European Central Bank President Jean-Claude Trichet rebuffed pressure to cut interest rates, expressing confidence on Tuesday that the euro zone is on track for a gradual and modest recovery with inflation in check. Presenting the ECB's annual report, he acknowledged that recent economic data have been mixed but he expressed no growing concern that the economic recovery may stutter, despite the pressure led by Germany and France for lower rates. "The evidence available continues to indicate that the moderate recovery of euro area real GDP growth that started in the second half of 2003 has continued in 2004," he told the European Parliament's monetary affairs committee. "Although recently released economic indicators have been mixed, we remain confident in our expectation of a gradual recovery and continued, though modest, real GDP growth in the euro area."
Trichet's remarks were in line with his message to top industrial nations last weekend at the International Monetary Fund in Washington. An EU source said at the weekend that German Finance Minister Hans Eichel and the new French finance minister, Nicolas Sarkozy, had urged the ECB to cut rates to boost growth, saying a benign inflation outlook gave it the scope to do so. The ECB has left the door open to a monetary easing if its slow recovery scenario does not materialise. But ECB policymakers have consistently said that official euro zone interest rates at 2.00 percent are low enough to support recovery. They next meet on May 6.
SLOW AND STEADY
In his testimony to the European Parliament committee and in his foreword to the annual report, Trichet gave no indication that the ECB was wavering in its evaluation of recovery prospects -- even over its biggest worry of flagging consumer confidence and low household spending. "On the domestic front, favourable financing conditions and an improvement in corporate earnings should continue to support investment in the euro area. Growth in real disposable income should sustain private consumption," Trichet told the committee. As for price stability -- the ECB's mandate which is defined as consumer price gains just below 2.00 percent -- Trichet said that short-term upward pressure is little threat. "During the coming months, annual inflation rates will edge up, mainly on account of energy prices and increases in indirect taxes in a number of countries in the euro area," he said. "However, looking beyond the short-term inflation, the outlook for price stability continues to be favourable in a context of gradual economic recovery." He also said that the surge in money growth is not alarming although the ECB will be vigilant in monitoring it. The annual report and his testimony criticised European governments for violating the fiscal deficit rules of the Stability and Growth Pact, which underpins monetary union. "It is crucial that confidence in the solidity of public finances ... be maintained," Trichet said. This struck a theme he has repeated often in recent months that citizens are withholding spending and saving more due to uncertainty over cutbacks in government programmes.
The euro zone's three largest economies all face serious problems controlling their budget deficits. Germany is heading toward its fourth year in 2005 of breaching the deficit cap of three percent of Gross Domestic Product as it struggles to pull its economy out of three years of stagnation. France has broken the cap in the past two years and is expected to do so again in 2004. The European Commission is about to issue an early warning to Italy. The ECB has consistently warned that without major structural reforms and budget discipline, the euro zone is condemned to a slow pace of growth about which monetary policy can do little. This needs urgent attention, said Trichet. "The disappointing performance of real GDP growth over recent years illustrates the euro area economies' lack of flexibility and resulting vulnerability to external shocks."///