Курсовая: European Monetary System

Курсовая: European Monetary System

on three fundamental principles: setting the objectives to be achieved,

establishing the most appropriate strategy for accomplishing these objectives

and, finally, selecting the best instruments for implementing its chosen

strategy.

While the Governing Council of the ECB is responsible for formulating its

monetary policy, both the Executive Board of the ECB and the national central

banks are involved in its application and therefore this constitutes one of

the tasks allotted to the European System of Central Banks (ESCB) as a whole.

Objectives, strategies and instruments therefore form the three main elements

which enable us to establish the precise point within the range of monetary

policy possibilities which should constitute the ECB's policy: its precise

altitude, longitude and depth.

The ECB's monetary policy objectives

We did not have to think long and hard to define the ECB's monetary policy

objectives and, generally speaking, those of the ESCB. This had been done for

us by the Treaty on European Union in which, under Article 105, it is stated

that "the primary objective of the ESCB shall be to maintain price stability"

which, on a more practical level, the ECB has defined as a year-on-year

increase in the harmonised index of consumer prices (HICP) for the euro area

of below 2%, which it seeks to maintain in the medium term. "Without

prejudice to the objective of price stability", continues the aforementioned

Article 105 of the Treaty, "the ESCB shall support the general economic

policies in the Community with a view to contributing to the achievement of

the objectives of the Community as laid down in Article 2".

If you refer to the aforementioned Article 2 of the so-called Treaty of

Maastricht, you will find that sustainable and non-inflationary growth,

together with a high level of employment and social protection, are among its

aims.

The ECB, then, must prioritise those of its activities which promote the

objective of stability and, without prejudice to this approach, it will

contribute, indirectly and to the extent possible, to economic growth and

increased employment.

Is this approach in any way contradictory? Absolutely not. The best

contribution the ECB can make to promoting investment and thus to generating

economic growth and increased employment is precisely by providing a

framework for price stabilisation. The worst path that the ECB could follow

would be to implement a lax economic policy which claimed to be directly

creating jobs.

In fact, in the medium term price stability will encourage efficient

investment, sustainable growth and employment. This is because stability

prevents price distortions, that is to say any distortion of the mechanism

which guides decision-makers in the markets, and thus favours an improved

allocation of resources. When stability is achieved, prices are more

transparent, which promotes competition and therefore efficiency.

Moreover, if economic agents have positive expectations with regard to

stability, the risk premium element of long-term of interest rates will fall,

promoting investment and lasting consumption. In this respect, it should be

remembered that one of the clearest inflation forecast indicators is an

increasingly steep maturity-related asset yield curve.

Finally, stability promotes growth and employment insofar as it allows

resources to be channelled into productive activity. Inflation, on the other

hand, merely encourages speculative investment with the aim of safeguarding

funds against monetary deterioration.

As we saw earlier, the aims set out in Article 2 of the Maastricht Treaty

also include social safeguards. In this context, therefore, it can be said

that inflation is the most unjust of all taxes, because it attacks personal

income and assets while distorting certain public redistribution mechanisms

such as, for instance, progressive taxation scales.

In other words, stability is not just important for economic efficiency but

also for social justice, since it provides economic conditions which benefit

the weakest and most vulnerable members of society.

An appropriate ECB monetary policy is a necessary condition but will not, in

itself, enable us to achieve stability. National taxation policies geared to

satisfying the objectives of the Stability and Growth Pact, together with

several supply-side policies leaning towards liberalisation and flexibility,

are also necessary to enable us to avoid the persistent need for measures to

combat inflation.

We must avoid the temptation to reinterpret the Stability and Growth Pact by

introducing "golden rules" of dubious legality, based on the false

theoretical foundations of the so-called "ultra-rationality hypothesis"

which, in the past, claimed to justify increased taxation pressure and which

now calls for increased public spending in terms of investment. Let's not

beat about the bush: taxation policy has only one golden rule, which consists

in maintaining a long-term budgetary balance on the economic horizon.

In connection with the ECB's objectives, it should also be noted that it is

difficult or even impossible to meet two separate targets simultaneously

using only a single monetary policy. This applies when dealing with the

concept of fixing fluctuation bands for the rate of exchange between the euro

and the US dollar. In this case, the exchange rate objective could conflict

with the price stability concept and the ECB would then fail in its primary

objective. We must not forget, with regard 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 manner.

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.

Conclusion

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

at the SOCIETAT CATALANA D'ECONOMIA

(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 to 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.

***

THE ROLE OF THE CENTRAL BANK IN THE UNITED EUROPE

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 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.

Monetary policy should be supported by sound budgetary policies and wage

developments in line with productivity growth and taking into account the

objective of price stability. Otherwise, price stability can only be

maintained at a high cost in terms of lost output and employment. This also

explains why independence should not mean isolation. It is important to have

a regular exchange of information and views with other policy-makers. The

Maastricht Treaty stipulates that the President of the ECB is invited to

meetings of the EU Council meeting in the composition of the Ministers of

Economy and Finance whenever there are issues on the agenda which are

relevant to the ECB's tasks. The President of the Council of Ministers and a

member of the European Commission may attend meetings of the Governing

Council, although they do not have the right to vote. The President of the

Council of Ministers may submit motions for deliberation. Apart from these

formal contacts, there are many informal contacts, for example in the context

of the so-called Euro-11 group of finance ministers from the euro area

countries. I regularly attend meetings of this group.

Monetary policy cannot be used to solve structural problems, such as the

unacceptably high level of unemployment in the euro area. Structural problems

call for structural solutions, in this case measures targeted at making

labour and product markets work more flexibly. The best contribution the

ECB's monetary policy can make in this context is to maintain price

stability. In this way one of the conditions for sustainable growth in

incomes and employment is created. As important as this is, it should be

realised that jobs are created by firms which are confident about the future

and not by central banks.

5. Accountability and transparency

Accountability for policies is the logical complement to independence in a

democratic society. The Maastricht Treaty includes a number of provisions in

this respect. First, there is the mandate to pursue price stability. This

provides a qualitative measure against which the ECB's performance can be

measured. As I have already mentioned, we have decided to enhance this by

providing a quantitative definition of price stability. One of the aims of

publishing our monetary policy strategy is to make our policy decisions

transparent.

The ECB has to publish an annual report in which, inter alia, the monetary

policy of the previous and current year are discussed. I present this Annual

Report to the EU Council and to the European Parliament, which may hold a

general debate on the basis of it. The President and other members of the

Executive Board of the ECB may be heard by the competent committees of the

European Parliament. I have agreed to appear before the European Parliament

at least four times a year. The ECB has to report on its activities at least

quarterly. It has been decided to go beyond this requirement and to publish a

monthly bulletin.

It is my view that the main way to achieve accountability is through being

transparent and open. In passing, I should like to note that transparency

also enhances the effectiveness of a central bank. The better it is

understood, the more successful a central bank is. Apart from the activities

I have already mentioned, transparency is achieved in several ways. Every

month, after the first meeting of the Governing Council, the Vice-President

and I give a press conference. I start the conference with a comprehensive

introductory statement, in which I explain the decisions taken by the

Governing Council and the underlying analysis and arguments for and against.

This introductory statement is published immediately on the ECB's Internet

Web site. This is followed by a question and answer session attended by

several hundred journalists. The questions and answers are also published on

the Internet shortly afterwards. All the members of the Governing Council

frequently make speeches, give interviews and contribute to journals and

books. Thousands of people visit the ECB and the national central banks each

year and, for our part, we and our staff attend many conferences and other

public events.

6. EU enlargement

The European integration process continues. The euro should be made a

success. I have already explained how we have started the process of doing

that. Some observers have criticised the EU for its "obsession with its own

internal dynamics", in particular in the context of European Economic and

Monetary Union (EMU). With all energies focused on meeting the convergence

criteria and the preparation for the launch of the euro, Europeans outside

the EU have wondered whether EMU and enlargement are not mutually exclusive

objectives.

Let me briefly comment on this issue. After the historic decision to complete

the European Single Market in the 1980s, it was felt that economic

integration should not stop at that point. To fully reap the rewards of

economic integration within the Community, a single currency was felt

necessary; a logic pointedly encapsulated in the title of one report: "One

market, one money".

Hence, the underlying idea of EMU was to advance European integration and to

ensure that full use would be made of the economic potential of the Single

Market. This idea continues to be the focus of European policy-makers, as

evidenced by the association agreements and the ongoing accession

negotiations with a number of European countries, Poland among them. Good and

mutually beneficial economic relations with third countries in Europe and

further afield are a pillar of EU policy orientation. Recognising this, the

principles of an open market economy with free competition are enshrined in

the Treaty on European Union. EMU will not weaken this commitment, but rather

reinforce it. Closer co-operation in Europe and the respect of common

principles in the political, economic and social fields are likely to form

the basis for further integration. The ECB shall contribute to this process

within the scope of its responsibility.

Countries wishing to deepen their monetary co-operation to the ultimate

extent possible by forming a monetary union will have to adapt their economic

and legal systems to the standards required by the Treaty and aim at a

sufficient degree of economic convergence. In the absence of these

conditions, adjustment costs for both current and new participants could be

high. Any premature decision on the adoption of the euro could have severe

repercussions on a country's competitiveness and trigger painful economic

adjustments. Therefore, implementation of the necessary institutional reforms

and of a sufficient degree of convergence should not be considered as an

obstacle preventing further integration in Europe, but rather as an essential

means of ensuring the lasting success of EMU, for existing and new

participants alike. Looking at the impressive progress made in a relatively

short time in this country, there is no reason to be pessimistic about

Poland's chances of meeting these standards and convergence criteria. I shall

not venture, however, to predict when this will be the case.

Even at the current juncture, though, EMU in one part of Europe is already

having an impact on the whole region. Let me briefly mention two aspects:

* If the euro emerges, as I believe it will, as a strong and

stable currency, it will provide the countries in the region

with an important reference currency, an anchor towards

which, should the intention arise, monetary policy could

credibly be oriented.

* Furthermore, EMU is set to bring about the development of a

truly unified European financial market, close to that of

the United States in depth and sophistication. The

competitive pressures of this euro area financial market

will create more favourable financing conditions for

borrowers. A number of central and eastern European

countries have already successfully tapped this market.

In view of these effects, it is altogether natural that the ECB has started

to follow with great interest economic and financial developments in the

wider Europe, particularly in those countries which have applied for EU

membership. Moreover, the ECB monitors closely the exchange rate developments

with those countries which have established some form of exchange rate link

to the euro.

The euro has the potential to become more than just a new currency for almost

300 million people in 11 countries. It may also become a unifying symbol,

standing for all that the peoples of Europe have in common. Consequently, the

public perception of the euro could endow the single currency with a role in

the European integration process reaching beyond monetary policy in the

strict sense. May the euro contribute to the establishment of what the

preamble to the Treaty Establishing the European Community calls: "an ever

closer union among the peoples of Europe".

***

The single European monetary policy

Speech by Willem F. Duisenberg

President of the European Central Bank

at the University of Hohenheim

on 9 February 1999, in Hohenheim, Germany

Ladies and gentlemen, The single European monetary policy has been a reality

for a little more than five weeks. After years of intensive preparatory work

and successful economic convergence, monetary policy is now jointly

determined for a large part of Europe by the Governing Council of the

European Central Bank. The monetary policy is implemented by the Eurosystem,

the name given to the ECB and the 11 central banks of the EU Member States

participating in Monetary Union.

The single currency is quoted on the international financial markets and is

used in non-cash payments. However, the euro will not appear as yet in

tangible form as banknotes and coins. Nonetheless there is no doubt that this

currency, which was only brought into existence on 1 January 1999, will play

an important role both within the euro area and beyond.

There is good reason for this confidence, ladies and gentlemen. Overall the

first few weeks went smoothly for the single currency and the monetary policy

of the Eurosystem. The start did not pass by entirely without a hitch - which

was not to be expected in any case, given the significance and scale of this

project - but there were no major complications.

Monetary Union is a unique and outstanding achievement. It provides the great

opportunity to achieve the goal of lasting price stability throughout Europe.

Price stability is the best contribution that monetary policy can make to

lasting economic and employment growth in Europe. The national governments

and all those involved in collective wage bargaining are being called on to

remove the structural causes of the excessively high unemployment. We can

only hope that the introduction of the euro will spur the implementation of

structural reforms.

The stability-oriented monetary policy strategy of the Eurosystem

The Treaty establishing the European Community assigns the European System of

Central Banks (ESCB) - and thereby the Eurosystem - the primary objective of

maintaining price stability. The Governing Council will do its utmost to

fulfil this task and to explain its monetary policy so as to be

comprehensible to the general public. For this reason we have developed a

stability-oriented monetary policy which essentially consists of three main

elements.

The Governing Council has published a quantitative definition of its primary

objective, price stability. This gives clear guidance for expectations in

relation to future price developments. Price stability is defined as an

increase in the Harmonised Index of Consumer Prices of the euro area of less

than 2% compared with the previous year. The publication of this definition

provides the public and the European Parliament with a clear benchmark

against which to measure the success of the single monetary policy, and

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