ECB's Papademos waarschuwt voor inflatie, onrustige markt en wisselkoersen (en)

The uncertain outlook for growth and inflation as well as improvements to financial supervision in the EU and the strong euro were key issues discussed by European Central Bank Vice-President Lucas Papademos when he presented the ECB's annual report to the Economics Committee on Monday.

Mr Papademos warned that there was a risk that "current temporarily high annual inflation rates, which may persist for a rather protracted period of time, could have second-round effects on wage and price setting." The outlook for growth, meanwhile, "is surrounded by unusually high uncertainty and downside risks, stemming in particular from continuing financial market tensions which may last longer than initially expected," as well as from further oil and food price rises and protectionist measures.

Increased risks to financial system

Regarding the market turmoil, the ECB Vice-President said "the risks to euro area financial system stability have materially increased over the past eight months." He called for greater transparency by financial institutions on their exposures and losses from complex financial instruments, and for better risk management practices and for strengthened cooperation and information exchange between central banks and prudential supervisory authorities.

MEPs seek answers on market turmoil, prices and euro exchange rates

Olle Schmidt (ALDE, SE), who will draft Parliament's response to the ECB's report, stressed his support for the ECB's independence, and contrasted this with recent comments by incoming Italian Prime Minister Silvio Berlusconi. He and Ieke van den Burg i (PES, NL) asked about the supervisory structure in the EU, and whether a more grouped or centralised approach was needed.  

Mr Schmidt and Udo Bullman (PES, DE) both raised the high value of the euro against other currencies, notably the US dollar, while Alain Lipietz (Greens/EFA, FR), Elisa Ferreira (PES, PT) and Christoph Konrad (EPP-ED, DE) were among those asking about the ECB's approach to inflation amid rising prices for oil and food.

Inflation and external value of euro

"There should be no doubt that preservation of price stability is our prime objective and monetary policy is determined by this objective," said Mr Papademos. Speaking of the effect of "price shocks" on short term inflation performance, he said "we need to ensure this does not acquire a permanent character, which would affect households and their income even more." He also stressed that the ECB's independence "is an important pre-requisite for achieving our primary objective of price stability and our other tasks."

He said we had "witnessed a steady increase and sharp fluctuations" in the external value of the euro.  He recalled that - together with the rest of the G7 - the ECB had expressed concern at the economic implications of sharp fluctuations in exchange rates.  

Enhance the current supervisory system

On market supervision, he said: "Our view is that the existing structure - the Lamfalussy framework, as it is known - is appropriate to address the challenges", but "there is room for improvement to fully exploit its potential." Some steps had already been announced by the ECOFIN council's latest informal meeting, but there was much work needed to flesh them out and put them into practice.  There was a case, he added, for central banks to have more access "in an appropriate and confidential way to the micro-prudential database" [i.e. the information held by prudential supervisory authorities about the situation of individual financial institutions].

21/04/2008

Committee on Economic and Monetary Affairs

In the Chair : Pervenche Berès (PES, FR)