BRUSSELS, Jan 20 - The following is the full text of European Central Bank Chief Economist Otmar Issing at the start of his testimony before the European Parliament on Monday.
It is a pleasure for me to appear again before this Committee today. Let me express my thanks for our very constructive exchange of views over recent years. I will first briefly outline the Governing Council's most recent assessment of the macroeconomic outlook for the euro area. I will then focus on what, in my view, are the most important structural issues facing the euro area, in particular in the context of the Parliament's draft resolution on structural reforms and the Lisbon agenda.
1. The current economic outlook in the euro area In the course of 2003, economic growth strengthened and the economic outlook improved significantly. The conditions for a continued economic recovery are favourable. On the domestic side, interest rates are low and financing conditions are generally favourable. Furthermore, investment growth should benefit from ongoing efforts by firms to enhance productivity and hence profitability. On the external side, although recent exchange rate developments are likely to have some dampening effects on euro area exports, export growth should continue to benefit from the dynamic expansion of the world economy. As President Trichet has made very clear: We are not indifferent, but concerned about excessive movements in the exchange rate. In our view, the short-term risks to this outlook of a gradual recovery in the euro area gaining momentum in the course of 2004 are balanced. However, over longer horizons some uncertainties exist, related to structural imbalances in some regions of the world and their potential effect on the sustainability of global economic growth.
As regards consumer prices, inflation rates have over recent months remained slightly higher than we expected in the summer of 2003. This has been due mainly to oil and food price developments but also reflects increases in indirect taxes and administered prices. We expect annual inflation rates to fluctuate around 2% in the coming months and fall later this year, remaining in line with price stability thereafter. This expectation is based on the assumption that wage developments will remain moderate in the context of a gradual economic recovery. Moreover, the appreciation of the euro should continue to dampen price pressures through its effect on import prices. While certain risks to price stability may develop in an economic upswing, this broad picture is also confirmed by cross-checking with the monetary analysis. In fact, the accumulation of excess liquidity should not be of concern for price stability, provided that the economic recovery is gradual.
At its meeting on 8 January 2004, the Governing Council regarded the level of key ECB interest rates as appropriate to ensure price stability over the medium term. Interest rates in the euro area are currently at very low levels by historical standards and liquidity is very ample. From a longer-term perspective, the maintenance of price stability is the best contribution monetary policy can make to strengthening economic growth, since price stability creates an economic environment with low real interest rates and high confidence among households and firms. The importance of preserving public confidence cannot be overemphasised. This concern should also inform fiscal policy considerations, especially at the current juncture. This year will be crucial as regards strengthening the credibility of the institutional framework for fiscal policy and bolstering confidence in the soundness of the public finances of Member States across the euro area. Together with the Treaty provisions, the overall fiscal framework of the Stability and Growth Pact remains of central importance and must be fully respected. These are the foundations for trust and confidence in EMU. They are key not only to stability but also to growth, since sustainable public finances are a precondition for preserving low risk premia in financial markets. The Governing Council therefore strongly urges governments and the ECOFIN Council to live up to their responsibilities. Excessive deficits should be corrected as soon as possible. And governments should now honour the commitments they made last November.//