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Европейская денежная система

to this issue, that combining linked exchange rates, the free circulation

of capital and monetary autonomy is not, to be quite blunt, sustainable. It

is precisely this which is the raison d'кtre of the ECB as the single

monetary authority in an economic area which has irrevocably fixed exchange

rates (a single currency) and freely circulating capital (a single market).

To conclude this section, let me stress that it is essential for the

ECB to make it absolutely clear that its main objective is stability. If,

as some would suggest (for instance in the Modigliani manifesto), the ECB

were to directly target employment, this would adversely affect the

credibility of its monetary policy and thus have an impact not only on

inflation but also, paradoxically, on employment. The direct targeting of

employment objectives by a central bank is counterproductive.

The ECB's monetary policy strategy

A strategy is a combination of criteria and procedures which allow

decisions to be taken in order to achieve a monetary policy objective. This

decision-making process can be based on inflation forecasts which depend on

the behaviour of a relevant monetary variable or, more simply, on the

"pegging" of exchange rates to a stable currency. This last strategy is

ideal for more open economies, encompassed by a specific monetary zone,

such as, for instance, the Netherlands and Germany. However, this would not

be suitable for a much larger but relatively closed economic space such as

the euro area.

I believe that it is a mistake to try to exaggerate the polarity of

the inflation strategy and the monetary strategy. These are quite clearly

separate strategies but they are not in any way opposed, incompatible or

irreconcilable. Certainly, some aspects of each of these strategies should

be combined, resulting in another, completely separate and valid strategy.

This is what the ECB has done and it now needs to give the end product a

name which does not merely describe the desired objective ("the stability-

orientated monetary policy strategy").

There are two components to the ECB's monetary policy strategy. The

first, more practical and visible component consists in a quantitative

reference to the growth of the money supply as defined by the broad M3

aggregate. Taking into account the quantitative definition of stability,

economic growth and realistic hypotheses on money circulation rates, this

monetary reference has initially been set at 4 1/2%.

The second component of the ECB's monetary strategy, a more general

and enveloping one, is the estimation of inflation forecasts and risks for

price stability in view of changes in a group of significant variables, all

of which are related to the euro area as a whole. Some examples of these

significant variables are credit, long-term interest rates, prices of raw

materials, import prices, wages and public spending deficits.

Inflation is a monetary phenomenon. When the rate at which the money

supply grows is greater than the nominal potential rate of growth of an

economy, in the medium term this will generate inflation. In other words,

the medium-term inflation rate is indicative of excessive monetary

expansion in relation to economic growth. Growth in the money supply

therefore provides the best early warning of inflation and monetary control

is the best monetary policy strategy. The virtues of the first component of

the ECB monetary strategy are, when all is said and done, well known. If it

worked, this alone would be sufficient.

In practice, however, things are never so simple. Inflation

forecasting and control cannot rely solely on a monetary aggregate because

of doubts as to whether or not this monetary aggregate can be controlled

and is stable and meaningful. If a narrow definition of money, such as M1,

is adopted, controllability can be achieved in that, through the monetary

policy instrument, it is possible to have a greater impact on its

evolution, but this is offset by the loss of stability and significance. If

it is decided to opt for a broad monetary aggregate, such as M3 or M4, the

money demand function becomes more stable and clearly more significant, in

that a greater correlation can be achieved between exchange rates,

providing a better explanation of changes in nominal costs and inflation,

in return for some loss of control. Despite this, doubts persist. In

practice, these will, of course, increase when national currencies are

replaced with the euro; then the need for the second part of the monetary

policy strategy will become obvious.

The ESCB monetary policy tool

The wide range of instruments available to the ESCB for the

implementation of the euro area monetary policy has been established with

reference to two fundamental criteria: efficiency and neutrality. These

instruments can be separated into three categories, related to open market

operations, standing facilities and minimum reserves.

The ESCB's instruments and procedures do not differ significantly

from those traditionally used by the Banco de Espaсa and with which you are

all familiar. This means that I only need to highlight a few differences.

In addition, I should add that over recent weeks the Banco de Espaсa has

introduced changes aimed at facilitating a smooth transition.

With regard to open market operations, the frequency and maturity of

the main re-financing operation has become that of a weekly auction of

loans with a maturity of two weeks, and an interest rate which is either

announced in advance (fixed rate auction) or announced later as the result

of offers received (variable rate auction). There will also be monthly

auctions for three-month loans which will always be of the variable rate

type in order to avoid sending signals to the market. Fine-tuning will be

carried out in exceptional circumstances between two regular auctions and,

finally, the structural liquidity demand can be influenced by means of open

market transactions which consist in the direct purchase and sale of

securities or the issuance of debt certificates.

Standing credit and deposit facilities will supply or absorb

overnight liquidity, without the imposition of any other restrictions on

their use by institutions other than the provision of guarantees or

collateral. Both types of interest on standing facilities constitute a

strip or corridor which will contain short-term market interest rate swings

and provide a structure for monetary policy trends. This means that they

will play an important role in terms of providing signals, a role also

fulfilled by the Banco de Espaсa but in a less predetermined and formalised


As far as guarantees for all these transactions are concerned, it

should be stated that acceptable collateral may take the form of either a

public instrument or a private instrument, provided that these are of a

suitable nature, according to the neutrality principle applied to the

public sector and to the private sector.

The minimum reserves will be equal to 2% of book liabilities

calculated on the basis of a monthly average, will be subject to a minimum

exempt level of EUR 100,000 and - this being the most important point

underlining the main difference compared with the current position in Spain

- will be remunerated in line with market rates. The averaging provision

will allow us to absorb liquidity shocks without recourse to standing

facilities. Such a minimum reserves will constitute a useful tool for

restricting the volatile nature of monetary market interests rates, for

reducing the need for fine-tuning and for tightening up the system's

liquidity, thereby enhancing the effectiveness of the monetary policy. Its

remuneration in line with the market will not only reduce money demand

elasticity with regard to interest rates but also offer neutrality to euro

area banks as compared with those in other countries which do not use such

a tool.


Although inevitably in a simplified form, I hope that this statement

on the aims, strategy and instruments of the euro area monetary policy has

provided some basic information on the central core of the ECB's operations

and that it can be used as a starting-point for our discussions.

Thank you for listening; during the discussion period, I shall be

pleased to elaborate on the issues raised or examine any others which you

think may be of interest.

The monetary policy of the Eurosystem

Main remarks of the speech delivered by Eugenio Domingo Solans

Member of the Governing Council and the Executive Board of the

European Central Bank


(Institut d'Estudis Catalans)

Barcelona, 2 July 1999

The text will be available in Catalan at a later stage.

* The primary objective of the Eurosystem and, therefore, the touchstone to

measure its success is the achievement of price stability. In the medium

term the best contribution that the Eurosystem can make in favour of

sustained growth is, precisely, to create an environment of stability.

There is clearly no greater fertiliser for economic growth than price

stability, and nothing is more refractory to economic growth than

inflation. Provided that stability is achieved and that there is no risk

for stability in the future, the Eurosystem has to create the best monetary

conditions for exploiting the considerable growth potential of the euro

area. This should be done in a passive way, without any activism: like the

air we breathe, not like the air from an oxygen tank.

* The 5.2% increase in the three-month moving average of the 12-month

growth rates of M3 covering the period from March PROGRAM

99.DOC[pic][pic]&Microsoft Word 8.0

аto May 1999 is in line with the 4 Ѕ reference value for money growth,

which is the basis of the first pillar of the ECB's monetary policy.

Neither the slight increase in the moving average compared to its value

last month (5.1%) nor the non-substantial and almost constant difference

from the reference value signal a risk for price stability.

* The results of the broadly based assessment of the outlook for price

developments, which constitutes the second pillar of the ECB's strategy,

confirm that there is no risk to price stability in the euro area.

* The second pillar of the ECB's monetary policy strategy includes, among

other indicators, the exchange rate developments of the euro. The ECB's

assessment on the evolution of the exchange rate of the euro should,

therefore, be linked to the risk for price stability of a depreciation of

the euro. Taking into account that the euro area economy is a rather closed

one, no significant inflationary impact should be expected from the recent

exchange rate developments of the euro.

* One main feature of the instruments and procedures of the Eurosystem's

monetary policy is their high level of flexibility, in the sense that

without discretionary changes the instruments can accommodate a wide range

of different market situations. On the other hand, there is flexibility in

the sense that the Eurosystem has at its disposal a wide set of monetary

policy instruments and has, therefore, the possibility to move from one to

the other if and when it is deemed appropriate, taking into account their

advantages and disadvantages. In the first stage of the ECB's monetary

policy, the fixed rate tender with a discretionary allotment is the best

choice for the main refinancing operation owing to its advantages in terms

of signalling effects and controlling both the liquidity allotted and the

volatility of overnight rates. On the contrary, in the case of longer-term

refinancing operations, the Eurosystem as a rule does not intend to send

signals to the market and the effects on the liquidity and on the overnight

rates are weaker. Therefore, for longer-term refinancing operations, the

market-oriented variable rate tender has a clear advantage.

* The activities and the monetary policy decisions of the ECB should be

interpreted from a euro area perspective as a whole. To interpret them from

a national standpoint would be a mistake.



Speech by Dr. Willem F. Duisenberg,

President of the European Central Bank,

National Bank of Poland,

Warsaw, Poland on 4 May 1999

1. Introduction

First and foremost, I should like to congratulate the National Bank

of Poland (the NBP) on its 75th anniversary. The age of the NBP already

suggests that as the President of the European Central Bank (ECB), an

institution that is even less than one year old and has only been

conducting monetary policy since January this year, I should be modest. I

am aware that the role of the NBP has not been constant over these 75 years

and that in the past decade, in particular, the NBP has gone through a

remarkable restructuring process. My previous central bank, de

Nederlandsche Bank, has, together with the International Monetary Fund and

many national central banks, been involved in assisting the NBP in its

efforts to adapt to the role of a central bank in a market economy. Of

course, the real work had to be done by you yourselves and I believe you

can be proud of what has been achieved over the past decade.

Today in my speech I should like to focus on the role of the ECB, as

a truly European institution. First of all, I shall explain the background

against which the introduction of the euro and the establishment of the ECB

should be considered. Thereafter, I shall discuss the main features of the

institutional structure that determines monetary policy-making. I shall

then turn to our monetary policy strategy and the role of accountability

and transparency in this strategy. I shall conclude by briefly addressing

the issue of EU enlargement.

2. The process of European integration

On 1 January of this year the euro was introduced in 11 countries

with a combined population of almost 300 million. The ECB started to

conduct a single monetary policy for the so-called euro area. Former

national currencies, such as the French franc and the German Mark are no

longer autonomous currencies, but subdivisions of the euro. Euro banknotes

and coins will only be introduced in 2002.

The voluntary transfer of monetary sovereignty from the national to

the European level is unique in history. However, it should not be seen as

a single, isolated event. The introduction of the euro is part of the

process of European integration. This process started shortly after the

second World War and has now been under way for more than half a century.

The aims of European integration are not only, or even primarily, economic.

Indeed, this process has been driven and continues to be driven by the

political conviction that an integrated Europe will be safer, more stable

and more prosperous than a fragmented Europe. It is true that economic

integration has been the main engine of this process and that, although it

has had its ups and downs, integration has delivered important economic

benefits. On balance it has been successful.

The introduction of the euro and the establishment of the ECB are

important new steps in this process of European integration. They are not

the completion of this process, for at least two reasons. First, the launch

of the euro can be compared to the launch of a rocket. A good launch is

crucial, but only the beginning of the mission. The euro has been launched

successfully. The challenge now is to make it a success. This will not

happen automatically, but will require effort on the part of many

authorities, institutions and people. Second, four EU Member States have

not (yet) introduced the euro. I hope that this will happen in the future.

Moreover, as you are aware, the EU itself is likely to increase its

membership over time, also to include Poland. Ultimately, this is bound to

extend the euro area. This process, too, is already requiring and will

continue to require great efforts: no pain, no gain, as is often the case.

3. The institutional framework of the single monetary policy

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


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

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