Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 10 January 2013
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. Let me wish you all a Happy New Year. We will now report on the outcome of today’s meeting of the Governing Council.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. HICP inflation rates have declined over recent months, as anticipated, and are expected to fall below 2% this year. Over the policy-relevant horizon, inflationary pressures should remain contained. The underlying pace of monetary expansion continues to be subdued. Inflation expectations for the euro area remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. The economic weakness in the euro area is expected to extend into 2013. In particular, necessary balance sheet adjustments in financial and non-financial sectors and persistent uncertainty will continue to weigh on economic activity. Later in 2013 economic activity should gradually recover. In particular, our accommodative monetary policy stance, together with significantly improved financial market confidence and reduced fragmentation, should work its way through to the economy, and global demand should strengthen. In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring.
Let me now explain our assessment in greater detail, starting with the economic analysis. Following a contraction of 0.2%, quarter on quarter, in the second quarter of 2012, euro area real GDP declined by 0.1% in the third quarter. Available statistics and survey indicators continue to signal further weakness in activity, which is expected to extend into this year, reflecting the adverse impact on domestic expenditure of weak consumer and investor sentiment and subdued foreign demand. However, more recently several conjunctural indicators have broadly stabilised, albeit at low levels, and financial market confidence has improved significantly. Later in 2013 a gradual recovery should start, as our accommodative monetary policy stance, the significant improvement in financial market confidence and reduced fragmentation work their way through to private domestic expenditure, and a strengthening of foreign demand should support export growth.
The risks surrounding the economic outlook for the euro area remain on the downside. They are mainly related to slow implementation of structural reforms in the euro area, geopolitical issues and imbalances in major industrialised countries. These factors have the potential to dampen sentiment for longer than currently assumed and delay further the recovery of private investment, employment and consumption.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 2.2% in December 2012, unchanged from November and down from 2.5% in October and 2.6% in August and September. On the basis of current futures prices for oil, inflation rates are expected to decline further to below 2% this year. Over the policy-relevant horizon, in an environment of weak economic activity in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain contained.
Risks to the outlook for price developments are seen as broadly balanced over the medium term, with downside risks stemming from weaker economic activity and upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices.
Turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued. The annual growth rate of M3 remained broadly unchanged at 3.8% in November 2012, after 3.9% in October. M3 growth continued to be driven by a preference for liquid assets, as M1 growth increased further to 6.7% in November, from 6.5% in October, reflecting inflows into overnight deposits from households and non-financial corporations. Following our non-standard monetary policy measures and action by other policy-makers, a broadly based strengthening in the deposit base of MFIs in a number of stressed countries was observed. This allowed several MFIs to reduce further their reliance on Eurosystem funding and helped to reduce segmentation in financial markets. M3 growth was also supported by an inflow of capital into the euro area, as reflected in the strong increase in the net external asset position of MFIs.
There has been little change in credit growth, which remained weak in November. The annual rate of decline in loans to the private sector (adjusted for loan sales and securitisation) remained at -0.5% in November. This development reflects further net redemptions in loans to non-financial corporations. Net redemptions, however, were less pronounced than in previous months, amounting to €4 billion in November, after €7 billion in October and €21 billion in September. The annual rate of decline in loans to non-financial corporations was -1.4% in November, after ‑1.5% in October. The annual growth in MFI lending to households also remained broadly unchanged at 0.7% in November. To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the ongoing adjustment in the balance sheets of households and enterprises.
In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue strengthening the resilience of banks where needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels. Decisive steps for establishing an integrated financial framework will help to accomplish this objective. The future single supervisory mechanism (SSM) is one of the main building blocks. It is a crucial move towards re-integrating the banking system.
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.
Other economic policy areas will need to make further contributions to ensure a firm stabilisation of financial markets and an improvement in the outlook for growth. Further structural reforms should be rapidly implemented to make the euro area a more flexible, dynamic and competitive economy. In particular, product market reforms to increase competition and competitiveness are essential, accompanied by measures to improve the functioning of labour markets. Such reforms will boost the euro area’s growth potential and employment and improve the adjustment capacities of the euro area countries. They will also add further momentum to the progress being made with regard to unit labour costs and current account imbalances. As regards fiscal policies, the recent significant decline in sovereign bond yields should be bolstered by further progress in fiscal consolidation in line with the commitments under the Stability and Growth Pact.
We are now at your disposal for questions.
STAFF: Ladies and gentlemen, I will soon know all your names, but for today, can I please ask you to state where appropriate your name and your publication? Eva Kuehnen, Reuters, please.
QUESTION: Thank you. Mr. Draghi, my first question is about today’s rate decision. I was wondering, was it unanimous? And did you discuss cutting rates?
And my other question concerns Ireland. Ireland had a successful bond auction this week. And does this now qualify Ireland for the OMT? Or what does the country have to do to be considered for this program? Thank you.
DRAGHI: Thank you. The discussion – the decision was unanimous. And I can spend some time explaining why this is so. We – if you look at – if you look at the overall landscape, taking as a medium-term perspective, you look at what’s happened in the last six months, you will see a significant improvement in financial market conditions and a broad stabilization of some conjunctural indicators.
Let me just go one by one through a list of things that are now better than they used to be. Bond yields and country CDS are much lower, significantly lower. Stock markets have increased. Volatility is at historical minimum. Low redemptions, as I just said, are lower, as I just read now, are much lower than they were in September, one-fifth of where they were in September.
We’ve seen strong capital inflows in the euro area. The deposits in periphery banks have gone up. TARGET2 balances have gone down. The ECB balance sheet size, which often is indicated as a source of risk, continues to shrink. So all in all, we have signs that fragmentation is being gradually repaired.
But all this has not found its way through the real economy yet, so the real economy continues to be weak, as we had discussed in our projections last month. Even though we have improvements – also I forgot to say – in current account balances in all the confidence indices. However, the real economy continues to be what it was diagnosed in our projections a month ago. So there wasn’t any reason, really, to change the medium-term outlook for price stability. And that’s the main reason why the – our discussion has been unanimous, our decision’s been unanimous.
On Ireland and whether it qualifies for OMT or not, I did say many times what are the prerequisites for accessing OMT. So I don’t want to comment specifically on this. We know what they are.
STAFF: Stefan Ruhkamp (inaudible)
QUESTION: As you said, there are some signs that the capital flight – the capital flight from some – from the weak countries in the euro area has stopped. And would you say that is aturning point and a turning point in the crisis? And if so, do you start to think about an exit plan, at least, to reduce the non-standard measures?
DRAGHI: No, we are not thinking about an exit now, but we see that the system, the economy will exit when it’s ready. We are seeing it. The balance sheet is shrinking. TARGET2 balances are going down. But we still see signs of significant fragmentation in the euro area.
So to define a turning point, you need – you need a lot of things besides financial market stabilization. You also need to see some signs of recovery, which we have foreseen, but later in this year, in the course of this year. You need to see some – also some general greater strength in – in – in the economy.
And basically, we don’t see – I mean, our medium-term outlook for price stability remains what it was. So there is no – no reason to think about exit.
QUESTION: But could it be a turning point in the debt crisis? I mean, you said it’s probably not a turning point in the economic crisis.
DRAGHI: Well, we – you see, that’s where – that’s where the government policies, the national government policies, become crucial. The continuation of the structural reforms process, the improvement on the competitiveness – that’s the paragraph on structural adjustment that is in my introductory statement.
They’re regaining competitiveness. The action on the product markets, with the restoration of competition in the product markets, all these are factors that would basically grant a long-term improvement and not only a financial markets improvement.
STAFF: Gabi Thesing, Bloomberg?
QUESTION: Thank you, Gabi Thesing, Bloomberg News. I have two questions. Can I press you again on the discussion in the Governing Council? You said the – the decision was unanimous, but last month, we had a significant amount of support for a rate cut. And I find it quite hard to believe that that wasn’t there this month. Was it there?
And you have people like your former colleague, Mr. Orphanides, who basically said the current confidence swing is merely a lull in the crisis brought on by the OMT. And with unemployment being, you know, at a – at a record high, the recession is actually worse than in 2009. So, you know, he would say you should cut rates.
And my second question is, there have been some issues in the Eurosystem in the sense that the national central banks seem to apply different collateral rules as they see fit. So which is – I don’t know – a bit embarrassing for the ECB. Are you going to do anything about it to make sure that the same collateral rules are applied right across the board?
DRAGHI: Now, on the first question, I’ve already answered. Since our last assessment, there was nothing that made us change our medium-term outlook on price stability, so the decision taken –
DRAGHI: – and any – and any sign we’ve seen since then are sign of financial markets’ stabilization, if not returned confidence, and a broad stabilization, in conjunctural indicators. That explains why now we have unanimity. But basically, there was no reason to change the decision taken last month.
On the – now, you’re – on the collateral issue – on the second question – you’re referring evidently to press reports that recently have appeared. And let me say just about the specific incident. This occurred in the summer of 2012 and had been corrected at the end of August 2012. So I think some media reports failed to observe this important point. The difficulties had been already addressed on this specific point.
Second point, the incident had no impact at all on monetary policy, contrary to what’s been stated in some media. But having said that, I said last time, I repeat today, we take these incidents very, very seriously. And already we had asked the audit committee chaired by Governor Liikanen proposed several measures, which the Governing Council adopted at our last meeting on December 6th.
These measures include a series of reviews and audits, which had been specified in our various press communique on this point, but on top of this, always following the audit committee recommendations, we’ve decided to create a data quality compliance network and an ECB unit that are responsible for, first, monitoring the data quality by performing regular checks and reports and promoting improvements in NCB processes, procedures. NCBs means national central banks – processes, procedures, international – internal controls, as well as existing checking procedures.
So we are doing everything we can to prevent these incidents, fix them when they happen, and we continue to do so. And it’s not true that each central bank applies its collateral rules as it sees fit. We saw last time it was – it was an issue of interpretation. This time, there were objective technical difficulties that had been addressed by the Banque de France, as they have stated in a press release.
QUESTION: (OFF-MIKE) whether called for rate cuts today?
QUESTION: Whether called for rate cuts today?
DRAGHI: I said it was unanimous.
QUESTION: You said the decision was unanimous.
DRAGHI: Yeah, so –
QUESTION: But in terms of the discussion, I mean, the markets want – the markets want –
DRAGHI: No – no – no –
QUESTION: – to know what the mood on the council is.
DRAGHI: No, if the decision was unanimous, it implies that there was no question to – no request to have a rate cut. I’m sorry, just that one thing implies the other.
QUESTION: Does it?
STAFF: Silvia Wadhwa, CNBC, please.
QUESTION: Two questions. First of all, you said rightly that obviously the ample credit supply or the ample supply of money doesn’t arrive yet at the real economy. Have you got any indication whether that’s – how much of that is lack of credit demand and how much of that is actually clogging up of the pipeline? Because we’ve heard even from – even from corporate chiefs of German – here in Germany, where they – who have access to the capital markets, that the call to politicians is stop pampering the banks, we need actually money to arrive where it’s supposed to arrive. So is there something like clogging up of the pipeline in terms of credit supply?
And the other one is, are you more pleased by the fact that yields have come down to a more comfortable level or more disappointed by the fact that you’ve got a fantastic OMT program that nobody seems to want yet?
DRAGHI: Well, the – on the first point, we’ve gone through this on other occasions. I mean, banks don’t lend for three reasons. One is lack of funding. Another one is lack of capital. And the third is either risk aversion or credit risk.
In the course of last year, the first issue, the lack of funding, been addressed. The lack of capital also seems to be – to have improved significantly. So we’re now left with high risk aversion and credit risk, credit risk caused by the recession itself.
So the bottom line of this is that all the positive factors that are listed at the beginning, plus our accommodative policy stance, and the continuing reform process, and the improvement on the – in repairing fragmentation will find their way through the economy. And we’ll see better credit conditions in the course of this – of this year.
I already pointed out that the net redemptions in November have been significantly lower, one-fifth what they were in September. That’s an example of improvements. But we are – I mean, the starting point was really very low. So it’s going to take some time. And at the same time, of course, demand is what it is, so it’s not – it’s a situation of – it’s still a very weak economic activity situation, the one that we’ve described in – today and in – in December.
On the second question, the question is, we are pleased whether yields have gone down. Well, we are pleased not so much that the yields have gone down, but – but the fact that tail risks have been removed and – and this has led to an improvement in financial market conditions and the beginning of a stabilization and confidence return in the financial markets.
STAFF: Alessandro (inaudible)
QUESTION: I have two questions. The first one is, again, on the problem of credit not finding a way to the real economy. Do you feel – is there anything further the ECB could do? You did two LTROs at the beginning of last year. Could you envisage some point that you could do another one?
The other question is about monetary policy. There seems to be a broad rethinking among some of your colleagues around the world on a monetary policy strategy. The Bank of Englandis rethinking inflation targeting. The Fed has indicated the very long-term guidance on rates. Could you give us a flavor if there’s any discussion on that at the ECB, notwithstanding that, of course, you are bound by your mandate of keeping price stability? Was there any consideration that you might do anything like that in the future or even any comments on what your colleagues around the world are doing?
DRAGHI: On the LTRO, I mean, we believe that funding conditions right now are satisfactory. I don’t think that’s where the problem is, contrary to what was the issue at the beginning of last year, when there was a serious potential for serious distress and systemic risk materializing. The two LTRO have avoided a disorderly deleveraging, which could have had even worse consequences on the – on the credit flows and further disruption in economic activity.
On the – on the second question, I don’t want to comment in detail, really, but let me give you the bottom line of this, after some – some reflection. Each central bank has its own institutional set-up, has its own statutory objectives and its mandate. Within this institutional set-up, within the statutory objectives, each central bank tries to steer private-sector expectations. And as far as our mandate, namely maintaining price stability, I think we’ve shown how to do it. And basically, markets understood.
STAFF: Stefan (inaudible) please (inaudible)
QUESTION: Stefan (inaudible) Mr. Draghi, I have two questions. One is regarding your speech in London from last year, where you said the ECB will do enough or can do enough. Mr. (inaudible) the –
DRAGHI: If I had said enough, it wouldn’t have worked anyway.
QUESTION: Yeah, but Mr. Mersch said at the end of last year that one can rescue the euro only if countries are going along and doing what they have to do. Is there a difference in the view how – how far the ECB can go within the ECB part (ph)?
And the second question, well, in – in – it’s about your relationship with the Bundesbank. The Bundesbank in early 1992 (ph) said (inaudible) about the EMU and said it may become too early (ph). In 1998, Mr. Tietmeyer said that probably there are coming too many countries in the EMU and that might cause problems. In 2010, Mr. Weber) said the SMP will not work and you have to replace it last year. Now you’re discussing about banking union, and the Bundesbank basically says we have to change the treaties before we can do a proper euro zone banking union. You seem to say no.
I don’t understand why you never listen or why those who try to drive European integration, you never listen to those who seemed to be right in the past, have a good record of being right, and doing always the opposite of that. Maybe you could say some words about that. Thank you.
DRAGHI: Well, I’m not sure how to read your question, because actually – I mean, you’ve put all examples in which the (inaudible) are not being followed. I mean, reality (inaudible) completely different direction. So I’m not sure what you want to say exactly.
But I will try to respond to the first question first. No, there isn’t any difference. In fact, the OMT foresees conditionality, conditionality within – with an ESM (ph) and an IMF presence means that countries have to act, means that OMT doesn’t start without programs. And even so, it means that it does require an independent assessment by the Governing Council. So there isn’t any difference between what Mr. Mersch and myself or anybody on the board would say about that.
Second, on the point more generally, let me tell you, I’m not going to comment on individual statements. My responsibility is to convey the decisions of the Governing Council, not individual, not comment on individual statements.
Third, the principle of the single voice is essential. And markets have understood it very well, at least seems to me.
And, fourth, what matters is, in the end, the strength of the European system of central banks, where all central banks implement the decisions of the Governing Council. Thank you.
STAFF: Michael Steen, please, Financial Times.
QUESTION: Thanks. Mr. Draghi, despite this more positive mood, I mean, in the statement, you do still explicitly say that the economic risks are to the downside. Does that – does that suggest that given this much more confident financial markets we’ve been seeing, would you say there’s the beginnings of the risks of a bit of exuberance, the people are saying or feeling that the crisis is (inaudible) we’re very far from that.
And, secondly, what are the biggest risks that you see economically? You seem to be hinting in your statement that the single-biggest risk is political. And if you – if you were to give the – some concrete examples there, what would they be? Thanks.
DRAGHI: Yeah. No, I don’t see yet any risks of exuberance, but we certainly – because, after all, what’s happened is that we are now back in a normal situation from a financial viewpoint, but we are not at all seeing an early and strong recovery. So I don’t think there is any ground for exuberance yet.
Also, on the – on the financial markets, on the credit markets, we don’t – we’re not observing yet any sign of this – of this exuberance. We observe more a normalization of certain conditions.
There are here and there, by the way, signs that we are watching carefully, that might suggest that there is a certain exuberance in specific localized parts of the – of the financial system. And we are watching – we’re watching closely that that wouldn’t lead to excessive creation of debt or leverage as it happened before. But so far, these are fairly limited and contained examples.
The risks for economic activity, you are right. The risks stem essentially from lack of action by the governments on the fiscal side, whereby – what I mean by that? I mean that not only continuing fiscal consolidation is essential, but also implemented in a balanced way, through a proper combination of government expenditure reduction and taxation.
Now, the second point – which is becoming, as many people have said, really, which is becoming more and more essential and important to reduce long-term imbalances in the euro area, is the structural adjustment. That’s where eventually – that’s the only thing that matters for imbalances in the euro area. It’s structural adjustment. It’s to regain competitiveness. It’s to create a situation where you don’t have a permanent creditor and lots of permanent debtors. And that’s where action is needed and will continue to be needed for the foreseeable future.
QUESTION: (OFF-MIKE) follow up on the (OFF-MIKE) specific areas (OFF-MIKE)
DRAGHI: I’m sorry?
QUESTION: Sorry, just to follow up on the specific areas that you were looking at in terms – in markets where there might be the beginnings of signs of exuberance?
DRAGHI: Well, there have been – well, you know it very well, because the FT reported amply on that. You’ve seen creation of – well, you’ve seen the return of certain overvaluations in certain sector of the private equity deals, of some leverage buyouts, and so on. So that’s what I was referring to.
But this – as I said, these are still relatively defined and contained situations. You don’t see – you don’t see exuberance in other parts of the economy.
The positive thing is that if you look at the last, say, three, four, five months is that, all in all, the financing conditions have been – have become a little easier, because of the – because of everything I said at the beginning, decrease in yields, stock markets have increased their valuations, and so on.
STAFF: Scott Solano (ph), DPA-AFX (ph).
QUESTION: Thank you. Hello? OK, happy new year to you.
DRAGHI: Happy new year.
QUESTION: OK. A few weeks back, I was at a Christmas gathering, and then I stepped outside onto a terrace, and I was speaking with this man, and we were talking and talking, and eventually I asked him what he did. And he said he was in waste management. And I was like, he didn’t look like a garbage man to me. I was a bit confused. But then the nickel fell, and he was a banker. It made sense. And his job was to go in and value basically garbage assets. And he said this bank, which is a prestigious German bank, is valuing a lot of its garbage assets at fantasy values. And he said this is prevalent throughout the banking system.
And so my question to you is, can you comment on this? And what do you intend to do about it? And also, because so much waste management is going on at banks, is that why the Basel III liquidity requirements have been postponed?
DRAGHI: No, I don’t have that very negative picture of what – what is the current situation of the banking system. Actually, I think that a lot of repairing has taken place since the – since Lehman times. It doesn’t mean that the repairing is finished. So there is more to do, much more work to do.
But a lot of work’s been done, both in terms of deleveraging untenable positions and in terms of raising more capital. And the figures give quite good evidence of this.
Now, the work isn’t finished as your friend seemed to say and should continue. And that’s very much in the hands of national supervisors. But let me also add another positive side to this. National supervisors have become much more – much more active, alert, intrusive than they were before the financial crisis. Things have improved a lot also on the institutional level, on the public sector level.
Also, the flow of regulation, of new regulation – and I’ll come in a moment to the liquidity rules – but also the flow of new regulation has come out and has been put into place after the financial crisis, certainly helping into this – into this dimension from this – from this angle.
The liquidity rules by themselves don’t have a direct relationship with the weakness of the balance sheet. They deal more with the funding situation of the banks. So the – we welcome, by the way, the agreement of Basel, as far as the liquidity rules are concerned. We think it’s – it’s quite important, and we think also that the phasing in, the – it’s not been postponed, by the way. They’re not being postponed. It’s simply – there was no agreement about a gradual phasing in of these rules, which is pretty normal.
When you increase or when you change deeply the rules for the – was the same thing for the capital rules, you need to give time for the banks to adjust, but not only to the banks, also to policy makers, because some of our policies will have to take into account these changes anyway. Thank you.
STAFF: Brian Blackstone, Wall Street Journal, and then Sebastian (inaudible)
QUESTION: I want to go back to the labor markets and the – you’ve talked about the decline in fragmentation of financial markets, but the fragmentation in labor markets seems to be getting even more pronounced, especially in youth unemployment, where it’s almost 60 percent inSpain, it’s 8 percent in Germany. Overall unemployment is over 25 percent in Spain. It’s a little over 5 percent in Germany.
At what point does this become an issue for monetary policy that it affects the transmission of monetary policy in the same way that the fragmentation of financial markets affects it? And why can’t the ECB maybe think about ways to lower this fragmentation, if it gets to such an extreme level that it affects your ability to conduct monetary policy?
And my second question, going back to the issue of global central banking in 2013, it appears that more central banks may be either explicitly or implicitly looking at the exchange rate as a tool, when other policy tools are exhausted. If the ECB is just focusing on price stability, couldn’t there be collateral damage to the euro zone, if you’re the only one out there that’s talking about price stability, while other central banks are experimenting in these different ways to help their economies?
DRAGHI: Thank you. There are several issues to – several angles from which you can look at unemployment, but just keep in mind that our mandate is not full employment, like the dual mandate of the Fed. Our mandate and our statutory objectives are to keep price stability, is to keep price stability. But having said that, the unemployment and the level of economic activity are important, very important factor in our assessment of price stability. And we certainly want to look at the unemployment rate and analyze whether how much of this is structural and how much of this is cyclical.
And you see, there are certainly some elements of – of the unemployment being structurally high in what we see today. You quoted one. What’s the reason for such high youth unemployment? If all workers were treated the same, unemployment should distribute uniformly across the working population. The fact that we observe such high figures of youth unemployment means that you have often dual labor markets, where you have the young with very little protection and the old, the others, with a lot of protection, so that unemployment gets concentrated in the – in the young part of the population.
And that – we know that that is so, because the – the greater flexibility that’s been introduced since the beginning of this – of the year 2000s was basically concentrated on the young part of the population, so that when the crisis came, they were the ones to – they were the first ones to lose their jobs.
Then the next question is, why there is – so there isn’t such – there isn’t any – well, there’s very mobility (ph) in this unemployment. Why isn’t unemployment – why aren’t the workers moving from the areas where there is no – there is no demand to areas where the labor demand is better? So, you see, these are all structural reasons.
When you look also – there is another observation – when you look at output gaps, you see that, for the output – the significant levels of output gaps would justify lower levels of inflation than we actually have, which, again, seems to say that there are certain structural components here in the unemployment rate. Now, monetary policy cannot do much about that, even – I mean, even – even in general cannot do much about that.
And finally, we believe that ensuring price stability is actually – gives you the long-term foundation for growth and job creation. But this doesn’t mean that we don’t take into account unemployment and the economic activity in our overall assessment of the situation and of the prospects.
The second question was – I’m sorry, I forgot it.
QUESTION: (OFF-MIKE) other central banks conducting policies that affect the exchange rate, and if the ECB is not doing anything on that, that you end up taking a hit by just focusing on price stability.
DRAGHI: Look, I – I never comment about exchange rates. But the exchange rate is certainly a very important element as far as growth and price stability are concerned, and we certainly use it as one of the elements for our economic assessment. But it’s not a policy target. That’s to be kept in mind.
Having said that, the – I can go back and read to you what’s the international consensus coming from the G-20 statement, and we stick with that, where we say – I mean, we say – the G-20 said, we (inaudible) our commitments to move more rapidly towards more market-determined (ph) exchange rate system and exchange rate flexibility, to reflect underlying fundamentals, avoid persistent exchange rate misalignments, and refrain – and notice – refrain from competitive devaluation of currencies. That’s a solemn commitment that the G-20 entered into. We reiterate that successful (ph) (inaudible) financial flows and disorderly movements (ph) in exchange rates have adverse implications for economic and financial stability. So – but let me finally add that, so far, both the real and the – and the effective exchange rate of the euro are at – at their long- term average. Thank you.
STAFF: Sebastian (inaudible)
QUESTION: Mr. Draghi, I have another question on the collateral issue. Given the fact that there was again a mistake at a national central bank last summer, do you still feel comfortable with the measures which have been adopted in December? And wouldn’t it be the time to think about centralizing the valuation of collateral at the ECB and taking away the – this competence (ph) from the national central banks to a certain extent?
DRAGHI: I think that’s a good question. That’s a good question. And it’s – you know, this – the way collateral is being managed and handled was decided at the beginning of – at the beginning of the ECB. And I would say that right now we have to strengthen the governance of this process, and we are doing so. We have to implement all the decisions that we’ve taken. And then we’ll certainly reassess the situation after that. And we see whether the steps we’ve undertaken are really satisfactory, because as I’ve said, beginning – we have taken this very, very seriously.
STAFF: (inaudible) International Herald Tribune.
QUESTION: Mr. Draghi – Mr. Draghi, two questions, if I can. First of all, just a very simple question. Would you ever consider – would the ECB ever consider or has considered anything along the lines of the Bank of England’s funding for lending scheme as a way of addressing the fragmentation issue?
And, secondly, you mentioned the Basel rules. Was the decision on Sunday at all a signal that perhaps we could see other concessions to the banking industry on other aspects of the Basel rules, such as the net stable funding ratio? Thank you.
DRAGHI: On the first question, you see, the combination of LTRO with the possibility of using additional credit claims as collateral, which we had before the Bank of England actually launched the scheme, is very much in the same – in the same – the same kind of actions. It’s very similar.
In other words, the Bank of England, in accepting a broad set of collateral, moved towards we had already in place, because the – you have ample liquidity. It’s medium-term liquidity. And banks can use their lending as a collateral for further funding. So these are very strict – and the pricing conditions were – and still are – attractive.
So from this viewpoint, there isn’t much difference in the objectives of the – of the two schemes. Of course, our scheme doesn’t involve the U.K. treasury or any treasury, while the U.K. involves the treasury. And our scheme is, indeed, given our institutional set-up, as I said, each central bank has its own institutional set-up, and decides and takes actions within that set-up. We think our scheme is simpler.
On – I’m sorry, the other question was –
QUESTION: (OFF-MIKE) Basel rules (OFF-MIKE)
DRAGHI: Yeah. Well, I think – on the Basel rules, on the latest decisions on liquidity, I think the governor of the Bank of England, who’s also the chairman of the GHOS, the Governors and Heads of Supervisions group, said everything that needed to be said at the time.
We welcome this – these rules. We think they are important. We think the approach taken is – as he said – is realistic. And we also welcome the gradual phasing in, because in a variety of ways, our monetary policies will have to take these changes into account, as well. Thank you.
QUESTION: (OFF-MIKE) one question I think has not been answered yet is, is the worst over? Can we say that, first?
Second, did you shut the door to rate cuts, because you didn’t discuss it, or somehow do you think that you have some powder left?
And I have – there are banks who want to give back their liquidity that you lent last year – almost one year ago. Have you any sign of how many banks and how much could it be?
DRAGHI: Now, this third question, no, we don’t – we have estimates, of course, but the range of these estimates is so wide that I don’t want to discuss them now. We will know more at the end of this month when the banks will start repaying their first LTRO. They can repay it weekly. We will communicate the amounts and the number of counterparties. You will not know from us the name of the banks, because we don’t communicate the name of the banks.
And then in – on February 27th, they will start repaying, if they do wish so, the second LTRO. They can repay on a quickly basis – I’m sorry, on a weekly basis, and everything will be communicated on a weekly basis, as well.
On the rate cuts, I’ve answered. I don’t think there is any – any further thing to say, any other consideration to make.
We had a discussion. There was no reason to change our medium-term price stability assessment since our last monetary policy meeting. Any sign we had was a sign of broad stabilization in the conjuncture and a certain return of confidence in the financial markets. But as I said, the economic activity is still weak and will remain weak for – at least in the first part of next year, of this year.
And this also is good as an answer to whether the worst is over.
QUESTION: Is it?
DRAGHI: We – the present situation is characterized by high uncertainty. And this uncertainty stems from – as I said before – from geopolitical risks, from price of oil, from commodity prices, and from the policies of the governments, which we – where we had substantial, significant progress, but they have to continue. And I just said, they – especially on the structural side at this point in time. Thank you.
STAFF: We’ll take two more questions, one from the middle – I think the gentleman from Spain –
QUESTION: (inaudible) Spanish daily, El Mundo. Could OMT (ph) lose its, let’s say, magic effects in the market, if not country (ph) asks for it? And second question. Jean Claude Juncker has just said that too much fiscal consolidation is becoming – could become negative for a country like mine, like Spain, because it’s – because so big unemployment. What can you comment on – on that?
DRAGHI: Well, on – on the first, you don’t have to ask me, ask the markets. On – on the second, there are many comments of this type about several countries in euro area. My answer to this is that so much progress, accompanied by so many – so big sacrifices have already taken place that to revert to a situation which has been found to be untenable would be – would not be right.
We shouldn’t forget that this fiscal consolidation is unavoidable. And we certainly are aware that it has short-term contractionary effects. But now that so much has been done, I don’t think it’s right to go back.
STAFF: Right. We’ll have (inaudible) and (inaudible) and then we have another event later on, so there will be – some of you have to go there, as well. Thank you.
QUESTION: (OFF-MIKE) from (inaudible) sorry for my voice. Chancellor Angela Merkel said in the past few months, in more than one occasion, that this crisis will take at least five years to overcome. Do you agree with her? Or are you more optimistic? Thank you.
DRAGHI: Well, I – I am not – I’m not really in a position to make long-term assessments at this point. We see that the long-term – we look at our price stability medium-term horizon, and we see that inflation is in line with our policies, and our policies are in line with our objectives.
QUESTION: (OFF-MIKE) German television. Mr. President, may I ask you again, you’ve shown us where the stage of the current crisis is, in the view of the Governing Council. Do we think that the national governments really use the time efficiently, which the ECB actually has bought them, with their extraordinary measurements, in order to solve the crisis in due time?
And, secondly, may I ask you, the fact that there is a certain calming down in the financial markets, do you also see this as personally a success, seeing it in the light that there has been quite heavy criticism surrounding these decisions? Thank you.
DRAGHI: Well, on the first, our – we have to acknowledge that significant progress has taken place in all countries in the euro area, all countries where – I mean, you look at fiscal side, you look at current account, you look at competitiveness, you look at unit labor costs, you look at experts, you look at basically all aspects of the economic activity have been – been affected by reforms of different kinds, whether fiscal or structural.
The – the – but the point now is not to be complacent about what’s taken place and relax, but rather keep on, persevere, because as we all see, we start seeing the benefits, and the benefits of this don’t come only from OMT, from the ECB action. They come from the substantial progress that’s been undertaken at national level, first and foremost, but also – let’s not forget – but this is – by the significant progress that the year 2012 has brought at the euro area governance level. We made – we made significant steps towards greater integration.
So the – the beneficial effects that we see today – and I went through some of them at the beginning of this press conference – are really the composite outcome of all these factors.
Also, let’s not forget about one thing. We spoke a lot about contagion, when things go poorly, but I believe there is a contagion, a positive contagion when things go well. And I think that’s what also is in play now. There is a positive contagion.
STAFF: Thank you very much.
DRAGHI: The second – I’m sorry. You had a second question?
DRAGHI: I think I’ve answered the second question, as well, or not?
QUESTION: Well, not really. This is a more personal question. I would like to ask you again whether you see it as a personal success, as well, that – the calming down on the markets, indeed, has been achieved, despite the fact that there has been really severe criticism concerning the measurements being taken.
DRAGHI: Well, I think – let me – let me be absolutely fair on this. I think the jury’s still out. It’s too early to be – to claim success. Thank you.
STAFF: OK (inaudible) president. Thank you very much.
DRAGHI: Thank you.