Европейская денежная система
meanings of this expression with which I do not concur.
First, I do not concur with the idea that there is no political union
in Europe today. It is not because the content and the competence of the
European Union are mainly economic, that its nature and historical role are
not political. Even before the single currency, EU competence extended over
virtually the whole Corpus Iuris of economic activity, from the
establishment of "the free movement of goods, persons, services and
capital" (the four freedoms proclaimed by Article 3 of the Treaty) to
external economic relationships. To understand how very political these
issues are, it should suffice to think about the place they take in the US
political debate today, or have taken in the politics of our countries
before the creation of the European Community. Moreover, the institutional
architecture of the European Union is entirely that of a political system,
not that of an international organisation based on intergovernmental co-
operation: a legislative capacity that prevails over that of Member States,
a judicial power, a directly elected Parliament.
Second, I do not concur with the idea that Monetary Union has
developed outside the political process. Quite the contrary is true. The
establishment of a single currency in the European Union has been achieved
because of the strong political determination of elected governments over a
full decade, from June 1988 to May 1998. It is significant that during that
long period continuity has not been broken by repeated changes of political
majority in virtually all countries except Germany. Technocrats, i.e.
central bankers, have "only" played their role, crucial as it may be. They
have provided expertise, from the drafting of the blueprint to the
preparatory work for the actual start of the system. And, no less
important, they have loyally accepted the limits of their role and
recognised that the ultimate decisions have belonged to elected
politicians. This is the meaning of the two statements of July 1988 and
March 1998 with which the Bundesbank has defined its position at the
beginning and the end of the crucial decade. "In der Beschrдnkung zeigt
sich der Meister".
The establishment of a single currency is a strongly political event
in its genesis and a profound social and cultural change in its nature. As
economists and central bankers we pay limited attention to notes and coins
because they are a minor and endogenous component of the money stock. For
many politicians, however, Monetary Union meant little else than a common
banknote. They saw, better than us, that for the people money has to do
with the perception of the society to which they belong and, ultimately,
with their culture. As such, money goes well beyond the economic sphere of
human action. Indeed, the act whereby we accept to provide goods or
services to an unknown person in exchange for pieces of paper that have no
intrinsic value is perhaps the most significant and widespread testimony of
the social contract that binds people. This is why coinage and money
printing have always been a prerogative of the State.
Yet, for two main reasons it remains true that Europe has a lack of
political union. First, the European Union is still not the ultimate
provider of internal and external security, the two key functions that
constitute the raison d'кtre of the modern State. Second, EU institutions
still fail to comply with the key constitutional principles that constitute
the heritage of western democracies: foundation of the legislative and
executive functions on the popular vote, majority principle, equilibrium of
Why does the lack of political union constitute a challenge for the
Eurosystem? I would answer as follows.
In a period of less than thirty years money has abandoned both the
anchors it has had since the earliest times: metal and the sovereign. It is
true that central banks have struggled for years to free the printing press
from the influence of the modern sovereign, as they struggled in the past
to free it from the influence of private interests. It is equally true that
the present status of the Eurosystem in the constellation of public powers
is exceptionally favourable. However, only a superficial thinker could
confuse independence with solitude and take the view that the lack of
political union strengthens the position of the central bank and makes it
freer to fulfil its mission.
The security on which a sound currency assesses its role cannot be
provided exclusively by the central bank. It derives from a number of
elements that only the State or, more broadly, a political union as
previously defined, can provide. When we say that a currency is a "safe
haven" we refer not only to the quality and credibility of its central
bank, but to the solidity of the whole social, political and economic
structure to which it belongs. And historical experience shows that when
that structure appears to weaken, the currency weakens, irrespective of the
actions of the central bank. A strong currency requires a strong economy
and a strong polity, not only a competent central bank. The central bank
is, and should remain, an institution with too limited a mission to replace
the lack of a political union.
The problems posed by the coexistence of a single currency with a
still unachieved political union will influence both practical and
intellectual activity in the coming years. They will have implications for
the central banker, the politician and, more generally, the citizen. For
the politician the implication is that his political decision to move ahead
with Monetary Union in advance of political union contains an implicit
commitment to work for the completion of political union. The central
banker should be aware of the special difficulties and responsibilities
deriving from this anomalous condition. On the one hand he will have to
cope with this situation and adapt his attitudes to a composite - EU and
national - institutional architecture, one that lacks the simplicity he was
used to and in which the Eurosystem now represents the most advanced
supranational component. On the other he should be prepared for the further
evolution of that same architecture. Finally, from the citizens that we all
are, it will require a deeper reflection about the multiple "social
contracts" he is part of, and the loyalties they entail.
I have been fortunate to operate in an environment in which no
conflict has arisen between the central banking profession I have exercised
for more than thirty years and the European conviction that, like many
persons of my generation, I matured in my youth. Since the early '80s I
have also been convinced that monetary union, i.e. a confluence of the two
motives, was desirable and possible. At the same time, the challenges for
the Eurosystem originate precisely from that confluence.
The challenges are not solely economic in their nature, nor can their
features be captured by the functional relationships economists are most
familiar with. Although partly related to economic factors, their features
are in fact tied to the special institutional environment to which the
Eurosystem now belongs. They derive from the tension between the completion
of the union in the monetary field and the incompleteness of the overall
construction. It is a tension because in that environment the notion of the
public interest is no longer as simply and statically defined as it was
when the Nation-State was an all-pervasive reality and the jurisdiction of
the central bank coincided with its jurisdiction. Inevitably, this tension
runs through the institutions of the European Union, the Eurosystem itself,
and even our minds.
A challenge is a call to a difficult task; it entails the two notions
of necessity and difficulty. The problems I have tried to describe are a
challenge not only for practitioners, but also for the academic profession,
because their solutions can hardly be found in a textbook and will only be
invented if the creativity of practitioners will be supplemented with that
Monetary policy in EMU
Prof. Otmar Issing
Member of the executive board of the European Central Bank
6 October 1998
On 1 January 1999, the curtain will ri"+ !-+ 1999\MAYOR99.DOC†[?]р?p-
-#"+ !-+ 1999\INDUSTRIAL MARKETING.DOC?[?]р?x- -#"+ !-se on a world
premiиre. For the first time in history, sovereign states will abandon
their own currencies in favour of a common currency, and transfer their
monetary policy sovereignty to a newly created supranational institution.
This process is all the more unusual from a historical perspective because
the national currencies involved are not being abolished because of their
weakness. On the contrary, proof of a large measure of monetary stability
is demanded as a precondition for participation.
The decision has been taken. The Euro will start on time. It must not
- and it will not - fail. The European System of Central Banks (ESCB) will
devote its best endeavours to making European Monetary Union (EMU) a
The French president recently called this unique project a "great
collective adventure". As a central banker I am generally not in favour of
"adventures" - but who would deny that there are risks and uncertainties in
this enterprise? You should be reassured that at the European Central Bank
(ECB), we have the necessary independence, instruments and tools to deal
with these risks and uncertainties in a successful way. I will discuss some
of these in a moment.
Moreover, when considering the uncertainties implied by the
transition to Stage Three of EMU, we should not forget that Monetary Union
will also reduce, or even eliminate, a number of risks. This has already
been demonstrated, even before the actual introduction of the euro. Recent
turmoil in international financial markets did not cause any significant
disruption to exchange rates among currencies of the designated
participants in Stage Three. This is a clear demonstration of the success
of the EMU process.
Today, I will address the role of monetary policy in EMU.
First, I will make reference to the final goal of monetary policy -
the maintenance of price stability.
Second, I will discuss some important issues relating to the design
and implementation of the monetary policy strategy at the outset of Stage
Three of Monetary Union; and
Finally, I will describe some features of the operational framework
of the ESCB that have recently been finalised.
Let me begin by discussing the over-riding priority we attach to the
maintenance of price stability.
2. The priority of price stability
The Treaty on European Union - the Maastricht Treaty - stipulates
that the "primary objective of the ESCB shall be to maintain price
stability". It was left to the ESCB to provide a quantitative definition of
this primary objective. At the ECB's precursor, the European Monetary
Institute (EMI), it was agreed that, in the interests of transparency and
accountability, the ESCB's chosen operational definition of price stability
should be announced publicly. This announcement would form an important
element of the overall monetary policy strategy. Simply defining price
stability leaves open the question of why price stability is desirable. As
a central banker, the benefits of price stability appear self-evident. Any
single argument in favour of price stability cannot comprehensively
describe the benefits that it brings.
For instance, concerning the United States, Martin Feldstein has
recently shown that, in combination with taxes and social contributions,
even quite modest rates of inflation can cause considerable real economic
losses. Research at the Bundesbank has produced similar results for
But elimination of the losses caused by this channel is only one
illustrative example among the many benefits of price stability. The
greatest contribution that the ESCB can make to the euro area's output and
employment performance is to achieve and maintain the stability of prices.
Stable prices are at the core of the 'stability culture' we are trying to
create in Europe, a culture that is the foundation of sustainable and
strong growth in the standard of living for Europe's citizens.
At the same time, the ESCB does not operate in a vacuum. Monetary
policy needs to be supported by an appropriate fiscal policy and necessary
structural reforms implemented at the national level if this 'stability
culture' is to be built on solid and sustainable foundations. The private
sector also has its part to play, notably by exercising wage moderation,
given the high levels of structural unemployment in the euro area. Progress
on all these dimensions is not only desirable, but also absolutely
necessary. Monetary policy alone cannot ensure strong, non-inflationary
growth and improved employment prospects throughout the euro area. However,
only a monetary policy focussed closely on the achievement of price
stability can lay the basis for these conditions.
Of course, that is not to say that the ESCB can, or should, ignore
broader macroeconomic considerations. For instance, the threats posed by
deflation in combination with nominal rigidities to the real economy have
to be taken into account. In order to prevent any misunderstanding, let me
be very clear: my discussion of deflation has to be seen in the context of
the formulation of an optimal definition of price stability for the ESCB
that takes into account deflationary dangers. These dangers certainly
cannot be ruled out and our definition of price stability should reflect
them. However, simply recalling the current rate of inflation in the euro
area - 1.2% - shows that deflation is not an immediate concern for policy-
While periodic and transitory falls in the price level may be normal,
and should not give rise to major concerns, a prolonged deflation is
clearly inconsistent with any meaningful definition of price stability.
Moreover, since nominal interest rates cannot fall below zero, a prolonged
deflation may render the interest rate policy of the central bank rather
ineffective. What remains is out-right purchases of assets - both foreign
Similarly, the ESCB cannot ignore the implications of nominal
rigidities in wages and prices for the transmission mechanism of monetary
policy. If we were to live long enough under a regime of stable prices, I
would not exclude the possibility that wage and price setting behaviour
would adapt, and nominal rigidities would finally disappear. This would
reduce some of the potential output costs of fighting inflation, and thus
increase the net long-run benefits of price stability. However, for the
time being we may have to live with these rigidities and take their effects
into account when deciding on our monetary policy strategy.
In this respect, the present situation is not easy for the ESCB.
Unemployment in the euro area is currently very high.
However, in contrast to these persistently high levels of
unemployment - which are largely structural in origin - the prospects for
maintaining price stability are currently very encouraging. Inflation
expectations and long-term interest rates in the euro area are at close to
historical lows. Actual area-wide inflation is also very subdued.
The current low 'headline' rate of inflation has been moderated
somewhat by recent falls in oil and commodity prices, themselves stemming,
in part, from the economic and financial crises in Asia and, more recently,
in Russia. However, this effect on inflation has been largely off-set by
the impact of indirect tax rises in a number of participating countries,
which have raised consumer prices for certain goods. All in all, the
changed external environment contributes to an overall outlook of very
subdued inflationary pressures.
In defining price stability, one might ideally refer to a conceptual
measure of 'core' inflation that tries to isolate monetary effects on the
price level - for which the ESCB is properly responsible - from such terms
of trade or indirect tax shocks, over which it has little immediate
In our month-to-month communication with the public, 'core' measures
of inflation may prove useful. But, in its preparatory work for Monetary
Union, the EMI recognised that any sensible definition of price stability
for the euro area would have to be based on a comprehensive and harmonised
price measure. 'Core' measures of inflation typically exclude some items.
They are unlikely to be comprehensive enough to satisfy the requirements of
an index suitable for a sensible public definition. These considerations
point to using the 'headline' measure of the harmonised index of consumer
prices (or HICP) for the euro area in the definition of price stability.
Finally, the ESCB needs to build on the success of its constituent
national central banks (NCBs) in reducing inflation and achieving price
stability during the convergence process in Stage Two of EMU. Given the
current generally benign inflation outlook in the euro area that is the
product of these accomplishments, there is an understandable desire to
'lock-in' the current success in achieving price stability as well as the
apparent credibility of monetary policy, and ensure continuity with
existing central bank practice.
3. The importance of the monetary strategy for a successful start of
European monetary policy
When price stability is defined using the principles just outlined,
how should the ESCB proceed to maintain it? In achieving and maintaining
price stability - the primary objective of the Treaty - the choice of
monetary policy strategy is vital.
Within the ECB, a considerable amount of work on the monetary policy
strategy has already been completed, building to a large extent on the
substantial earlier preparatory work of the EMI. A high degree of consensus
has been reached among the NCBs and within the ECB about the main outlines
of the strategy - I will address some of these areas of agreement in a
moment. The final decision has not yet been made. But you should be
reassured that progress is being made at a good pace. I have no doubt that
we will be in a position to announce the details of the ESCB's monetary
policy strategy in good time, prior to the start of Stage Three.
Being a new institution, the European Central bank must be prepared
to come under intense scrutiny right from the start. In particular, the
international financial markets will monitor its every decision like hawks.
Facing this environment in the run-up to Monetary Union, the ESCB must
ensure that everything possible is done to make the launch of Stage Three
as tension-free as is possible. Choosing and announcing an appropriate
monetary strategy is crucial.
The monetary policy strategy is, in the first place, important for
the internal decision-making process of the ESCB - how the Governing
Council will decide on the appropriate monetary policy stance, given the
economic environment. Above all, the ESCB strategy must lead to good - that
is to say, timely and forward-looking - monetary policy decisions.
But the strategy is also of the utmost significance in communicating
with audiences outside the ESCB. It should stabilise inflation
expectations. The more the strategy helps to promote credibility and
confidence in the ESCB's monetary policy at the outset of EMU, the more
effective that policy will be - and the easier the ESCB's task of
maintaining price stability will become.
In deciding upon the appropriate monetary policy strategy, the
following aspects must be seen as essential requirements. The strategy
* reinforce the ESCB's commitment to price stability, the
primary and over-riding task stipulated by the Treaty;
* it must clearly signal the anti-inflationary objectives of
the ESCB, and serve as a consistent benchmark for the
monetary policy stance; and,
* it must be transparent and explained clearly to the general
public - only then can the strategy serve as a basis for the
ESCB's accountability to the public at large.
The realisation that achievement of an optimal, non-inflationary
macroeconomic outcome may founder on the private sector's distrust has been
central to the monetary policy debate of the nineteen-eighties and
'nineties. The search for answers to the questions raised by this debate
has spawned an enormous economic literature. The keywords "time
inconsistency" and "credibility" draw forth an almost unmanageable flood of
publications that have appeared in the wake of the pioneering contributions
of Kydland / Prescott and Barro / Gordon.
The need to establish a credible and consistent monetary strategy in
the face of the well-known time inconsistency problem faced by policy
makers - the dilemma highlighted by this economic literature - is
especially important for the ESCB at the outset of Monetary Union. As a
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