ECB President Warns of Oil Price Impact in Future

Mr Trichet told the European Parliament's economic and monetary committee that oil prices will drive euro-zone inflation up more than previously expected. The ECB sees annual inflation of between 2.1% to 2.3% in 2005 and 1.4% to 2.4% in 2006.

 

He said that the main danger of higher inflation comes from "potential second-round effects in wage and price-setting behaviour triggered by ongoing oil prices."

 

Committee chairwoman French Socialist Pervenche Berés suggested that given the impact of rising oil prices on the EU economy it would be a good idea to create a coordinated response rather than each nation "sticking to his own line and doing his own thing." Mr Trichet said coordination of national policies is a decision for EU ministers but he added that tax cuts aren't the best way forward, suggesting a focus on other ways to help the poorer elements of society. He said it is important to avoid the errors made after the first oil crisis in the 1970. "Don't make the production sector carry the whole burden of the oil price changes, the result would be to weaken the EU economy for many years to come."

 

 

Mr Trichet also expressed disquiet about the level of some countries' budget deficits particularly given the "relatively long periods" they have been given to bring their deficits back below 3% as required by EU rules.

 

A number of MEPs were concerned about the entry of the newest member states to the euro. All of them are obliged to become part of the single currency once they  meet the economic conditions laid down for entry. The so-called Maastricht criteria set down requirements for debt and deficit levels, inflation, interest rates and also require a stable currency for two years before joining. Some countries aim to join by 2007, others have said they are aiming for 2010, others will join later, but no dates have yet been set. Alexander Radwan (EPP-ED, DE) asked whether the new members "are sufficiently prepared and what would be the procedure" for joining. Mr Trichet said that all the rules and criteria will be "rigorously applied" and he called on all countries, including those already in the euro-zone to apply EU rules on fiscal and monetary policy.

 

Polish Socialist Dariusz Rosati raised concerns that efforts to bring the generally higher levels of inflation in the new Member States into line with the euro-zone requirements could lead to monetary problems, but Mr Trichet replied that he believed the effects could be absorbed.

 

Euro-zone interest rates set to remain stable 

 

Mr Rosati also asked about interest rates. Trichet said that he isn't "preparing the market for an increase in rates or for a decrease but (the ECB) remains vigilant." He added that given current conditions the "present rates are appropriate." He stressed the need to maintain price stability as a "necessary condition for growth."