FRANKFURT (MNI) – The following is the first part of verbatim text
of ECB Vice President Lucas Papademos’s opening statement to the
European Parliament’s committee on Economic and Monetary Affairs:

Dear Madam Chair,

Dear honourable Members of the Committee on Economic and Monetary
Affairs,

It is a privilege to present to you today the ECBs Annual Report
for 2009. This presentation is a cornerstone of the ECBs accountability
towards the European Parliament. In my introductory statement, I will
first briefly review the key economic and monetary developments in 2009,
summarise our current assessment of the macroeconomic outlook and
explain our monetary policy decisions. I will then focus on two highly
topical policy issues, namely the current fiscal policy challenges in
the euro area and the planned reform of financial regulation and
supervision in the EU and globally.

Before doing so, I should like to highlight an important event in
2009: the entry into force of the Lisbon Treaty on 1 December 2009. The
new Treaty substantially increases the powers of the European
Parliament. It also gives the ECB the status of a Union institution and
strengthens its independence by explicitly anchoring the ECBs
institutional features and financial independence in primary law.
Moreover, the Lisbon Treaty emphasises the importance of the
Eurosystems mandate by making its primary objective of maintaining
price stability an objective of the EU as a whole. Economic developments
and monetary policy

In 2009 the European Central Bank performed its functions in an
exceptionally challenging environment as the global financial crisis
continued to unfold. Following the severe intensification of financial
market tensions in autumn 2008, euro area real GDP contracted by 4.0% in
2009, largely driven by a sharp decline in exports and in private
investment. The decrease in private consumption was relatively
contained, although households increased their saving rates
substantially. Economic activity in the euro area reached a trough in
the second quarter of 2009 and has increased at a slow pace since then.

The significant macroeconomic stimulus, the measures taken to
support the financial system, and the pick-up in global activity have
underpinned the recovery of the euro area economy. Looking ahead, the
Governing Council expects real GDP to continue to expand at a moderate
pace in 2010 and to strengthen further in 2011. This expectation is in
line with the latest ECB staff projections and the forecasts of other
institutions. The recovery is likely to be uneven over time and across
regions. The risks to this growth outlook are assessed to be broadly
balanced, but uncertainty remains high.

With regard to price developments, average annual HICP inflation
fell sharply to 0.3% in 2009, from 3.3% in 2008, largely due to
substantially lower oil and other commodity prices as well as a result
of the impact of the severe contraction in activity and rapidly
deteriorating labour market conditions. In the course of 2009, annual
HICP inflation turned negative for a few months, primarily as a
consequence of the dynamics of commodity prices, particularly oil
prices, and the associated base effects. Excluding energy and food
prices, HICP inflation has been on a gradual downward trend since
mid-2008, primarily reflecting a substantial moderation in labour costs
and a sharp fall in profit margins over the course of 2009.

In March 2010, euro area annual HICP inflation rose to 1.4%, from
0.9% in February, mainly driven by energy and unprocessed food price
developments. Nevertheless, in view of the projected slow economic
recovery and high unemployment, inflation is expected to remain moderate
in 2010 and over the rest of the policy-relevant horizon. Risks to this
inflation outlook remain broadly balanced. Inflation expectations over
the medium and long term continue to be firmly anchored in line with the
Governing Councils aim of keeping inflation rates below, but close to,
2% over the medium term. The firm anchoring of inflation expectations to
price stability reflects the high degree of credibility of the ECBs
monetary policy.

The analysis of monetary and credit developments confirms the
assessment of low inflationary pressures over the medium to longer term.
In the course of 2009, the annual growth rates of the broad monetary
aggregate M3 and of MFI loans to the private sector declined
substantially and in parallel. Towards the end of last year, these
growth rates were in negative territory. The continuous decline in
annual M3 growth in the course of 2009 largely reflected the strong
downward impact of the exceptionally steep yield curve, while the
subdued levels of activity and trade, and the uncertainty surrounding
the business outlook, dampened firms demand for bank financing.

Overall, the latest developments in money and credit markets
support the assessment of low inflation risks over the medium to longer
term. In February 2010, the annual growth rates of M3 and of loans to
the private sector both stood at -0.4%. The growth of M3 and loans to
the private sector is likely to remain weak in the coming months as
well. It is worth pointing out that the negative annual growth in bank
loans to the private sector masks diverging developments in the annual
growth in loans to households, which has been positive over the past few
months, and in loans to non-financial corporations, which has been
negative, although in February the flow of such loans was positive.
These differences in sectoral loan developments are in line with past
regularities: growth in loans to households tends to pick up early in
the economic cycle, while lending to non-financial firms typically lags
behind improvements in economic activity.

In an environment of subdued inflationary pressures, the Governing
Council lowered, in four steps, the rate on the ECBs main refinancing
operations between January and May 2009 by a further 150 basis points,
to the historically low level of 1%, bringing the total reduction since
October 2008 to 325 basis points. The interest rate on the deposit
facility was reduced to 0.25%. The key ECB interest rates have not been
changed since May 2009. The Governing Council is of the opinion that the
current ECB interest rates remain appropriate and it expects price
stability to be maintained over the medium term.

In addition to reducing the policy interest rates, the Governing
Council adopted further enhanced credit support measures in 2009, in
order to ensure the smooth functioning of the money market, improve
financing conditions and foster the provision of credit to the economy.
These non-standard measures have achieved the intended objectives. In
particular, they have exerted significant downward pressure on term
money market rates and bank lending rates, thereby supporting the
financing of households and corporations. Overall, the timely and
effective policy actions of the Eurosystem in response to the crisis and
the ECBs credible commitment to price stability have been instrumental
in fostering confidence, preserving price stability over the medium term
and supporting economic recovery in the euro area in an environment of
heightened uncertainty.

When the ECB adopted these non-standard monetary policy measures,
it already had a phasing-out strategy in mind. As financial market
conditions improved and economic activity started to recover, the
Eurosystem initiated a gradual phasing-out of those non-standard
measures that were no longer needed. The timely exit from these measures
was and is appropriate, so as to avoid market distortions that could
result from maintaining such measures longer than necessary and to
provide incentives for banks to restructure and strengthen their balance
sheets. Thus, in December 2009, and again in early March 2010, we
decided to phase out gradually some of the extraordinary liquidity
provision measures and scale back the number, frequency and maturity of
longer-term refinancing operations. We conducted the last 12-month
operation in December 2009 and the last 6-month operation in March 2010.
In early March, the Governing Council decided to return to variable rate
tender procedures for the regular three-month longer-term refinancing
operations, starting with the operation to be conducted on 28 April
2010. At the same time, we will continue to provide adequate liquidity
to the euro area banking system by conducting the main refinancing
operations as fixed rate tender procedures with full allotment for as
long as needed and, at least, until October this year, so as to
facilitate the provision of credit to the euro area economy and further
support its recovery. Needless to say, if upside risks to price
stability were to emerge, the Governing Council would take timely and
appropriate action.

[TOPICS: M$$EC$,M$X$$$,M$$CR$,MT$$$$]