ZONA EURO II - EURO AREA II

The manipulators talk about growing in Euro Area (forecast of -0,4% in 2013) but European Central Bank (ECB) cut again in the interest rate on the main refinancing operations from 0,5% to 0,25%, with a low level of the mean of prices increase (0,7% in October). Some member of the Council wanted wait and see. Incredible! So much affraid from inflaction by German authorities and what we have? Threats of deflaction from a money to much strong, a spiral of devaluation of the other merchandises! Listen the leader of ECB (2013 http://www.ecb.europa.eu/press/pressconf/2013/html/is131107.en.html):

Mario Draghi, President of the ECB,
Frankfurt am Main, 7 November 

«Ladies and gentlemen, I am very pleased to welcome you to our press conference. I will now report on the outcome of today’s meeting of the Governing Council, during which we took a number of decisions on key ECB interest rates, forward guidance and liquidity provision.
First, based on our regular economic and monetary analyses, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 25 basis points to 0.25% and the rate on the marginal lending facility by 25 basis points to 0.75%. The rate on the deposit facility will remain unchanged at 0.00%. These decisions are in line with our forward guidance of July 2013, given the latest indications of further diminishing underlying price pressures in the euro area over the medium term, starting from currently low annual inflation rates of below 1%. In keeping with this picture, monetary and, in particular, credit dynamics remain subdued. At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%. Such a constellation suggests that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on. Accordingly, our monetary policy stance will remain accommodative for as long as necessary. It will thereby also continue to assist the gradual economic recovery as reflected in confidence indicators up to October.
Second, following today’s rate cut, the Governing Council reviewed the forward guidance provided in July and confirmed that it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation continues to be based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics.
Third, we continue to monitor closely money market conditions and their potential impact on our monetary policy stance. We are ready to consider all available instruments and, in this context, we decided today to continue conducting the main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 6th maintenance period of 2015 on 7 July 2015. This procedure will also remain in use for the Eurosystem’s special-term refinancing operations with a maturity of one maintenance period, which will continue to be conducted for as long as needed, and at least until the end of the second quarter of 2015. The fixed rate in these special-term refinancing operations will be the same as the MRO rate prevailing at the time. Furthermore, we decided to conduct the three-month longer-term refinancing operations (LTROs) to be allotted until the end of the second quarter of 2015 as fixed rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.3%, quarter on quarter, in the second quarter of 2013, following six quarters of falling output. Developments in survey-based confidence indicators up to October are consistent with continued, albeit modest, growth in the second half of the year. Looking ahead, output is expected to continue to recover at a slow pace, in particular owing to a gradual improvement in domestic demand supported by the accommodative monetary policy stance. Euro area economic activity should, in addition, benefit from a gradual strengthening of demand for exports. Furthermore, the overall improvements in financial markets seen since last year appear to be gradually working their way through to the real economy, as should the progress made in fiscal consolidation. In addition, real incomes have benefited recently from generally lower energy price inflation. This being said, unemployment in the euro area remains high, and the necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity.
The risks surrounding the economic outlook for the euro area continue to be on the downside. Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices, weaker than expected domestic demand and export growth, and slow or insufficient implementation of structural reforms in euro area countries.
According to Eurostat’s flash estimate, euro area annual HICP inflation decreased in October 2013 to 0.7%, from 1.1% in September. This decline was stronger than expected and reflected, in particular, lower food price inflation, a larger fall in energy prices and some weakening in services price inflation. On the basis of current futures prices for energy, annual inflation rates are expected to remain at low levels in the coming months. Underlying price pressures in the euro area are expected to remain subdued over the medium term. At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%. Such a constellation suggests that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below but close to 2% later on.
Taking into account today’s decisions, the risks to the outlook for price developments are broadly balanced over the medium term. Upside risks relate in particular to higher commodity prices as well as stronger than expected increases in administered prices and indirect taxes, and downside risks stem from weaker than expected economic activity.
Turning to the monetary analysis, data for September confirm the subdued underlying growth of broad money (M3) and, in particular, credit. Annual growth in M3 moderated to 2.1% in September, from 2.3% in August. Annual growth in M1 remained strong at 6.6%, reflecting a preference for liquidity, although it was below the peak of 8.7% observed in April. Net capital inflows into the euro area continued to be the main factor supporting annual M3 growth, while the annual rate of change of loans to the private sector remained weak. The annual growth rate of loans to households (adjusted for loan sales and securitisation) stood at 0.3% in September, broadly unchanged since the turn of the year. The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) was -2.7% in September, compared with -2.9% in August. Overall, weak loan dynamics for non-financial corporations continue to reflect primarily their lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets. At the same time, the October 2013 bank lending survey tentatively signals a stabilisation in credit conditions for firms and households, in the context of still weak loan demand.
Since the summer of 2012 substantial progress has been made in improving the funding situation of banks. In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets declines further and that the resilience of banks is strengthened where needed. The ECB’s comprehensive assessment before it adopts its supervisory role under the single supervisory mechanism will further support this confidence-building process. It will enhance the quality of information available on the condition of banks and result in the identification and implementation of necessary corrective actions. Further decisive steps to establish a banking union will help to restore confidence in the financial system.
To sum up, taking into account today’s decisions, the economic analysis indicates that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on. A cross-check with the signals from the monetary analysis confirms this picture.
As regards fiscal policies, the euro area budget deficit is projected to decline further from 3.1% of GDP in 2013 to 2.5% in 2014, according to the European Commission’s autumn 2013 economic forecast. At the same time, the euro area government debt ratio is expected to rise from 95.5% of GDP in 2013 to 95.9% in 2014. In order to put high public debt ratios on a downward path, governments should not unravel their efforts to reduce deficits and sustain fiscal adjustment over the medium term. The composition of fiscal consolidation should be geared towards growth-friendly measures which have a medium-term perspective and combine improving the quality and efficiency of public services with minimising distortionary effects of taxation. Governments must also decisively strengthen efforts to implement the needed structural reforms in product and labour markets. Progress has been made in reducing current account deficits and unit labour cost differentials, but substantial efforts still need to be undertaken with a view to further improving competitiveness, supporting rebalancing within the euro area and creating more flexible and dynamic economies that in turn generate sustainable economic growth and employment.
We are now at your disposal for questions.
* * *

Question: My first question is on the prolonged period of time over which we are going to see low inflation. Is there any chance you could elaborate a bit on how long we are going to see low inflation for and do you fear that inflation may drop even lower than it already is, meaning there is a high chance of deflation? And my second question is: what options do you have in place to fight inflation if it drops even lower than it is currently? I am considering the fact that the main refinancing rate is at 0.25% now and you have only one traditional rate cut left.
Draghi: On the first question, I think you will have a fuller picture in December with our macroeconomic projections. Based on our updates and the latest figures on inflation, we expect that it will extend for some period of time, for an “extended” and “prolonged” period as we said, and we will be clear on the length of time of this period in December. But certainly it is not going to be a very short time.
As regards the second question, I have actually answered this question on other occasions. If by deflation we mean a self-fulfilling fall in prices across a very large category of goods and across a very significant number of countries, we do not see that happening. Certainly, we have one country where the fall in prices is more marked than in others, but we have to be careful to separate the various effects. Some of it is actually welcome in a sense because it shows that there are some relative price adjustments, a certain amount of rebalancing across countries. Some of it certainly reflects the price of the various commodities, namely energy and other commodities, and I will say more about that later. But by and large we are not seeing deflation. What we see is a broadly based and protracted period of low inflation. Remember that the objective of the ECB is to have an inflation rate which is below, but close to, 2%, and there are many reasons why this was chosen as the ECB’s objective many years ago – I think it was 12 years ago, in 2001?
Constâncio: May 2003.
Draghi: May 2003. We can go into this further in upcoming questions if you are interested.
Question: Mr President, could you give us a little bit of an explanation as to why you decided to have an asymmetric corridor now and whether you discussed cutting the deposit rate into negative territory? Second, the LTRO was on the agenda of today’s meeting. Could you give us a flavour of what the debate on this subject was like?
Draghi: On the first question, remember that we are in a context of fixed-rate full allotment in all our ECB refinancing operations. The EONIA fluctuates between the deposit rate and the main refinancing rate, so the fluctuation range is unaffected by the level of the marginal lending rate. But we wanted to preserve the incentive for banks to actively manage their liquidity positions between the two weekly main refinancing operations. This is why we left the distance between the marginal lending facility rate and the main refinancing rate unchanged, which explains why we now have a corridor which is asymmetric. We also discussed the deposit facility rate and, as I said on other occasions, we are technically ready and it is part of our artillery, and in a sense it also answers the previous question about what we will do if we see a low rate of inflation. We do not see one and we do not think it is going to materialise because we see that inflation expectations are firmly anchored at 2%, or less than 2%. However, we want to have some instruments in our artillery and this is one and another is certainly the one you mentioned, the LTROs. We did not discuss this in any depth today, but there are a whole range of instruments that we can activate, if needed.
Question: Mr Draghi, could you explain why the Governing Council decided to drop the downward bias in its forward guidance? Did you not?
Draghi: No, I am sorry.
Question: You did not expressly mention it…
Draghi: You never listen when I read the statement because you are preparing your questions for the follow-up.
Question: No, actually I didn’t.
Draghi: I will read it again. “Following today’s rate cut, the Governing Council reviewed the forward guidance provided in July and confirmed that it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.”
Question: So you are maintaining the downward bias?
Draghi: Yes, indeed.
Question: Was the decision to maintain the downward bias unanimous as well?
Draghi: No, I think I would summarise the discussion today by saying that we were wholly in agreement about the need to act. But there were differences about when to act. A significant majority of the Governing Council members remarked that there was sufficient evidence of a broad-based and protracted period of low inflation. Other members of the Governing Council said that the incoming data in the next month could also provide further information and so they reserved their views for next month. So the main discussion was whether to act today or not, with a view to some possible action in the future. On the forward guidance, yes, the position was unanimous.
Question: I want to get back to your point that there may be a prolonged period of low inflation. Is that satisfactory to you that there is prolonged period of low inflation or should the ECB be doing something to make it less prolonged? And my second question is: when other central banks have approached the zero bound, they have bought assets, quantitative easing. You didn’t mention that as one of the options in your tool kit. Is that an option for you to buy private sector assets, government bonds?
Draghi: I will answer the second question immediately. We haven’t reached the lower bound. As I said, we have a whole range of instruments that we can still activate before reaching the lower bounds. I mentioned some of them before but, in principle, we could even cut the interest rate, the MRO rate, further. So, we are not there yet.
On the first point: as the introductory statement says, taking into account today’s decision, the risks are broadly balanced for inflation. We believe that we have contributed to shortening this protracted period of time with today’s decision.
Question: The cut in the interest rates will not particularly help the tightening of liquidity conditions and the scarcity of credit. One of your colleagues mentioned the possibility of stopping sterilising the SMP purchase of bonds and reducing the minimum reserve. Did you discuss this or is this on the table among the instruments that you mentioned? And regarding the scarcity of credit: are you worried that the comprehensive assessment that you are now conducting could contribute to bank deleveraging, and so to the lack of credit to the real economy?
Draghi: First of all, we believe that this decrease in interest rates is effective, and we are seeing market reactions to this effect. There are also some more technical reasons why this is effective: clearly, it reduces the volatility of the EONIA because it restricts the corridor. So, in terms of liquidity, let’s not forget that there are still €730 billion of MROs and LTROs outstanding. We should also not forget that many contracts are indexed to money market rates. So, all in all, I think these decisions today support lending to firms and households. Let’s also not forget that they will support the recovery through lower real interest rates. So there are various reasons to believe that both today’s decisions and our forward guidance have been effective.
On excess liquidity, I know there is a whole drama about this, but again I have warned you several times not to think in terms of a precise mechanical relation between the size of the excess liquidity and the EONIA. Let me give you a very interesting piece of evidence: in March 2012, the excess liquidity was €800 billion and now it’s €185 billion. And there has been hardly an upward movement in EONIA if you compare the two data. So, there isn’t a mechanical or stable relation and there isn’t any threshold value; and we certainly monitor this closely. We don’t want to have undue tightening, but we should remember that the excess liquidity is determined by several factors, the most important of which is the degree of fragmentation – and that’s been changing. In fact, some would say that the reduction in the excess liquidity is primarily determined by the decrease in fragmentation.
Regarding the comprehensive assessment and whether this would cause deleveraging: we don’t think so. We certainly want banks that do the right deleveraging of non-performing loans and other non-performing assets, but I don’t think that is unexpected; the markets were already actively asking for it. The comprehensive assessment will shed light on the banks’ balance sheets and that is what the private sector wants in order to be convinced to put money into this industry. That’s why the credibility of the comprehensive assessment is so important in the end, when all is said and done. That’s the ultimate objective, namely to have the private sector investing in the banking sector. Of course, we want to reach many other objectives with the comprehensive assessment, but the idea of coming out with banks that, in order to become stronger and healthier, have to be more transparent, is really underlying the whole process.
Question: Why is a prolonged period of low inflation representing a risk if expectations are still so well anchored?
Draghi: Well, why did, may I say, our founding fathers actually want to have something below but close to 2%? There were three reasons for this. First of all, they very wisely thought about possible measurement errors in HICP data, so they wanted to keep a significant cushion between price behaviour and deflation. In other words, you may well have a situation where you think that you are at say 1% inflation but, instead, it turns out that you are actually at minus 2%. Unfortunately, this has happened before, in other parts of the world. The second reason is that (and this is very relevant now) they thought about the adjustment within the euro area, the rebalancing of the different country members. They knew that these countries are very different. And so, the possibility of having imbalances was always being looked at and considered. Now, in order to rebalance these disequilibria, countries have to go through a readjustment of their prices ̶ since they do not have the exchange rate, they have to readjust their prices. This readjustment is much harder and difficult if you have zero inflation than it would be if you have 2%. That was the second reason. The third reason is that, as we have discovered in many other jurisdictions, the effectiveness of standard measures of monetary policy is greatly reduced as you reach the lower bound of inflation, as you go down to zero. Finally, there is also a fourth reason why you want an inflation rate of 2%, particularly in the current stage of a recovery which is still proceeding: it is proceeding, but it is still relatively weak, it is uneven, it is fragile (as I have said many times before) and, most importantly, it starts from low levels. So the unemployment rate is still very high. Incidentally, it looks like it is stabilising. But it is stabilising at the top, so it is very important at this point in time to have lower real interest rates. I think that is why it is important to have an inflation rate which is close to but below 2%.
Question: What seems to be astonishing about today’s announcement is how unprepared the market generally was for it. I have seen various comments that it was a shock announcement and that it was very aggressive, and it has clearly taken the market by surprise when you look at the reaction in euro/dollar and some of the equity markets. So, my question really is about the communication strategy currently that you are pursuing, and the fact that you have decided to make this announcement today. And I ask you, if you could put some texture on this: do you think that the markets have become overly complacent and doubted the credibility of your will to act? You can clearly see in euro/dollar that people seem to have taken it for granted that there would not have been a cut now, or possibly even in December. And I saw one market commentator describe you as having a pea-shooter to deal with the deflationary tanks that were approaching you. Well, it seems to me that you have pulled out a bazooka or, possibly, even an anti-tank weapon today. Could you put some texture on the communication strategy for us?
Draghi: In doing so, I think I will abstain from judging the markets. This is one of the hardest things to do and it is usually quite useless because they do what they want, no matter what. So, I will actually urge all of you to read the introductory statement that I read at the last press conference. And it says: “The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time. This expectation continues to be based on an unchanged overall subdued outlook for inflation extending into the medium term, given the broad-based weakness in the economy and subdued monetary dynamics.” Note “unchanged”: it has changed. Since then, it has changed. And it has changed in a variety of ways. First of all, as I was saying before, it is now broadly-based over a certain category of goods: we see that it is now based on services, energy, processed food, non-energy industrial goods and unprocessed food. It has also changed in the sense that, if you look at the quarterly annualised figures for inflation, they do actually go down in September and October. So that is the big change. Basically, we observe what has happened and that is exactly what our forward guidance was saying. So, if there were to be a change, we could change. In this sense, I have to remark that the credibility of our forward guidance comes out strengthened out of the decision today.
Question: My colleague’s question was focused more on the communications strategy. Maybe I can ask in my words: you said that within the Governing Council today the question was not so much whether to act, but when to act, and so you decided to act in a reflex way today, the motive being more to create a kind of surprise and to obtain a better reaction…
Draghi: I see your point and no, that is not the reason. The reason why a significant majority of the Governing Council members thought it was time to act was exactly because of the reasons I gave before. Last month, we said that the expectation is based on an unchanged overall subdued outlook for inflation extending into the medium term. Well, that outlook has changed. So, there have been changes since I last read the introductory statement. And these changes have been judged to be of significance, both in terms of category of goods and in terms of length of time. We can go into further details to explain this but these two things are important. Sorry, you had another question?
Question: In today’s announcement it was said that the rate cut will only come into effect on 13 November and not immediately. What is your position on this?
Draghi: You are catching me unprepared on this and …
Constancio: That is the date of the next main refinancing operation. It is coming.
Question: I just have a question as regards Ireland. Ireland is preparing to become the first eurozone country to end the bailout programme and the Irish government has said that it may not seek a precautionary credit line. Commissioner Olli Rehn has said that it is very possible that Ireland could exit without a precautionary credit line and it seems that the Commission would be prepared to back this if Dublin decides to go it alone. Would the ECB be comfortable with Ireland exiting its programme without a precautionary credit line of some kind? And secondly, do you think a decision has to be made by 15 December on this?
Draghi: First of all, I think the Irish government has to be congratulated for the progress and overall success of its actions over the last few years. The Irish programme has remained on track and progress has been made in many areas. More action is certainly needed in some areas, especially the banking sector. The decision on whether a programme is needed is entirely in the hands of the Irish government. So it is up to them to ask for a programme. The ECB and the other institutions – the IMF and the Commission – would say that it would certainly be useful to have a precautionary programme in place, although it is also true to say that the success has been quite significant. So, it is up to the Irish authorities to decide what they want to do and we certainly do not want to interfere.
Question: Mr Draghi, in relation to the comprehensive assessment of the banks, and you have mentioned that there is more to be done on the Irish banking situation, on Tuesday Olli Rehn said that you have an incentive to avoid, as he put it, “crap on your hands” in terms of these assessments, looking back at what happened in 2010 in Ireland, Spain and Germany. Does this mean that you are now inclined in this forthcoming assessment to go harder on those three countries, banks and their regulators?
Draghi: I think that, in all these countries, of course to varying degrees, significant progress has been made. The rules of the AQR and the stress tests are going to be the same for everybody. No difference is planned among countries. Let me give you the way in which one would describe a successful comprehensive assessment, especially a successful AQR. What we need to establish is a well-defined routine and if we are able to do that we will be successful. A well-defined routine does not make any differences or exceptions. So I think that’s the most important thing and we don’t foresee any exceptions for that.
Question: Mr Draghi, two questions. First of all, you said that fragmentation has decreased in the eurozone, but how much do you think that this rate cut will help credit flow to some other countries that need it most? Do you see it reducing fragmentation further and, if so, perhaps you can explain the mechanism where that will happen? And the second thing is how much is the Governing Council concerned about the level of the euro against the dollar and did that play any role in the discussion today?
Draghi: I can answer the second question. As I have said many times, the exchange rate is not a policy target. It is important for price stability and growth and it certainly didn’t play any role in today’s discussion and, as far as I can remember, it was not mentioned. So, that’s the first answer. But as I said it remains important for our price stability objective and for growth. On fragmentation: fragmentation has been steadily declining since July last year until about three to four months ago. All indices, bank indices, mostly on the funding side, but also Target 2 and other indices, would show that. After that, while we continue to observe improvements in market performance across the board, both interest rates and volatility indices, etc., we are actually observing that this improvement has stopped. So fragmentation is basically a little better than it was four months ago, but rather than observing dramatic improvements month by month, we are observing by and large a static situation. We are also observing many favourable facts here, for example interbank lending from the non-stressed countries to some stressed countries has improved, which is a major piece of news. When we look at the overall areas and the aggregate numbers, we have to say that we are now in more or less the same situation as we were three months ago. So I think this change in interest rates now would certainly reduce the fragmentation and is something that will help healthy banks that are located in stressed parts of the euro area to have an easier access to the interbank market. In this sense, it is an instrument for reducing fragmentation. We are also confident that as the overall economic situation improves, fragmentation will also decrease, because let us not forget that fragmentation began with a very high risk perception, both by the core countries towards the stressed countries for a variety of reasons but also by the very same banks in the stressed countries vis-à-vis the private sector in those countries. And it had much to do with the recession. So as we come out of that and we see the extent of what we call the three uncertainties – political uncertainty, economic uncertainty and financial uncertainty – we see that, broadly speaking, these three categories are decreasing significantly in the euro area. So I would also expect fragmentation to decrease.
Question: Mr Draghi, coming back to the issue of market expectations, you have mentioned that it is your feeling that the forward guidance has been strengthened by this decision. On the other hand, one could argue that markets were caught on the wrong foot by today’s decision and you were not successful in guiding expectations as regards your reaction function. You mention it quite often, at almost every meeting, but, apparently, the markets are still not quite clear about your reaction function.
Draghi: Well, I am not sure, because the money market term structure has reacted very well. Our evidence is that, actually, our forward guidance has been successful. As soon as we issued the forward guidance, we saw that, after the May Governing Council decision, the curve flattened. Of course, there are other factors that influence money market rates. We do not live on an island or on another planet. We had several announcements concerning the tapering or not tapering of monetary policy in the largest financial centre in the world. We had announcements in other jurisdictions as well, and it would be unthinkable that these announcements would not produce any effect on our own money market rates. But, by and large, as we have seen, there has been a kind of mean reversion – a return of money market rates to levels that are admittedly higher than the ones that were produced in the aftermath of the statement of forward guidance, but certainly below the rates that these announcements would have produced. What we are pretty sure of is that the forward guidance has been effective in reducing the volatility of money market rates. It has also been effective in reducing the sensitivity of money market rates to news that would not warrant any change in fundamentals or, in other words, the sensitivity of our money market rates to news coming from the rest of the world of the kind I mentioned before. We are pretty sure of that. And we are also pretty sure that the forward guidance has reduced the excessive sensitivity to news that has to do with our fundamentals. But I would also say – as I have said many times – that we are also fairly successful in controlling the level of interest rates and, recently, the term structures have actually flattened. Of course, it is very difficult to measure all these effects exactly, because there are many other things happening at the same time. You are never sure whether it is your own forward guidance that is the determining factor, or other factors.
Question: Let me go back to the topic of deflation or lower inflation. Some experts are saying that the euro area is now facing the risk of deflation, which is similar to Japan’s experience. Of course, Japan has experienced a prolonged period of deflation, and some experts are saying that the reason for this deflation is that companies put priority on the adjustment of balance sheets and did not borrow money from banks and did not make investments and that this led to deflation. Do you think that the situation in the euro area is now similar to Japan?
Draghi: No, I do not think it is similar to Japan. We have to go back to 2009 and think of what things should have happened since then. What is quite clear is that, to different degrees across euro area countries, the public sector, the private sector and the banking sector where all over-leveraged. Being over-leveraged meant that they had too much debt and not all of their assets were of good quality. So, they had to deleverage. We should not forget that there where bubbles in the construction sector in Spain. But, more generally, it was the situation that in some countries – not all – there was a very high degree of debt. This had to be reduced, or the ratio of debt to assets had to be reduced, or, in the case of the public sector, both deficits and debts had to go down. There was a period of time when most countries actually ran fiscal consolidation programmes and, on the private sector side, there was significant deleveraging, both by corporations and by banks. And these went hand in hand with some other changes in the euro area, especially changes in risk perception which took place in 2011. You will remember the stress test, the mark-to-market valuations of debt, the absence of a backstop for a long time, and the PSI. All these things have changed the risk perception with respect to sovereign debt. All these factors are at the root of the recession. Now we are coming out of that. If you look at the euro area from a distance, you see that the fundamentals in this area are probably the strongest in the world. This is the area that has the lowest budget deficit in the world. Our aggregate public deficit is actually a small surplus. We have a small primary surplus of 0.7% ^[1], compared with, I think, a deficit of 6 or 7% deficit in US, - 6 I think - and 8 % in Japan. This is the area with the highest current account surplus. And it is also the area, as we said before, with one of the lowest – if not the lowest – inflation rate. This does not translate automatically into a galloping recovery. But, actually, it gives you the fundamentals upon which you can pursue the right economic policies. Structural reforms are the necessary and sufficient condition for this to happen. In the absence of that, unfortunately, we are going to stay here for quite a long time.
Question: Mr President, you have talked about an asset quality review exercise without exceptions. In this sense, do you expect some exceptions on the application of the state aid rules by the European Commission if a number of European banks need precautionary capital after the stress tests?
Draghi: You’re referring to banks that have been found to be viable and with a regulatory capital which is above the minimum, after the asset quality review. The AQR provides a snapshot of a situation where these banks would actually be having a capital which is above the regulatory minimum. Then we have the stress tests, and the situation that I described in my letter was about what we should do if a bank which is o.k. statically turns out to be in need of capital – under stress. Would you proceed to bail in creditors of this bank right away? Clearly, the situation is difficult because if you do so, the creditors would run away immediately and the bank would fail, even though statically it was solvent and viable. I think this is a genuine problem, and since then we have discussed it, and we have statements by Vice-President Almunia to this effect. Both the ECB and the Commission are working on this. And I’m quite confident that, by the time we do the stress tests, we will have found a way to deal with this problem.
Question: We have fewer and fewer questions. But, referring to May 2003, if I guess correctly, you wanted to say something about a possible strategy overhaul which was actually due after five years, or is it in your plans? Many people are talking about that. Many ECB watchers are saying that a strategy overhaul could be needed for inflation or for adding another column, for instance, like the role for financial stability of the ECB into the strategy. What do you think of this?
Draghi: No, I don’t think we had any discussion on this point. Are you thinking about an extension of our mandate? It would not be up to us to decide what our mandate is. We are perfectly happy with what we have today, and it’s up to the legislators to decide the mandate of the ECB. We have to, in a sense, apply the mandate and that’s what we are doing, by the way, with the decision today. We have acted fully in line with our mandate of maintaining price stability with an objective of having an inflation rate below, but close to, 2%. That is not to be forgotten.
Question: No, I was referring to the overhaul of the strategy which took place at the time of Mr. Issing and Mr. Duisenberg back then and which fixed the 2% objective.
Draghi: I’m sorry. Maybe Vítor has a longer memory?
Constâncio: I was a member of the Governing Council back then. No, the 2% was there from the beginning. The difference was that, in the beginning, the definition of price stability was to have inflation below 2%, without any other consideration. And, there were many discussions in the media and in academic circles that that definition meant that, if inflation was minus 1%, it was o.k. as well, because it was below 2%. So, in May 2003, we clarified that that was not the case, so the definition was clarified as “below, but close to, 2%” for the reasons that the President gave in one of his answers. In May 2003 we changed other small things in the framework. For instance, if you recall in the presentations of the press conferences in the early days, monetary analysis came before economic analysis, and that was reversed in the decision of May 2003. It was also clarified that, when looking at monetary aggregates, we were looking at a set of aggregates and not just M3. We changed also the way the reference value had been dealt with before May 2003 and it was clarified that the monetary analysis focused more on medium-term considerations, as a way of cross-checking the result of the economic analysis. So, there were four or five points of clarification, of fine tuning of the framework, with the main change being the definition of the objective, which before did not have this idea of below, but close to, 2%.
Question: When you say in your introductory statement that you expect a prolonged period of low inflation followed by an uptick, the October numbers came out more negatively than expected. So what is your rationale for believing that there won’t be more negative news out there to pull figures even lower and going into deflation because you continue to say there is a downside risk to the economy?
Draghi: I think I did say this in the introductory statement. Basically, we will be clearer in December when we have our macroeconomic projections, but it is a combination of energy prices and other prices, the weakness of the economy for some time, so this gives us the evidence to say that it is going to be there for a protracted period of time. And it is also true that as the recovery gains momentum, we also see the possibility of a return to our inflation expectations level. So, we see expectations of inflation firmly anchored at 2%. We know that at some point in time actual inflation will drive back. We now see that this point of time is not next month, and that is what I tried to convey. We will be clearer on the factors behind our outlook of subdued inflation for a protracted period of time in December.

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^[1]It is actually a small deficit»