LIEGE, Belgium (MNI) – Europe’s citizens can be sure that their
central bank will safeguard price stability as its mandate requires,
ECB President Jean-Claude Trichet said Wednesday.
In remarks largely on competitivity and devoid of comments directly
related to current monetary policy, Trichet said, “Our 331 million
fellow citizens can rest assured that the ECB is fully faithful to its
primary mandate.”
Ensuring medium-term price stability and anchoring expectations
appropriately is the best contribution monetary policy can make to
long-term growth and job creation, he said.
Pointing to average HICP inflation in the area of 1.97% over the
first dozen years of the common currency, Trichet affirmed that the
ECB’s definition of price stability is “deeply entrenched in medium- to
long-term inflation expectations, which confirms the ECB’s credibility
and the public’s confidence in the ECB’s ability to deliver price
stability over the medium term.”
It is a “natural phenomenon” in a currency union that inflation
sometimes differs among member states, Trichet asserted, implying that
“temporary deviations from the euro area-wide inflation average should
not be a matter of concern.”
“Indeed, they constitute an important potential adjustment channel
within a currency union where exchange rates are fixed,” he continued.
“But inflation differentials can turn into a source of concern when they
become large and persistent.”
Sustained inflation rates in some Eurozone member states in excess
of the area average were long regarded as evidence of a catching-up
process, he observed.
However, he said, “increasingly evidence suggests that this effect
has been overstressed as an explanation for inflation differentials in
the euro area. In some cases, these differentials were not driven by
healthy catching-up effects, but were largely the outcome of
inappropriate macroeconomic policies and debt-financed booms in domestic
demand.”
The ECB’s price stability definition of close to but under 2% is
thus appropriate at the national level as well, Trichet concluded: “Unit
labour costs, and therefore wage developments, after having taken due
account of the labour productivity increases, need to be consistent with
this.”
In this connection, Trichet warned that using inflation as a
benchmark for wages can cause an inflationary spiral that would result
in a loss of cost competitiveness.
“This is why central bankers are against wage indexation,
particularly in a single currency area,” he explained.
Trichet urged that member states develop a common understanding of
mutual surveillance and a competitiveness strategy reflecting five “key
elements” in addition to national adherence to the common definition of
price stability used by the ECB.
These elements would also include the idea that all sectors must be
considered in any assessment of competitiveness, he said, calling the
non-tradable sector “essential” for competitiveness.
Moreover, the public sector wage developments are “much more
important than is generally realized” and must thus take into account
implications for the whole economy, including its “role model” function,
he urged.
In addition, the current account balance is “an important summary
indicator that may signal losses of competitiveness and emerging
imbalance” and should thus be monitored closely, he said.
Finally, Trichet said that sound public finances are essential for
competitiveness.
–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com
[TOPICS: MGX$$$,M$$EC$,M$X$$$]
