s part of the response that I want to give you to your second question.
The concerns of the savers should be taken very seriously. When we say savers here, we should have clear in mind, these are people who have saved most of their lives to provide for their retirement. These are people who signed a policy, insurance policies with insurance companies, and they see the value of these insurance policies going down. So these concerns are serious.
And here the answer is that the interest rates will go up, will go up when the recovery will come back, when growth will come back. Thank you.
STAFF: Domenico Conti, Ansa?
QUESTION: Mr. Draghi, Domenico Conti of Ansa. Just a quick question on the ABS purchases on which the ECB is intensifying its preparation. Among the discussions that the council members had, was there the possibility that many, for instance, U.S. investors rush to buy such products, thereby basically pushing an upwards pressure on the euro? And are there any possible countermeasures? Have they been taken into consideration? Thank you.
DRAGHI: Well, if -- if -- let me step back. We are working on the ABS, but you know that there are also other actors that would have to work on this, namely there has to be a revisitation of the regulation that had been introduced in the past few years about ABS to eliminate some of the undue discriminations towards this specific product when this product is simple, real and transparent. So this is -- this is the key point.
Now, if this -- if this effort by ourselves, by the other relevant institutions, because clearly there are other institutions that are working on the same -- on the same -- on the same issue, by the regulators, where -- to produce a product which is so attractive for the world, that means there will be a very sizable financing inflow for the SMEs and the real economy.
So that would be the greatest success. And for us in Europe, it would certainly help to restore a one capital market and to fight fragmentation, which is, in my view, one of the most important causes of the present crisis.
I would -- I would value these benefits much more than -- than the exchange rate. Incidentally, however, the exchange rate in -- one of the reasons for the strength of the exchange rate was the inflows coming from outside from investors interested in euro area economies, and that has moderated quite so in the last quarter.
STAFF: Geoff Cutmore, CNBC.
QUESTION: Thanks very much for the question. The German Bankers Association also described what you’ve announced today as a disincentive to structural reform. But it seems that in announcing this package today, you have shown that you are comfortable with the level of structural reform that governments are currently implementing. So that’s my first question. Is the German Bankers Association wrong?
And my second question relates to the knee-jerk reaction we’ve seen from European politicians to the outcome of the elections. France, Spain, other countries are now looking at cutting tax rates and stepping back from the more aggressive fiscal reform programs that were in place. Do you think that that is a bad idea at this stage, given the high levels of government debt we still see in Europe?
DRAGHI: First, our package is not a disincentive for structural reforms. Clearly, it’s -- they are two different things. We have a mandate. The mandate is price stability. And the Governing Council is unanimous and determined to take actions, any action within its mandate, to reach the objective of price stability.
Are we comfortable -- you said something which actually I wouldn’t agree completely. Are we completely comfortable with the degree of progress about structural reforms by the governments? No. No. We said there has -- I mean, if we go back -- let me go back to the introductory statement, because it was a sentence exactly addressing your viewpoint here. It’s quite a cautious sentence, says, as regards structural reforms, important steps have been taken to increase the competitiveness of the adjustment capacity of countries’ labor and product markets, although progress has been uneven and is far from complete. That’s not a statement of satisfaction. So it’s -- that is quite clear.
Now, on the -- so no relation between this program and that. This program basically complies with our mandate, which is price stability. Second, no satisfaction. Some progress, but no satisfaction.
The -- your other question raises a quite -- a quite important point. Here the -- I would say the word, the message that the ECB has sent has always been you have to consolidate your balance, your budget, but governments have to do so in a growth-friendly way. And the growth-friendly way means lower current government expenditure, lower taxes, to the extent that it’s possible within the Stability and Growth Pact, higher capital goods expenditure, higher public investment, and all this should be accompanied by structural reforms.
If any of these pieces is -- falls down, then you don’t have a growth-friendly consolidation. If you -- as many governments -- as many government have done under the pressure of emergency in the three -- at least three, four years ago, they -- if governments pursue fiscal consolidation only through the increase in taxes, we have what we have today, namely that this is the area of the world where you have the highest taxes, and that doesn’t seem to be conducive to growth.
If governments think that they have to -- they can’t consolidate the budget and that’s enough and they don’t pursue structural reforms, you can see that that’s not sustainable.
STAFF: Sebastian (inaudible) BFM.
QUESTION: Thank you. Thank you for the question. Sebastian (inaudible) BFM Business. Mr. Draghi, in France, Manuel Valls, the prime minister, is sometimes compared to Matteo Renzi. What do you think about that? I mean, do you believe that France is doing enough with its current structural reforms?
And second question, regarding the exchange rate. You say that strong euro is a serious concern for the ECB, even if you don’t have any target. Do you think it’s possible to see euro fall back to its initial level against dollar at 1.17? Thank you.
DRAGHI: Thank you. Well, you’re really asking too much from me if you ask me to make comparisons between European leaders. I am very -- I have nothing to say about -- about your first part of the first question.
On the -- on the -- on the other part, I think all countries should continue to do structural reforms. And they -- and the governments of the countries that are lagging behind know better than anybody else that they need these reforms.
The second part about the exchange rate, I’ve often said, the exchange rate is not a policy target, but it’s very important for price stability and growth. And I think we’ve discussed on other occasions how the current level of inflation has been impacted by the appreciation of the exchange rate. If we go back to the last three years, we have two stories. First, the first part, the first half of the last three years, it was mostly the declines in the price of oil and food and perhaps some other commodities that have accounted for something like two-thirds of -- something like 80 percent, 75 percent, 80 percent, of the difference between inflation then and inflation now, which if I’m not mistaken is about 1.3 percent.
Then, in the last year, it was the oil -- the prices in dollar terms haven’t moved much. It was the exchange rate that has accounted for the decline in inflation. Thank you.
STAFF: Over here?
QUESTION: (inaudible) Mr. Draghi, Bloomberg HD Television Turkey (inaudible) so my first question is, you have given us a new TLTRO, a sterilization program. You have extended the full allotment period and so forth, so if I’m not mistaken, this means over 500 billion euros worth of liquidity, of course, will, you know, each have to go back home and calculate it and what it means.
But my main question is, how sure can the ECB be that these programs are going to create inflation? And I’m saying this, when I’m looking at your forecast for 2015 and ’16, 1.1 and then 1.4, because even the Federal Reserve, after three periods of quantitative easing, was not successful enough to create the sort of inflation, and this was one of the major drawbacks that, you know, money markets couldn’t predict. So that’s my first question.
My second question is, with regards to the emerging markets, of course, and -- for the emerging markets to understand your ECB’s forward guidance better, you have given us a couple of -- you have given us three stages for this program to work, and the second was the fact that money markets are going to take this message and improve better.
So as the ECB, do you evaluate the effects of this program on emerging markets? That’s my second question. Thank you.
DRAGHI: Thank you. Well, the -- we are confident -- I think it’s been said in the introductory statement -- we are confident the measures that we’ve taken will drive inflation close to our -- to 2 percent in the medium term. It says together, the measures will contribute to a return of inflation rates to levels closer to -- closer to 2 percent. The inflation for the -- inflation expectations for the euro area continue to be firmly anchored, et cetera.
So we do expect these measures to take effect. So that’s the answer to the first question, but also keeping -- keep in mind that the -- the recovery isn’t finished. The recovery is low. As I’ve said many times, it’s fragile, it’s uneven, but it’s there.
And we’ve also observed the labor market has shown signs of stabilization. The unemployment rate in particular has stabilized and also has shown some signs of going down. So this gives us relative confidence that the measures we’ve taken today will contribute to reach the -- our objectives in the medium term.
On the second point, you know, it’s an issue that comes out each time a central bank of a large jurisdiction takes a monetary policy action, and namely the spillovers over emerging markets. In my view there, there are -- there are a few considerations one can make, but the first thing is to say that it’s very difficult today to conceive a structured cooperation framework for the central banks because each central bank is bound by its national bank, which for us is price stability.
There should be -- and there is -- there is and there should be more exchange of information, and the central banks of all countries are actually working actively to this extent. But the major actors in this process are of different types. First of all are the governments of the emerging market countries should undertake the needed economic policies, namely policies oriented to stability, stability-oriented economic policies, which means budget consolidation, which means structural reforms.
It’s not coincidental that the last time we had a big spillover coming from a monetary policy decision of one large jurisdiction, not us, the most -- the most affected emerging market countries were also the countries the fundamentals of which were the weakest. So this is one set of actors.
The other actor -- very important actor is the IMF, where there should be -- the -- which is the only institution that can actually put in place a facility that could help emerging market economies to cope with transient, but very significant spillovers.
There is such facility already in place. It’s the flexible credit facility, the FCL. And it’s been used. It’s been used by -- at least as far as I can remember -- by Mexico and Colombia in the last few years with success. But there are other considerations that prevent some countries from accessing that facility or the IMF directly, which makes it difficult for them to do so. So work -- from what I can understand, work is ongoing on that front, as well.
STAFF: Arthur Beesley, Irish Times?
QUESTION: Thank you. Thank you. Arthur Beesley from the Irish Times. What is your assessment, Mr. Draghi, of the rise of nationalists and far-right parties in the European election? Does this suggest to you that political leaders and central bankers, indeed, are at risk of losing too much support for their response to the crisis?
My second question relates to claims made by Joan Burton, a minister in the Irish government, who is a candidate now to be deputy leader of the Irish government, who says that the limits of austerity have been reached in crisis countries such as Ireland. Thank you.
DRAGHI: The -- the first question is actually a good reason for deep reflection, for thinking. First of all, it -- one would say that the emergence of these nationalistic movements in different parts of Europe would prompt one thing, would prompt a deeper reflection on Europe. But the first answer that one would give is that, certainly, it’s not going back to square, whatever, zero that is the optimal response for resolving the problems of today’s Europe.
The other consideration is -- relates to the functioning of the European Parliament after the elections. And the most informed analysts’ view is that the European Parliament can actually function and continue its constructive role as in the past.
The third point, however, is to -- or perhaps the first -- is to acknowledge that the diversity of views is an expression of democracy. And therefore, it is to be -- it is to be welcomed.
But, frankly, it’s very -- the -- it’s frankly -- I think it’s a very good time to think deeply about how we can improve Europe, how can Europe become again a construction that delivers not only peace, which is not a small achievement, which has been delivered for a long time, but also prosperity and jobs.
STAFF: Thank you.
DRAGHI: Now, on your second question, I, frankly, wouldn’t have much to add to what I said before. Budget consolidation -- we shouldn’t forget that one of the reasons for this crisis was the -- the condition in which many budgets -- many budgets of European countries were at the beginning of the crisis and the level of debt and deficits in many countries -- this was not the only -- the only cause of the crisis, but certainly was one of - - one of the important ones. So we don’t want to go back to that situation. And that’s why I insist -- always insist to growth, insisting in growth-friendly fiscal consolidation.