ECB President Jean-Claude Trichet told MEPs on Wednesday that while inflation rates were presently low and likely to fall in the short run, they would rise again before the end of the year, with risks being on the upside.
Speaking to the Economic and Monetary Affairs Committee, he also stressed that wage moderation was essential in reducing unemployment. At the first of the year's four sessions of the Monetary Dialogue between the European Central Bank President and MEPs, Trichet said „conditions remain in place for the euro area economy to grow solidly,” with growth projected at 2.1-2.9% in 2007 and 1.9-2.9% per cent in 2008. Inflation rates were, he said, „likely to fall during the spring and summer before rising again towards the end of the year and hovering again around 2%.” The bank's economic assessment and its monetary analysis both showed that „upside risks to price stability prevail over the medium term,” he said, warning that „stronger than expected wage developments would pose significant upward risks to price stability.”
Exporters and the euro
Alexander Radwan (Germany) raised the issue of problems caused to exporters like Airbus by the strong euro, and asked what could be done to encourage international transactions to be priced in euro rather than dollars, which would eliminate the exchange risk. Trichet said, „we see a progressive augmentation of the use of the euro in both export and import contracts. This is true for goods and services, but not for most commodities, nor for some particular markets, perhaps, like aerospace.”
Wage rises a risk for job creation?
Given his call for wage moderation, Ieke van den Burg (the Netherlands) said that in recent times wage increases had been in line with inflation, or perhaps even falling behind if improvements in labor productivity were taken into account. The issue, she said, was „whether the share of wage earners in the total economy is not too low and needs redress.” Trichet argued in response that unemployment in the euro area was still too high, and that wage moderation had been one of the reasons why jobs had been created up to now
„You can augment the volume of wages and salaries distributed, either by expanding the number of workers, or by concentrating on those presently with jobs, but with more unemployment than in the first case.” Wolf Klinz (Germany) asked whether minimum wages were a good idea. „When you have mass unemployment,” said the ECB President, „it is not advisable to augment as much as possible minimum wages - it benefits insiders, but prevents outsiders from getting a job.” In a later response to Benoît Hamon (France) he stressed that this was a legitimate choice for Member State governments to make one way or the other, he was just pointing out the consequences, he said.
Views of the ECB in France
The debate in France over the euro exchange rate and ECB policy was raised by several MEPs, including Hamon and Werner Langen (Germany). Trichet stressed that the ECB's independence and its mandate were both part of the Maastricht Treaty, which had been approved directly by the French electorate in a referendum. He added that opinion surveys suggested that 73% of the French public favored central bank independence to ensure price stability.
He said it should not be forgotten that 12 million jobs had been created in the eurozone since its creation eight year ago, compared to three million in the same countries in the preceding eight years. On exchange rates, he repeatedly insisted on the need for caution in his comments, given the huge global markets at stake, and stuck to the line agreed by the G7 that „excess volatility and disorderly movements are undesirable.”
Interest rate policy supporting growth?
Dariusz Rosati (Poland) said monetary policy in the US had been more supportive of economic growth over the last years than in the euro area. „Was this a deliberate ECB policy?” he asked. Trichet disagreed on the premise: „Taking everything into account, I cannot conclude that we were less supportive over the last eight years that in the US. We had the boldness to keep interest rates at 2% for over two years - the lowest historical level seen by Europeans.” It was the ECB's credibility on preserving price stability that had enabled this „extraordinary boldness”, he added, which was why the Bank was „inflexible” in preserving this credibility. Monetary policy was, he said, still „on the accommodative side”, with interest rates „moderate,” though he stressed he was no longer describing them as „low,” a point „well understood by market participants.” (EP Press)