Mr. Duisenberg's opening statement at the press conference covering the latest meeting of the Governing Council of the European Central Bank Introductory statement by the President of the European Central Bank, Dr. W.F. Duisenberg, at th conference held in Frankfurt on 3/11/98.
Ladies and gentlemen, as in previous months, the Vice-President and I are today to report on the outcome of today's meeting of the Governing Council of the Eu Central Bank. The number of items considered by the Governing Council required a ful meeting. Most of the items on the agenda were of a rather technical nature or were rel legal implementation of decisions already taken at previous Governing Council meetings. the meeting was attended by Mr. Edlinger, President of the EU Council, and by Commissi de Silguy and Monti.
Let me first turn to the Governing Council's in-depth discussion on recent economic, monetary and financial developments .
Starting with the global macroeconomic environment, it was felt that the sp bad news has not continued over the most recent weeks. Also, when looking at ma developments, we have observed a strengthening of the US dollar vis-à-vis euro area cu since its trough in mid-October. We have seen a recovery in global stock markets and also witnessed some upward correction of long-term bond yields after they had fallen s a result of a 'flight to quality'. However, markets displayed considerable volatil October, reflecting the uncertainty prevailing in the world economy.
Whether or not we can now expect a process towards more normal condition remains to be seen. Given the underlying causes of the adverse conditions in Asia, Ru other parts of the world, a quick resolution is in any case not very likely. Moreover, quite clear that the world economy will suffer from these developments in 1999 and that area will also be affected to some extent.
However, the crucial and widely debated issue is the degree to which such e on the euro area will materialise and how long they may last.
As matters stand, there appears to be consensus that euro area economic g will slow down to some extent in 1999, driven largely by a weakening in net exports. In forecast, published on 21 October 1998, the Commission has revised downwards aggregate area real GDP growth to 2.6% in 1999, compared with 3.2% projected earlier this According to the same source, the slowdown is expected to be only temporary and real growth is anticipated to strengthen again in 2000, with the contribution of net trade At the same time, the outlook for inflation in the near term remains generally fa assuming continued wage moderation and subdued developments in import prices.
In today's discussion, the Governing Council agreed to examine further the outlook for the euro area at its two meetings in December. In this context, we will discuss the downside risks for output growth resulting from the evolution of world t from international financial tensions and the possibility of still more subdu developments. However, one should also mention the fact that a relaxation of fiscal po higher wage increases could lead to a reversal of current developments in consumer pr undermine confidence. Any uncertainties arising in these two fields would of
considerably complicate our assessment, given the high degree of uncertainty already as with the developments in the global economy.
With respect to today's review of the monetary, financial and macroecono situation in the euro area, the following aspects were discussed.
First, with reference to monetary growth, let me recall that when look various definitions of broad money, our preliminary data show broadly similar and stabl growth rates of between 3 and 5% in 1997 and the first half of 1998. According to ou analysis these monetary trends do not appear to signal inflationary pressures at thi However, a further assessment will be made in December on the basis of more up-to information.
Second, with respect to price developments, euro area HICP inflation fell 1.2% in August to 1.0% in September 1998. The generally low level of HICP increases m reflects a decline in energy prices, which were almost 4% lower in September than a yea and in other commodity prices; in addition, price pressure as indicated by industrial o and unit labour costs has remained modest. With respect to the decline in HICP infl September, this is closely related to a relatively strong fall in food prices (from 1. to 1.4% in September 1998), which account for almost one-quarter of the total HICP. monthly changes are certainly very difficult to interpret. However, I may point out prices display a larger degree of volatility owing to their seasonal pattern.
Third, taking into account distorting factors such as calendar effects, u developments in euro area-wide real GDP have remained fairly stable. Economic expansion broadly unchanged in the first half of 1998 from the solid growth seen in the secon 1997. Also, at this juncture, data partly available for the summer months point to the that recent rates of output growth may be broadly sustained beyond the first half of While the trends appear in some cases weaker, particularly when also looking at some data, the latest euro area-wide survey data on confidence, order books and capacity generally remain well above their long-run averages. However, further developments i data will have to be monitored closely. Concerning the assessment of the monetary polic in the euro area, the Governing Council - having carefully reviewed all factors and dev - confirmed the view taken at its previous meeting. It considered further interest rate towards the lower end of the current range prevailing in the euro area as being ap Measured by key central bank rates, the lowest rates in the euro area currently stan Market interest rates have also reached very low levels. In terms of three-month intere euro area average rate has fallen to 3.75%, following the reduction of interest rates of euro area central banks. With the announcement today of further interest rate reduct Banco de España and the Banco de Portugal, both effective tomorrow, the euro area avera continue its downward trend. Nominal and real long-term interest rates for the euro a historically low levels. It confirms the high degree of confidence that the euro has g judgement of the general public and of global investors. This confidence is a major as consolidation of a financial environment conducive to growth.
As has been proven in many instances in the past, monetary policy cannot structural problems. Indeed, monetary policies in the euro area countries have inc converged over the past few years and resulted in low levels of interest rates. Sever have followed virtually a 'common monetary policy stance' over a longer period, performances - for example in labour markets - within the euro area differ considera
country to country. The degree of success in this area seems to be closely related t reforms implemented in earlier years.
I am confident that we can cope both with current problems and with fu challenges. This requires a forward-looking, medium-term-oriented monetary policy, keeps inflationary expectations low. This is the decisive contribution of monetary po fostering of growth and employment. Dealing with structural problems is the task of other than monetary policy.
Let me now give the floor to the Vice-President to report on various aspect preparatory work for Stage Three .
## (a) Preparations for the 'changeover weekend'
With less than 60 days to go before the start of Stage Three, we are obviously particular importance to the provision of a framework allowing for a smooth change the euro. We began our preparations a long time ago and I am confident that the ESC be in a position to deliver its entire complex infrastructure to the markets by the 4 January 1999. I expect the banking and financial community in the euro area to aware both of the logistical challenge that the changeover weekend represents and need for careful preparation. Given the concentration of migration operations to t be conducted by a multitude of financial agents (i.e. payment systems, securities s systems, custodians, individual banks, exchanges and financial information provid the period from 31 December 1998 to 4 January 1999, the ESCB is preparing to w together with other public authorities to orchestrate the necessary policy respon unexpected events. To this end, the Governing Council has set up an ad hoc 'Changeover Weekend Committee' which will organise the monitoring of developments vis-à-vis final migration to the euro within the ECB and the national central banks and banking and financial industry, both prior to and during the changeover weekend.
Additional details on the preparation of the changeover weekend are provided in a press release which is to be issued to you this evening.
## (b) Payment systems issues
With regard to euro payment and settlement systems, I should like to draw your at to recent developments which suggest that many market participants consider the special currency to which the traditional rules applied elsewhere in the develop would not necessarily be applicable. Initiatives were taken, or allowed to deve have no precedent in the arrangements concerning other currencies. This rela particular to the granting of payment finality and intraday credit in a currency o country's own. Therefore, the Governing Council considered it appropriate to i policy statement clearly spelling out the fact that the rules which apply to all currencies in the world will also apply to the euro, and that the ECB bears responsibilities as all the other central banks in the world.
This policy statement on euro payment and settlement systems located outside th area is to be issued to you this evening.
The Governing Council also agreed on the main features of the legal framework w which the TARGET system will operate. These main features are set out in greater de
the 'Third progress report on the TARGET project', which the Governing Counci endorsed today. In common with previous progress reports, the current one wi published in the near future and will provide further technical details of intere participants.
## (c) Exchange of national banknotes
In the absence of euro banknotes at the start of Stage Three, the Governing Counc agreed on arrangements according to which the participating national central ban exchange legal tender banknotes of other participating Member States for na banknotes and coins at the official conversion rate as from 1 January 1999. To substitutability between the national currency units, the Governing Council deci each participating national central bank will arrange for such an exchange at one l least. The national central banks may, however, limit the number and/or the total v banknotes they are prepared to accept for any given transaction or on any one day.
Further details on that matter are provided in a separate press release which is t to you this evening.
## (d) Allocation of monetary income
As regards the income arising from the issuance of national banknotes from participating Member States, the Governing Council today decided that such income not be redistributed prior to the introduction of the euro banknotes. The Governin also confirmed, with respect to the allocation of monetary income of the nationa banks of the participating Member States for the financial years 1999 to 2001, monetary income for the said period will be calculated by employing the so-called method, by multiplying a defined liability base by a specified reference rate of in sum of the monetary income of each national central bank will be allocated participating national central banks in proportion to their paid-up share in t capital. Owing to the temporary character of the current decision, the question of income allocation will need to be revisited before the introduction of euro ban 2002.
## (e) Transfer of foreign reserve assets to the ECB
Today the Governing Council also adopted an ECB Guideline establishing the legal f as well as the modalities of the initial transfer of foreign reserves from the nat banks to the ECB. In this connection and as a measure for covering possible f exchange risks for the ECB, the Governing Council endorsed, in line with the Sta the ESCB, an ECB Recommendation for a Council Regulation which would authorise th ECB to increase its capital from the current level of 5 billion euros to up to amount.
## (f) Monetary and foreign exchange policy
Further decisions have also been taken with regard to preparing the monetary and exchange policy of the euro area. On previous occasions I have mentioned to you th acts are under preparation which specify general principles to be followed by the central banks when carrying out operations in domestic assets and liabilities and exchange reserve assets remaining with the national central banks. Such instr which are based on provisions of the Statute of the ESCB, aim from a legal point at ensuring the singleness of the ECB's monetary policy and the consistency o transactions with the Community's exchange rate and monetary policies. Against background, the Governing Council today adopted an ECB Guideline which establish certain reporting obligations for the national central banks' domestic asset an management operations and subjects such transactions to the prior approval of th whenever they exceed a certain amount. A similar ECB Guideline was adopted whi subjects all operations in foreign reserve assets - including gold - which exceed amount to the approval of the ECB. In addition, the Governing Council adopted an Guideline according to which any participating Member State's transactions whose f exchange working balances which exceed a certain amount must be notified to the EC advance. A similar arrangement is envisaged between the ECB and the Commission of European Communities for all foreign exchange transactions carried out in the con implementing the Commission's budget.
In the context of the statutory function of the ESCB to contribute to the conduct of policies of competent authorities in the field of banking supervision and financial stability , the Governing Council discussed the main driving forces that are likely to a EU banking systems in the medium and long term, including the establishment of EMU. Council members hold the view that the establishment of EMU is expected to reinforc structural tendencies that are already under way in the EU banking systems. These te include the reduction of excess capacity, pressure on profitability, enhanced com increased internationalisation and geographical diversification. One important aspect that EU banks seem to have significantly increased their awareness of the strategic im of the introduction of the euro over the past few months. They are devising specific accordingly, which include: (i) improvements in services and procedures; (ii) change range of products supplied to customers; and (iii) mergers, strategic alliances and agreements. We intend to make the outcome of this examination public in due course.
Finally, the Governing Council adopted an ECB Decision concerning public access to the documentation and archives of the ECB . This Decision will be published in the Official Journal of the European Communities.