Sunday, November 17, 2002


At a press conference yesterday Wim Duisenberg explained the decision of the governing council of the ECB as follows:

We have reviewed monetary, financial and economic developments and updated our assessment in the light of the information available. In view of the high uncertainty on future growth, and its implication for medium-term inflationary developments, the Governing Council has discussed extensively the arguments for and against a cut in the key ECB interest rates. The view has prevailed to keep interest rates unchanged. However, the Governing Council will monitor closely the downside risks to economic growth in the euro area.

However, for the time being, the main scenario for the euro area remains that economic growth is expected to return to rates close to potential in the course of 2003. In fact, this expectation is consistent with all forecasts published by international organisations. Private forecasters, on the whole, also seem to share the same view. Moreover, financial markets have shown signs of stabilisation in recent weeks following a period of considerable turbulence. The expectation of an improvement in economic activity in the euro area is contingent on a recovery of growth in private consumption, supported by a reduction in actual and perceived inflation rates. This expectation is also based on a projected gradual recovery of the world economy and export growth which, together with the low level of interest rates, should help to strengthen investment.

Nevertheless, the uncertainty surrounding this scenario remains high. It is therefore very difficult, at this juncture, to predict the timing and strength of the economic upswing, both in the euro area and globally. Regarding fiscal policies in the euro area, may I expressly refer you to the Governing Council's statement of Thursday, 24 October on the Stability and Growth Pact. There is a strong consensus within the Governing Council that the principle of budgetary discipline enshrined in the Treaty and the Stability and Growth Pact are indispensable for Economic and Monetary Union and that the Stability and Growth Pact has been successful in promoting sound public finances and fiscal convergence, as well as in supporting the return to price stability. Moreover, the Pact is in the interest of the Member States.

May I also again urge governments to implement decisively the structural reform agenda, both within the area of fiscal expenditures and revenues and in labour and product markets. Such action is needed to enhance potential output growth over the medium term. At the same time, the prompt implementation of structural reforms would contribute towards strengthening confidence in the euro area and thereby support economic growth in the short term
Source: Press Release ECB

Now Duisenberg may have many hidden abilities, but one of them certainly isn't communicative capacity. His press conference responses are pretty revealing. [Question]: Mr. Duisenberg, I have never heard you say before in this forum that the ECB has discussed the arguments for and against cutting or raising rates. Are you going to start doing this more regularly in the future in your opening statements?..........[Duisenberg:] I do not know yet what we will say in the future. That depends on the circumstances in the future, but it is true that you have never heard me say that before. You have heard it for the first time today. What I will do in the future is up to the future.............. [Question] So, this may not be a permanent change in the way in which the ECB communicates?...... [Duisenberg] Not a permanent change. But, you are right, it is a change......[Question] if the ECB were to continue to stick strictly to its two pillar mandate and monetary rules such as the "Taylor rule", is it not the case that the ECB should, in fact, perhaps raise rates very soon, given the high rates of M3, ample liquidity, high core inflation prices, high service prices and the threat of higher oil prices?.........[Duisenberg] That is a very hypothetical question. If we were to stick to rules like the "Taylor rule", what would you do then? Well, we do not stick to rules like the "Taylor rule", so I prefer not to speculate........ [Question] I was wondering whether the public debate on the Stability and Growth Pact had any impact on the decision-making process this morning?.....[Duisenberg] Well, you would have to be a psychiatrist, because what you are actually asking is: to what extent did it have an impact on the minds of the individual members of the Governing Council. Certainly, it is a factor we perceive. But then let me say that the utterances and the discussions about the Stability and Growth Pact are very much a thing, I believe, of the past–, of the very recent past....................

Yes, I think, I've finally got it. The word is obscurantist. Like his fellow countryman Barcelona FC manager Louis Van Gaal, Duisenberg is clearly not comfortable in front of the cameras. I sympathise, but then I wouldn't take the job of Head of the ECB. One of the key characteristics of a good central banker is a capacity to handle and present information. In fact it is a virtue for a central banker that he keeps people guessing, the problem is, as others have noted, Duisenberg keeps us guessing because we have difficulty understanding what he is trying to say, and little sympathy with the way he says it. One source that is definitely not normally obscurantist or guarded in its comments is the Economist:

On November 6th, America’s Federal Reserve caught nearly everybody off guard by cutting interest rates by half a percentage point—twice the cut expected, bringing rates down to 1.25%, the lowest level since 1961. On the following day, the European Central Bank (ECB)—in charge of monetary policy for the 12 countries of the euro area, which share a currency and interest rates—left rates unchanged at 3.25%.

The ECB did consider making a cut. At a press conference after its decision, the ECB’s president, Wim Duisenberg, said the question had been discussed “intensively” at the meeting. He also expressed concern at the poor growth outlook for the euro area as a whole. In the end, though, said Mr Duisenberg, “the view prevailed that it would be wise to leave interest rates unchanged.” He also noted that the ECB does not think it is for monetary policy to stimulate economic growth.On the face of it the ECB’s stance is hard to understand. Partly it reflects the ECB’s single-minded focus on inflation—which is, after all, what its mandate requires. The bank has set its inflation target at 2% or less, and for a good part of the past two years, inflation in the euro area has been bumping up against, or even exceeding, that target. Inflation picked up in October, following a sharp rise in the money supply, which the ECB uses as a guide for future inflation. Critics reckon the ECB would do better to have a symmetrical inflation target, much like the Bank of England has: Britain’s central bank has to keep inflation within one percentage point either side of a central target, currently 2.5%. This more flexible approach would give the ECB more scope to cut rates when there was, as now, widespread concern about economic weakness.

A closer look at what the ECB has done, as opposed to what it has said, suggests it has, in practice, been ready to react to weak growth and to tolerate some overshooting of its inflation target. Behind Mr Duisenberg’s comment about the limitations of monetary policy lies real concern about the failure of many euro-area economies, and above all Germany, to tackle urgent structural reforms. The German labour market is much too rigid, making it expensive to hire workers and difficult to fire them. Mr Duisenberg and at least some of his colleagues (no details of ECB discussions are ever released) are worried that an interest-rate cut used as a substitute for, instead of an accompaniment to, economic reform will bring little long-term benefit. That is probably correct. In the short term, though, an increasing number of economists now think the ECB should do what it can to stimulate growth and reduce the impact of the current economic and political uncertainty.
Source: The Economist

No comments: