Let me now turn to the institutional framework for the conduct of the
single monetary policy. This was laid down in the Treaty establishing the
European Community, the so-called Maastricht Treaty, and the Statute of the
ESCB, which is an integral part of this Treaty. According to the Treaty the
ECB has the primary objective of maintaining price stability. Without
prejudice to this objective, it is to support the general economic policies
in the Community, with objectives such as economic growth and high
employment.
Decisions on monetary policy are made by the Governing Council of the
ECB. This body comprises the six executive directors of the ECB and the 11
governors of the national central banks (NCBs) of the Member States which
have introduced the euro. These 17 people meet every fortnight at the ECB,
in Frankfurt am Main. Decision-making on monetary policy is fully
centralised. All members of the Governing Council have one vote, whether
they come from Germany or Luxembourg. This is because of an important
principle. They are not representing their country, but are obliged to take
decisions on the basis of euro area-wide considerations. Regional or
national monetary policy does not and cannot exist in the euro area. There
is only one, single monetary policy for the euro area as a whole.
Therefore, the ECB should develop into a truly European institution. This
is a process that will inevitably take some time, but my feeling is that we
are already making good progress.
The execution of monetary policy is to a great extent decentralised.
It is in large part carried out by the NCBs. The ECB and the 11 NCBs
together are referred to as the Eurosystem. If we refer to the ECB and the
15 NCBs of all EU Member States, we speak of the European System of Central
Banks (ESCB). The General Council of the ECB meets quarterly and comprises
the President and Vice-President of the ECB and the 15 governors of the
NCBs of all the EU Member States. This body does not make decisions on
monetary policy, but discusses issues concerning the relationship between
the "ins" and the countries I prefer to call "pre-ins", such as exchange
rate issues. The third decision-making body of the ECB is the Executive
Board of the ECB, comprising the six executive directors of the ECB. The
Executive Board is responsible for current business and the implementation
of monetary policy as decided by the Governing Council. The staff of the
ECB will, in the course of this year, reach a level of between 750 and 800
and is likely to grow further in the years ahead.
The ECB is one of the most, if not the most, independent central bank
in the world. Its independence and that of the participating national
central banks are firmly enshrined in the Maastricht Treaty. Members of the
Governing Council are not allowed to take or seek instructions from
anybody, politicians included. Politicians are not allowed to give such
instructions. Members of the Governing Council have a term of office of at
least five years. The ECB is financially independent.
The independent status of the ECB fits into the recent world-wide
trend of granting independence to central banks. This tendency is evidenced
by both practical experience and academic research. By shielding monetary
policy decisions from political interference, price stability can be
maintained without having to give up economic growth. Indeed, in that sense
having an independent central bank is a good thing for all concerned. The
reason for central bank independence is that monetary policy-making under
the influence of politicians tends to focus too much on short-term
considerations. This can easily lead to temporary, non-sustainable
increases in growth, but inevitably results in lasting increases in
inflation with no lasting gains in growth and employment at all.
Politicians all over the world have come to realise this and have decided
to remove the temptation to pursue short-term gains and to make their
central bank independent. It should be underlined that granting this
independence is, as it should be, a political decision. An independent
central bank needs a clear legal mandate.
4. The monetary policy strategy
The ECB has, as I mentioned earlier, such a mandate. However, the
Treaty does not specify how the ECB should pursue its primary objective of
maintaining price stability; in other words: it is silent on what is called
the monetary policy strategy. The ECB therefore formulated its strategy in
the second half of last year. That was no easy task. The introduction of
the euro constitutes a structural break, which may change the behaviour of
firms and individuals and make it less predictable. To a certain extent it
is comparable to what Poland experienced when it embarked on its reform
process. The rules of the game change and this makes policy-making more
complicated. Our monetary policy strategy has taken these specific
circumstances into account. It is tailored to this unique period of the
introduction of the euro, although it has elements of both monetary
targeting and inflation targeting.
In the context of this strategy the ECB has provided a quantitative definition of price stability. Price stability is defined as a year-on-year increase in the harmonised index of consumer prices (HICP) of below 2% for the euro area as a whole. Price stability is to be maintained in the medium term.
The strategy consists of two pillars. The first pillar is a prominent
role for money. Ultimately, inflation is a monetary phenomenon. It is in
the end result of too much money chasing too few goods. Therefore, we have
formulated a reference value for the growth of a broad monetary aggregate,
M3, of 4 Ѕ% on an annual basis. Growth of the money stock at this pace
would provide the economy with sufficient liquidity for growth in activity
in line with trend growth, without inflation. At the end of this year this
figure will be reviewed. It should be emphasised that we did not define a
target for money growth. The reason for this is the structural break that
the introduction of the euro creates. By calling this a reference value, it
is made clear that money is one variable which we look at very carefully in
order to examine whether inflationary or deflationary pressures are tending
to emerge. We do not, however, react mechanistically to changes in money
growth.
The formulation of the second pillar is also prompted by the potential changes in economic behaviour on account of the introduction of the euro. It is a broadly based assessment of the outlook for price developments on the basis of an analysis of monetary, financial and economic developments. In this context interest rates, the yield curve, wage developments, public finance, the output gap, surveys of economic sentiment and many other indicators are analysed. Use is also made of forecasts produced by other bodies and internally for inflation and other economic variables.
This brings me to the role of the exchange rate of the euro in our strategy. Since our primary objective is price stability and since the euro area as a whole is a relatively closed economy with an export share of 14% of gross domestic product, we do not have a target for the exchange rate of the euro, for example, against the US dollar. This does not mean, and it is good to underline this once more, that the ECB is indifferent to the external value of the euro or even neglects it. The external value of the euro is one of the indicators we look at in the broadly based assessment of the outlook for price developments. Within that framework, we constantly monitor exchange rate developments, analyse them and shall act on them, if and when this becomes necessary. However, such action will never be mechanistic, nor will it be isolated. The external value of the euro and its development are analysed and considered in the context of other indicators of future price developments. The ECB also tries to assess international confidence in the still very young euro. Of course, the level of international confidence in the euro is not the only factor determining its external value, nor is the exchange rate the only indicator of confidence in the euro. It is, for instance, encouraging to see how the euro has been received on the international money and capital markets. I am sure that an internally stable euro will also strongly underpin international confidence in this currency, as it has for other currencies in the past.
As the currency of a very large area, the issue of the international role of the euro naturally arises. The ECB takes a neutral stance regarding this role. It will neither be stimulated, nor hindered. On the one hand, an international currency has advantages for citizens in the euro area, on the other, it may sometimes complicate the conduct of monetary policy when a large amount of euro is circulating outside the euro area. We shall leave the development of the international role of the euro to market participants and market forces. If history is a guide as to what will happen, there will be a gradual process whereby the euro will have an increasingly international role. Such a gradual development would also be a welcome development, if only to prevent the euro from becoming too strong externally at some point in time. It is likely and understandable that interest in the euro is already considerable in those countries aspiring to join the EU, including Poland. I shall elaborate on this issue at the end of my speech.
Coming back to our monetary policy strategy, I should like to point
out that it is important to make clear what monetary policy can and cannot
do. Monetary policy can maintain price stability, but only in the medium
term. In the short term prices are also influenced by non-monetary
developments. Moreover, monetary policy measures only have an impact on
prices with long, variable and not entirely predictable time-lags of
between 1.5 and 2 years. Therefore, monetary policy-making should have a
forward-looking character. Today's inflation is the result of past policy
measures, and current policy measures only affect future inflation. The
uncertainty of the economic process in a market economy is another reason
for policy-makers to be modest. The ECB does not pursue an activist policy.
Precise steering of the business cycle or a cyclically-oriented monetary
policy are not feasible and are likely to destabilise rather than stabilise
the economy. Some commentators have interpreted our recent interest rate
reduction as a change to a more cyclically-oriented monetary policy
strategy. This is not true. Our strategy was, is and shall remain medium
term-oriented and firmly focused on maintaining the price stability which
currently prevails in the euro area.
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