States (statistics from the International Monetary Fund and the Bank for International Settlements as at the end of 1997, taken from the
Monthly Bulletin of the European Central Bank). We, therefore, have two distinct models of private financing which clearly have to be taken into account when assessing Europe's financial dimension compared with the United States or Japan.
The euro, the Eurosystem's monetary policy and, in general, the
activity of the ECB and the Eurosystem play a key role in the
integration of European financial markets and all markets in general.
The euro is acting as a catalyst for European economic integration.
And more integration will lead to a greater economic and financial
dimension.
Monetary and financial integration stemming from the euro and the
activity of the Eurosystem will affect the operation of the single
European market in a positive way. The European market, with a single
currency, will tend to be more transparent, more competitive, more
efficient and will function more smoothly. This is the reason why
joining the European Union, as a general rule, will lead to joining
the euro area, once certain economic conditions (the so-called
convergence criteria) have been fulfilled.
Monetary union is always a political operation, irrespective of
its technical and economic implications. Currency is one of the most
genuine expressions of sovereignty, because the power to issue money
is one of the greatest powers in existence. The Treaty on European
Union led, first, to the depoliticisation of monetary power in Europe,
by means of granting independence to the central banks and prohibiting
the monetising of public deficits, and afterwards to denationalisation
or supranationalisation (via the creation of the Eurosystem). The
Eurosystem was not only created for the purpose of improving the
operation of the Single Market, but also in order to make progress on
the building of the European political structure.
The euro should not only be seen as a catalyst for European economic integration, it should also be seen as a main beam necessary to construct the European political structure. The relationship between political power and monetary power is an interesting subject which is open to investigation and discussion, but that would certainly go beyond the scope of this speech. I merely wish to point out that, in the case of Europe, it is clear that following the achievement of a single currency, the door remains open to political union, which would represent a crucial step in the process of integration. In conclusion, it would seem clear that the implications of the euro go "beyond supply and demand" (to use the title of the work of Wilhelm Rцpke). We are now fully immersed in "meta-economy", which means it is time to end my speech.
Keynote address to be delivered by
Dr. Willem F. Duisenberg
President of the European Central Bank on
The European System of Central Banks
Current position and future prospects
At a Conference organised by the Royal Institute of International
Affairs on
European economic and Monetary Union
Markets and Politics under the Euro
London 27 november 1998
1. Introduction
Ladies and Gentlemen, I should like to express my appreciation at
being invited to deliver a speech at this conference organised by the Royal
Institute of International Affairs. It is a great pleasure for me to be
here, in London, today.
The topic I am going to address relates to the current position and the future prospects of the European System of Central Banks. I feel that this topic provides me with an opportunity to deal with the objective of the ESCB and its contribution to the other policies in the Community. I will also briefly touch upon the decision-making in the ESCB, recall the main features of our monetary policy strategy and talk about our regard for openness and transparency. The final part of my talk will cover the views of the ESCB on recent economic developments and the future outlook for price stability in the euro area.
2. Independence, transparency and accountability
In the Maastricht Treaty the ESCB has been given an independent status. The reason is that politicians all over the world have come round to the view that monetary policy decisions taken with too close a political involvement tend to take too short a time horizon into consideration. The consequence is that in the longer term such decisions do not support sustainable gains in employment and income, but only lead to higher inflation. This view is confirmed by a host of economic research.
Independence, however, requires a clear mandate. The ESCB has such a mandate. Its primary objective is to maintain price stability. Without prejudice to the objective of price stability the ESCB shall support the general economic policies in the Community. Price stability is not an end in itself: it creates the conditions in which other, higher-order, objectives can be reached. In particular, I share the deep concerns about the unacceptably high level of unemployment in Europe. The ESCB will do what it can to contribute to the solution of this problem. By maintaining price stability inflation expectations and interest rates can be kept at a low level. This creates a stability-oriented environment which fosters sustainable growth, a high level of employment, a fair society and better living standards. Moreover, in specific circumstances, if production, inflation and employment all move in the same direction, monetary policy can play some role in stabilising output and employment growth without endangering price stability. However, the contribution from monetary policy can generally be only limited. Given the structural nature of the unemployment problems the solution is to be found, above all, in structural reforms aimed at well-functioning labour and product markets.
An independent central bank does not only need a clear mandate. It
has also to be an open and transparent institution, for at least three
reasons. First, transparency enhances the effectiveness of monetary policy
by creating the correct expectations on the part of economic agents. A
predictable monetary policy contributes to achieving stable prices without
significant adjustment costs and with the lowest interest rate possible.
The second reason is that in a democratic society the central bank has to
account for its policies. Finally, transparency towards the outside world
can also structure and discipline the internal debate inside the central
bank.
Let me now turn to the ways and means of achieving transparency. As a first element the ESCB has defined a quantitative objective for price stability. It reads as follows: price stability is a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Although I do not consider deflation to be likely in the current environment, I may add that a situation of falling prices would not be consistent with price stability.
The Governing Council has made it clear that "Price stability is to
be maintained over the medium term". The ESCB cannot be held accountable
for short-run deviations from price stability, for example due to shocks in
import prices or specific fiscal measures. A monetary policy reaction to
short-run fluctuations in the price level would provide the wrong signals
to the market and cause unnecessary interest rate volatility. In summary,
the ESCB will react in an appropriate, measured and, when necessary,
gradualist manner to economic disturbances that threaten price stability in
the medium term, rather than in an abrupt way, in order to avoid
unnecessary disruptions of the process of economic growth. That said, the
ESCB will, whenever necessary, openly discuss and explain the sources of
possible deviations from the quantitative definition of price stability.
In addition, let me remind you that by focusing on the HICP for the
euro area, the ESCB makes it clear that it will base its decisions on
monetary, economic and financial developments in the euro area as a whole.
The single monetary policy has to take a euro area-wide perspective: it
will not react to specific regional or national developments.
The institutional implication is that the ESCB should develop into a
strong unity, with a strong centre and strong national central banks. It
should become a truly European institution, with a truly European outlook.
Of course, it may take some time to arrive where we ultimately want to be.
We have to get used to thinking in euro area-wide terms. In the ECB
Governing Council we are already "practising" that approach and are making
progress. I am confident that the ESCB will indeed act as a unity.
Transparency and openness will be apparent from the way in which the
ESCB communicates with the public. The ESCB will regularly present its
assessment of the monetary, economic and financial situation in the euro
area and provide information about each specific monetary policy decision,
be it a move in interest rates or an absence of change. This will notably
be done by way of press releases, press conferences, publications and
speeches. Press releases are made available immediately after the
fortnightly meetings of the Governing Council and, as you may know, they
always include a precise list of the decisions taken together with
background information.
There will be a monthly press conference. Such a press conference
will start with a detailed introductory statement, as has been the case so
far, and these introductory statements will also be published immediately,
without delay. In this statement the Vice-President and I will present the
Governing Council's view of the economic situation and the underlying
arguments for its monetary policy decisions, followed by a question and
answer session.
The publications of the ESCB will include, in particular, an ECB
Bulletin each month as well as an Annual Report. As from 1999, a detailed
analysis of the economic situation in the euro area will be presented in
the monthly Bulletin. Thematic articles in this Bulletin will include in-
depth analyses by the ECB on matters regarding the monetary policy of the
ESCB and the economy of the euro area. Further, you may also recall that,
as required by its Statute, the ESCB will publish its consolidated balance
sheet on a weekly basis.
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