NEWS Release - Speech by Dr Jens Weidmann President of the Deutsche Bundesbank - Current Developments in the Euro Area - Speech at the Bank of Slovenia Ljubljana | 01.03.2017
1 Introduction
Governor Jazbec ,Ambassador Riedel , Ladies and gentlemen -I am delighted to have the opportunity to return to Slovenia – and to Ljubljana. I was here just over four years ago to attend the external meeting of the ECB Governing Council. So I already know the charm Ljubljana holds for its visitors. This time, I will also have time to visit the National Gallery, where I am especially interested in seeing the works of Slovenian artists. To me, art is far more than mere decoration: it grants insights – for example, into a country’s soul at a given point in time.
Johann Wolfgang von Goethe, the great German poet, summed up this aspect of art as an expression of our inner selves when he said: “The mediator of the inexpressible is the work of art.” Ladies and gentlemen, by accepting the invitation of the Bank of Slovenia to this event, you no doubt had the expectation that I would express my views clearly. Indeed, this afternoon is dedicated to a format that stands for arguments and facts – meaning the opposite of “inexpressible”.
In my speech I would like to shed some light on current euro-area developments and the challenges ahead. I will then be glad to discuss with you the picture I have drawn.
2 Economic situation and monetary policy
The current economic situation of the euro area is quite good. The upturn has stabilised. With a macroeconomic growth rate of 1.7%, GDP in 2016 actually grew more quickly than euro-area production capacity; the output gap is gradually closing. Thus, unemployment in many euro-area countries is falling; in 2016 the unemployment rate for the euro area as a whole declined by almost 1 percentage point to 9.6%. That means it is now just a little less than 1 percentage point above its average in the pre-crisis years. The current Eurosystem projection from December assumes that the euro-area economy will continue to grow; namely by 1.7% this year and by 1.6% in each of the next two years.
A similar economic situation holds for Slovenia and Germany. Both countries currently benefit from robust economic growth. In fact, capacity utilisation in Germany is yet perceptibly higher than that of the euro area as a whole, employment is on maximum-value and confidence is quite high, for both, consumer and enterprises. The Bundesbank’s economists expect the economy to grow at a rate of 1.8% in 2017, too. But this is nothing compared to the figures forecasted for Slovenia. The European Commission is projecting growth rates of 3.0% in 2017 and 2018 due to higher consumer spending and accelerating investment.
The robust economic upswing and rising capacity utilisation in the euro area will also drive up price pressures gradually. Of late, however, inflation has risen even more strongly than expected in the December projection, recently hitting 1.8%. This sharp increase in prices, however, is attributable mainly to base effects and the higher oil prices of late – since the end of November, oil has become significantly more expensive. Assuming that oil prices do not rise any further, I see two notable developments.
First, inflation this year is likely to be well in excess of the figure projected to date; for Germany, an upward revision of around one-half percentage point is expected – and this might also be the case for the euro area as a whole. Second, we are likely to return to somewhat lower inflation rates by the end of the year. This is because domestic price pressures are still comparatively low at present. Core inflation, for example, which looks through energy price fluctuations and other volatile components of the consumer price index, stands currently at around the 1% mark. According to Eurosystem forecasts, however, it will slowly increase as the euro area continues its economic recovery and it is expected to reach 1.7% at the end of the forecast horizon in 2019.
In this constellation, an accommodative monetary policy certainly continues to be appropriate, though opinions differ over the right degree of monetary accommodation and the point in time at which the price outlook will have firmed enough to justify a change in communication and ultimately in the monetary policy stance. In this context, in my view some thoughts are worth sharing.
First, monetary policy is automatically looser in the coming months, even without central bank action: due to the increased inflation, the real interest rate declined. The effects are similar to a central bank rate cut. Second, in the euro area, we are now far removed from the threat of deflation, which is to say an expectations-driven downward wage-price spiral. Financial market participants seem to have a similar take on it: the probability, derived from inflation options, that the inflation rate will be negative in the next five years is now at its lowest point since the summer of 2011. Personally, I have always deemed such a deflation scenario highly unlikely. Third, some of the unconventional measures, which were taken in order to loosen the monetary policy stance, come with a different risk-reward calculus than the standard instruments of monetary policy. I am sure that it will come as no surprise that I am rather critical of government bond purchases.
This is because, in a monetary union of sovereign member states with a single monetary policy and largely autonomous economic and fiscal policies, government bond purchases are not a monetary policy instrument like our policy rates, for instance. Government bond purchases are increasingly blurring the line between monetary and fiscal policy, and government funding costs are depending to an ever greater extent directly on monetary policy decisions.
Euro-area central banks are now the largest creditors of their member states. All governments ultimately pay nearly the same interest rate on the debt in central banks' balance sheets, regardless of the country's creditworthiness. What’s more: the larger the part of the debt that central banks withdraw from the market, the less markets will exert their disciplining forces, sanctioning unhealthy public finances with higher risk premiums. This is all the more worrisome as the low-interest-rate environment offers few incentives for governments to consolidate their budgets.
Copyright: Deutsche Bundesbank, Frankfurt am Main, Germany"
page source http://www.bundesbank.de/
