ECB President Jean-Claude Trichet told MEPs on Wednesday that risks for inflation remained on the upside while there was high uncertainty surrounding growth prospects. MEPs also heard from Eurogroup chair Jean-Claude Juncker, who stressed the need to tackle inflation while acting to help vulnerable groups hardest hit by rising prices.In his opening statement at the third of this year's four sessions of monetary dialogue with the Economic and Monetary Affairs Committee, Mr Trichet said inflation rates "are likely to remain high for quite some time, moderating only gradually during 2009" and that risks were on the upside. There was "very strong concern in the Governing Council that higher energy and food prices may lead to the emergence of broad-based second round effects in price and wage setting." He urged all price setters and the social partners "to meet their responsibilities". He also called for the abolition of nominal wage indexation schemes.
"The current episode of weak economic growth is expected to be followed by a gradual recovery," he said, but, "uncertainty surrounding growth prospects is particularly high at the current juncture."
Market supervision - a greater role for the ECB?
Asked by Alexander Radwan (EPP-ED, DE) and Daniel Dăianu (ALDE, RO) about the implications of the sub-prime crisis for financial market supervision, Mr Trichet said "we are very keen on pushing the different authorities in Europe to the maximum amount of intimate cooperation." He added that the measures agreed in principle by Finance Ministers in the ECOFIN roadmap should be implemented without delay. On a possible wider role for the ECB on financial stability, he said the ECB had no particular view, but he had noted such proposals emerging in academic circles and within Parliament and the Governing Council would study them closely.
No change to inflation target
Elisa Ferreira (PES, PT) stressed that despite the ECB's sole focus on controlling inflation, price rises were running at double the target level. Mr Trichet responded that "the ECB aims to deliver price stability over the medium term; when there are price shocks we cannot deliver it immediately, but we have to be credible over the medium term, inflation expectations must be anchored." "The current monetary policy stance will contribute to achieving this objective," and there was no question of the ECB changing its target.
Speculation in the oil market?
Robert Goebbels (PES, LU) and Eoin Ryan (UEN, IE) argued that action should be taken to curb speculation which, they said, was driving up oil prices. Mr Trichet said he would not use the word "speculation" but "those who say there is no influence of financial investments in commodity prices are plain wrong." There was a more sustainable change than pure speculation, "this is the emergence of a new behaviour of portfolio managers considering that from zero, a higher proportion of commodities is more appropriate". More needed to be understood about the interaction with this, along with growing demand and supply restrictions, on commodity prices.
Fannie Mae and Freddie Mac
Karsten Hoppenstedt (EPP-ED, DE) and Piia-Noora Kauppi (EPP-ED, FI) both wanted Mr Trichet's reaction to the rescue of the giant US mortgage companies Freddie Mac and Fannie Mae. The ECB President said it was not his principle to comment on US decisions, but "the community of central banks has welcomed the decision, taking account of the acuteness of the circumstances. It was a very important decision."
Juncker: eurozone recession not expected
Immediately after Mr Trichet, the Economics Committee heard from Jean-Claude Juncker, Prime Minister of Luxembourg, in his role as chair of the Eurogroup (the finance ministers of the euro area). He told MEPs he did not expect to see a recession at the level of the euro area, and that the debate over whether there would be a period meeting the technical definition of recession was getting too much attention. However it was measured, there was a slowdown and policymakers needed to act in response, even though "it is important to avoid giving the impression that a more muscular, reactive approach would have made it possible to avoid what has happened. We are reacting to external shocks from beyond the EU's borders, which we could do nothing to avoid."
Eurogroup "has taken action"
"I am sorry to see that it is often said the Eurogroup does not have the appropriate reaction. We have taken a number of decisions to guard against second round inflationary effects, agreeing to exercise caution over administered prices, indirect taxes and public sector wages." At the same time, it was necessary to take measures to help the most vulnerable groups who were hardest hit by rising prices. "If we abandon the fight against inflation, we abandon the moral force of our calls for social progress," he said. The Eurogroup would now be discussing Member States' budget plans for 2009 so ministers could take account of their neighbours' plans, but this was not something which could be done in public.
Euro still overvalued, says Juncker
Mr Juncker said "volatility in exchange rates and the strong appreciation of the euro are not good for growth. The recent fall in the euro is in the right direction, but we still think it is overvalued."
MEPs raised with Mr Juncker some of the same questions asked of Mr Trichet. On financial market supervision, Mr Juncker called for greater cooperation between national authorities, but was not in favour of a single EU supervisor. On oil speculation, he said there should be more transparency in oil markets, so that a single analyst's prediction of a $200 barrel would no longer be enough to cause prices to leap: there should be regular updates on current European oil stocks, and international energy agencies should make their future price estimates public.
Mr Juncker called for continued work by Member States on structural reform and budgetary consolidation, even in difficult times. Finally, he disagreed with Mr Trichet on wage indexation, saying as long as it was applied with moderation in times of higher inflation it could have virtues.