Курсовая: European Monetary System

Курсовая: European Monetary System

thereby provides for the transparency and accountability of the Eurosystem

and its policy.

The wording "less than 2%" clearly defines the upper limit for the measured

inflation rate which is compatible with price stability. I do not think I

need emphasise that deflation - or a sustained fall in prices - would be

incompatible with price stability. The latest available data for the annual

rate of inflation according to the Harmonised Index of Consumer Prices for

the euro area as a whole fall within the definition of price stability. This

outcome is clearly the result, above all, of the successful monetary policy

of the national central banks in the years before the start of Monetary

Union.

The ECB has only been responsible for monetary policy for a little more than

one month. It will only be possible to judge the success of its current

policy in one to two years'time. This reflects the fact that the transmission

of monetary policy impulses is subject to relatively long and variable time

lags. The Governing Council has therefore emphasised that price stability

must be maintained in the medium term. This statement underlines not only the

need for a forward-looking approach to monetary policy, but also takes into

consideration the short-term volatility of prices in response to non-monetary

shocks which are beyond the control of monetary policy.

In order to achieve the goal of price stability, our strategy rests, in

particular, on two "pillars". Before I explain this in more detail, I should

like to emphasise that traditional and previously established macroeconomic

relationships could change as a consequence of the introduction of the euro.

This was one key reason why neither a monetary targeting nor a direct

inflation targeting strategy could be applied. Our strategy is also more than

just a simple combination of these two approaches. Rather, it is precisely

tailored to the needs of the ECB.

The first pillar of the monetary policy strategy is a prominent role for

money. Since inflation is ultimately a monetary phenomenon in the medium

term, the money supply provides a natural "nominal anchor" for a monetary

policy geared to safe-guarding price stability. To emphasise this prominent

role, the Governing Council has published a quantitative reference value for

growth in the money supply. The first reference value decided upon by the

Governing Council for growth in M3 was 4.5% per annum and was published on 1

December. This value is based on the above-mentioned definition of price

stability and assumes a trend growth in real gross domestic product of 2-2.5%

per annum, as well as a medium-term reduction in the velocity of circulation

of M3 of around 0.5-1% per annum.

We shall not, however, respond mechanistically to deviations from the

reference value for money supply growth, but shall first analyse them

carefully for signals relating to future price developments. Larger or

sustained deviations normally signal risks to price stability.

The second pillar of the monetary policy strategy consists in a broadly based

assessment of the outlook for price developments in the entire euro area.

This assessment will be based on a broad range of monetary policy indicators.

In particular, those variables which could contain information on future

price developments will be analysed in depth. This analysis should not only

provide information on the risks for price development, but should also help

to identify the causes of unexpected changes in important economic variables.

Some commentators reduced this comprehensive analysis to an inflation

forecast. At the same time, there were demands for the ECB to have to publish

these forecasts in order to satisfy the need for transparency and

accountability. Therefore allow me to make this clear: our strategy includes

a comprehensive analysis of numerous indicators and several forecasts. To

focus on a single official inflation forecast of the Eurosystem for a

specific point in time would in no way accurately reflect our internal

analytical and decision-making process. It would impinge upon the

transparency and clarity of the explanation of our policy. The publication of

an official inflation forecast would also be inappropriate with regard to the

accountability of the ECB, all the more so if this forecast were based on the

assumption of no change in the monetary policy. The success of the monetary

policy of the ECB should primarily be measured in terms of the maintenance of

price stability, not the accuracy of its conditional forecasts.

The stability-oriented monetary policy strategy of the Eurosystem, which I

have just outlined, constitutes a new and clear strategy. It emphasises the

primacy of the goal of price stability. It takes into account the inevitable

uncertainties concerning economic relationships inherent in the transition to

Monetary Union and the associated systemic changes and guarantees a high

degree of transparency.

Ladies and gentlemen, allow me to comment on certain suggestions on the

orientation of monetary policy which have recently appeared in the press.

Some of these ideas give the impression that monetary policy should

concentrate upon objectives other than price stability, since stable prices

have already been achieved. Inter alia, it has been suggested that the ECB

should react more or less mechanistically to exchange rate developments or

other variables such as, for instance, unit labour costs. Furthermore, there

were calls for monetary policy, by means of reductions in interest rates, to

be used to combat unemployment. Against this background there is a need to

set out clearly the possibilities and limitations of monetary policy.

Both the reasoning in the Maastricht Treaty and many economic analyses show

that the best contribution the single monetary policy can make to employment

growth is to concentrate on price stability. Without such a clear approach

there is a danger that the public may question the commitment of the

Eurosystem to the goal of maintaining price stability. Inflation

expectations, risk premia and thus long-term rates would rise. This would

increase the cost of the investment which is necessary for a sustained and

lasting rise in the standard of living.

Even under the best possible circumstances, though - i.e. if it proves to be

possible to assure lasting price stability - monetary policy alone cannot

solve the major economic problems of unemployment and future problems in

social security systems.

The Governing Council regards the current high level of unemployment in the

euro area as a matter of great concern. This problem is, however,

predominantly a structural one. It is mainly the result of the rigidities in

the labour and goods markets in the euro area which have arisen partly

through an excessive and disproportionate degree of regulation. Structural

economic reforms, which target the reduction of rigidities, are the

appropriate solution. In those euro area countries in which such reforms have

been implemented unemployment figures have declined markedly. In addition, I

should like to emphasise that moderate wage developments and a reduction in

the burden of tax and social security contributions would generally help to

reduce unemployment. This would be the case even if the country concerned did

not trade heavily with its neighbouring countries. The positive influence of

low taxes and wages on employment clearly has overall benefits from an

international perspective. Such a policy should not be denounced as "wage

dumping".

Turning to the role of exchange rates between the euro and other important

currencies outside the EU, in particular the US dollar, the Eurosystem has,

in formulating its monetary policy strategy, made an unambiguous choice. This

strategy clearly rules out explicit or implicit objectives or target zones

for the euro exchange rate. The pursuit of an exchange rate objective could

easily jeopardise the maintenance of the objective of price stability and

could thereby also be detrimental to real economic development. Target zones

for exchange rates could, for example, lead to the ECB having to raise

interest rates in a recession, despite increasing downward pressure on

prices. I am sure you will agree that such a mechanistic response to a change

in the euro exchange rate would not be optimal. Furthermore, it is important

to remember that we are living in a world with high capital mobility.

Exchange rate agreements, which might have been possible to implement until

recently, are no longer feasible.

The lack of an exchange rate target does not mean that the ECB is totally

indifferent to or takes no account of the euro exchange rate. On the

contrary, the exchange rate will be observed and analysed as a potentially

important monetary policy indicator in the context of the broadly based

assessment of the outlook for price developments. A stability-oriented

monetary and fiscal policy, as stipulated by the Maastricht Treaty and the

Stability and Growth Pact, is an essential pre-condition for a stable euro

exchange rate. Of course, there is no guarantee of lasting exchange rate

stability, not even in a fixed exchange rate regime. Exchange rate

fluctuations are often caused by structural or fiscal policy, asymmetric real

shocks or conjunctural differences. Monetary policy would clearly be

overburdened if it had to prevent such movements in the exchange rate.

We cannot and shall not gear our monetary policy towards a single variable,

whether a money supply aggregate, an index, the exchange rate or an inflation

forecast for a particular point in time. Nor can we be involved in any ex

ante co-ordination which would entail an obligation to react to particular

commitments or plans. The ECB will always carefully analyse all relevant

indicators. In this context, it is particularly important that the economic

causes of potential risks to price stability in the euro area are understood

as fully as possible. Appropriate monetary policy decisions also depend upon

the causes of unexpected changes in important economic variables. The

Governing Council must, for example, take a view on whether changes in

important indicators are of a temporary or permanent nature, and whether a

demand or supply shock is involved. In our deliberations we also attempt to

take into account how the financial markets, consumers and firms are expected

to react to monetary policy decisions. I believe few would contest that such

a complex analysis cannot meaningfully be reduced to a more or less

mechanistic reaction to a few variables or a single official forecast.

In addition, concern was often expressed that the Eurosystem would not act

transparently enough. In this context, it was said that a transparent

monetary policy also necessitated the publication of the minutes of the

meetings of the Governing Council and disclosure of the voting behaviour of

the individual members of the Council.

For sound reasons the Governing Council decided not to adopt this approach.

The publication of individual positions could easily lead to national

influence being exerted over the individual Council members. The members of

the Governing Council must not, however, be seen as national representatives.

They decide together on the monetary policy for the euro area as a whole. The

Governing Council has committed itself to go beyond the reporting and

explanatory requirements laid down in the Treaty, which are among the most

comprehensive requirements by international standards.

On the basis of our strategy, after every first meeting in the month I

deliver to the press a detailed explanation of our assessment of the overall

economic situation and, in particular, the outlook for price stability. The

content of this so-called "introductory statement" is very close to what

other central banks refer to as minutes. In this way, the public receives

comprehensive information immediately following the meetings of the Governing

Council. In addition, each month we shall publish a detailed report on the

economic situation and monetary policy throughout the euro area in our

Bulletin. Such rapid information on the results of the meetings of the

Governing Council and the current economic analysis of the ECB without doubt

demonstrates a high degree of openness and transparency.

The most recent monetary policy decisions and operations

Co-operation between the European central banks was always very close. In the

last few months of 1998 the countries participating in the third stage of

Monetary Union co-operated more and more closely. The co-ordinated reduction

in leading rates at the beginning of December 1998 clearly showed that the

currency union had begun de facto before the start of Stage Three. This co-

ordinated measure contributed substantially - as we now know - to the

stabilisation of market expectations.

For more than five weeks the ECB has been conducting monetary policy

operations, mainly in the form of reverse open market operations. The main

operation will be carried out at a weekly frequency with a maturity of two

weeks. So far, five such operations have been conducted successfully, at a

fixed interest rate of 3%.

Besides the reverse transactions which constitute the main instrument for

liquidity control and targeting interest rates, the Eurosystem offers two

"standing" facilities: the marginal lending facility and the deposit

facility. These can be accessed by credit institutions via the national

central banks. The marginal lending facility is primarily a safety valve for

short-term liquidity shortages in the banking system and thereby limits

upward movements in money market rates. To some extent, its counterpart is

the short-term deposit facility, which is used to absorb short-term liquidity

surpluses. This forms the lower limit for money market rates. For the start

of Monetary Union the interest rate on the deposit facility was set at 2% and

the rate on the marginal lending facility was set at 4.5%.

As a transitional measure, the Governing Council decided to establish a

narrow corridor of 2.75-3.25% between the rates on the marginal lending

facility and the deposit facility from 4 to 21 January 1999. The intention

was to facilitate the necessary adjustment to the new institutional

environment brought about by the transition to Stage Three. As already

announced, on 21 January 1999 it was decided to return to the rates on the

two "standing" facilities that were set for the start of the single monetary

policy. Since 22 January 1999, therefore, the rate on the deposit facility

has been 2% and the rate on the marginal lending facility has been 4.5%.

A critical factor in this decision was the behaviour of the money market for

the euro area as a whole since the beginning of the year. The Governing

Council established that over time there had been a marked reduction in the

difficulties experienced by some market participants with the introduction of

the integrated money market and, in particular, with cross-border liquidity

flows. All in all, the integration of the money market in the euro area

reached a satisfactory stage only three weeks after its implementation. In

analysing the money market it should be noted that, inter alia, there can be

a marked difference between ECB interest rates and short-term market rates.

On the one hand, market rates may include credit risk premia, and on the

other, expectations may lead to differences between the two rates.

At its meeting last Thursday the Governing Council confirmed its earlier

assessment of the outlook for price stability. Therefore it was decided to

leave the conditions for the next main refinancing operations, on 10 and 17

February 1999, unchanged. They will be carried out as volume tenders at a

fixed rate of 3%, the same conditions as the last such monetary policy

operations.

In addition, in recent weeks the first longer-term open market operations

were also conducted, in the form of reverse transactions. These were carried

out on 14 January 1999 in three parallel tender procedures with maturities of

one, two and three months. The fixed rate tender procedure was used. By

contrast with the regular main refinancing operations, the Eurosystem does

not use these longer-term operations to send signals to the market and

therefore usually acts as a price-taker. The ECB thus gives advance

indication of the planned allocation. The interest rates which arise from

these monetary policy operations should therefore be seen as indicators of

prevailing market conditions.

Regular assessment of the monetary, financial and economic situation

To conclude, I should like briefly to report on the Governing Council’s

current assessment of the monetary, financial and economic situation. On the

basis of these assessments the Governing Council decided last Tuesday to

leave interest rates unchanged.

Taking into account the latest monetary data for December 1998, the three-

month moving average of the 12-month growth rate of the monetary aggregate M3

(for the period from October to December 1998) remained more or less stable

at 4.7%. This value is very close to the reference value set by the Governing

Council. According to our analysis, the evolution of the money supply shows

no risks to price stability. Credit to the private sector also grew strongly

in December last year. Although at present we do not perceive any

inflationary signals, further developments will be very carefully monitored.

With regard to the broadly based assessment of the outlook for price

developments and the risks to price stability in the euro area, monetary and

financial developments can be seen to indicate a favourable assessment of the

latest monetary policy decisions of the Eurosystem. They indicate that market

participants expect a continuation of the environment of price stability.

Long-term rates fell to new historical lows at the beginning of 1999 and

there was an overall downward shift in the yield curve. Therefore, financing

conditions for investment are currently exceptionally favourable.

At present the growth prospects for the euro area are, however, still marked

by the uncertainties relating to the development of the world economy in

1999. These uncertainties have had a negative impact on indicators of the

economic climate in the euro area. There are widespread expectations of an

economic slowdown in the near future. This deterioration in the external

economic environment can be linked, above all, to the financial crises in

Asia, Russia and Latin America. However, there is a mixed picture. While the

growth rate for industrial production fell up to November 1998, retail sales

figures and consumer confidence have recently shown positive trends.

Furthermore, growth in real gross domestic product in the euro area was

relatively robust in the third quarter of 1998. In the United States real

growth in the fourth quarter actually turned out higher than expected.

Measured against the Harmonised Index of Consumer Prices, the HICP, consumer

prices in the euro area rose by 0.8% in December 1998. This is a tenth of a

percentage point lower than in November. This development is in line with

earlier trends. It can be linked, in particular, to a further decline in

energy prices and a weakening in price increases in industrial goods.

All in all, the above-mentioned economic development and the available

forecasts for 1999 do not indicate any noticeable upward or downward pressure

on prices. Potential upward risks could arise from a change in the external

global economic situation and any associated effects on the euro area, via

import and producer prices. These developments must be carefully monitored.

There is concern that inflationary pressure might develop in the event of a

strong increase in wage prices and an easing of fiscal policy. Developments

in the exchange rate will also be closely monitored in view of their

significance for price developments.

Finally, let me emphasise that the current level of real interest rates is

exceptionally low. If real interest rates are taken simply as the difference

between nominal rates and the current increase in consumer prices (HICP),

short-term real interest rates in January 1999 stood at 2.3%, i.e. around 80

basis points lower than one year ago. Long-term real rates have fallen even

more, by 110 basis points, and stood at 3% in January. These levels are very

low, both compared with other countries and with historical data. In line

with the safe-guarding of price stability, the current monetary and financial

conditions thus clearly support future economic growth. Monetary policy can

do no more than this without jeopardising the great overall economic

advantages of price stability and its own credibility.

Real structural reforms which increase the flexibility of the labour markets,

as well as a continuation of the moderate increase in wage prices, would not

only ease the burden on monetary policy but would also support employment

growth. This will be all the more true if the deterioration in the economic

situation this year is worse than expected owing to the negative aspects of

the external economic environment.

The statistical requirements of the ESCB

Speech delivered by Eugenio Domingo Solans,

Member of the Executive Board of the European Central Bank

on the occasion of a visit to the Banque Centrale du Luxembourg

Luxembourg, 25 March 1999

The booklet introducing statistical requirements for Stage Three, which the

EMI published in July 1996, began with the bold statement: "Nothing is more

important for the conduct of monetary policy than good statistics." These

challenging words show the importance which the EMI attached to this area of

preparations for Monetary Union, and I must say this has been fully justified

by our experience in the first few weeks of the life of the euro.

The statement of requirements

But let me start back in 1996. Because of the time it takes to implement

statistical changes in reporting institutions and central banks, a statement

of prospective statistical requirements could be delayed no longer. But that

statement had to be made with very imperfect knowledge. Nobody knew at that

stage (for example) what definitions of monetary aggregates would be chosen

for the single currency area, or what their role would be. Given the

differences in financial structures in our countries, it was not clear how to

identify the financial institutions from whose liabilities the money stock

would be compiled. It was decided to define them in functional terms, and in

such a way that money-market funds as well as banks of the traditional type

would be included. It was not clear at that stage whether minimum reserves

would be applied, and, if they were, what form they would take - although it

had been decided that the banking statistics data would provide the basis for

any such system. Implementation had to start quickly for the statistics to be

ready in time for a Monetary Union starting in 1999, but no one knew which

Member States would adopt the single currency - though it was clear that the

distinction between business inside and outside the euro area, would be of

critical importance for monetary and balance of payments statistics, and

would have to be planned for in statistical systems.

In mentioning monetary and balance of payments statistics, I do not want to

suggest that the statistical requirements set out in 1996 were confined to

these areas. On the contrary, they covered a wide range of financial and

economic data, including financial accounts, prices and costs - relating

directly to the ESCB's main responsibility under the Treaty, namely to

maintain price stability - government finance data, national accounts, labour

market statistics, production and trade data and other conjunctural

statistics, and more besides. These areas are, or course, under Eurostat's

responsibility.

The focus on the euro area as a whole

In formulating and implementing statistical requirements, it was important to

realise that the ESCB's attention would have to focus on the euro area as a

whole. Monetary policy cannot discriminate among different areas of the

Monetary Union - although in practice it may have different effects because

of different national economic and financial structures. Focus on the area as

a whole has important implications. The data must be sufficiently comparable

for sensible aggregation; they must also be available to a comparable

timeliness and to the same frequency. In some cases (monetary and balance of

payments statistics) they had to be available in a form permitting

appropriate consolidation. In short, with a few exceptions, it was realised

that adding together existing national data would not be adequate. Important

initiatives were already under way, such as the adoption of a new European

System of Accounts [ESA95] and the implementation at national level of a new

IMF Balance of Payments Manual. However, wide-ranging statistical

preparations would be necessary for the ECB to have the sort of statistical

information that the national central banks have traditionally used in

conducting monetary policy.

How far the provision meets the current need

I arrived at the ECB about 2 years after these requirements had been released

and 7 months before the start of Monetary Union. I must confess that I

doubted many times in those early weeks whether statistics could be ready in

time to sustain monetary policy decisions. There were anxious moments too in

the late stages of finalising the monetary policy strategy: would the

requirements set out in 1996 correspond to the need perceived in autumn 1998?

I am now sure that the decisions made in 1996 were correct. In practice, one

choice in autumn 1998 was almost automatic: thanks to the work of Eurostat

and the national statistical offices in the context of the convergence

criteria (with active involvement of the EMI), there was no plausible rival

to the Harmonised Index of Consumer Prices (HICP) for the purpose of defining

price stability. I am aware that national consumer price indices are

sometimes criticised for overstating inflation, because they take

insufficient account of quality improvements and use outdated weights. While

further development of the HICP is to come, and at present there is no

satisfactory treatment of expenditure on housing, I believe that every effort

has been made to apply the lessons from experience with national consumer

price measures. The other choices for statistical elements in the strategy

were less obvious. In fact the banking statistics reporting structure

announced in 1996 proved able to provide the monetary aggregates and the

counterpart analysis required, and - with a little fine-tuning - to meet the

needs of a statistical basis for reserve requirements, details of which were

also finalised in the autumn. We were thus able to begin publishing monetary

statistics only a few days after the final decisions were taken (at the

Council meeting on 1 December), and were able to publish with some estimation

last month back data on the three monetary aggregates monthly to 1980, and a

note urging caution on users of the earlier data.

However, the monetary strategy avoids putting too much weight on one area or

type of information. This is only partly for statistical reasons. The

formation of the euro area is a substantial structural change, which may in

time affect monetary and financial relationships. So the ECB also examines a

range of economic data for the light they shed on the assessment of the

economic situation and, in particular, prospects for inflation. The editorial

and economic developments sections of the Monetary Bulletin show the way the

ECB draws on this information; the statistical information itself is set out

in tables in the statistical section. Thus, in addition to money and credit

and the HICP, the editorial typically touches on GDP, industrial output,

capacity utilisation, orders, the labour market, business and consumer

confidence, costs and prices other than the HICP, earnings and wage

settlements, fiscal positions - naturally placing the emphasis on what are

judged to be the most important developments at the time. All these areas

were covered by the statement of requirements made in 1996.

I do not need to say that, at present, an accurate assessment of the economic

situation in the euro area is of vital importance. The editorial section of

the March Bulletin concludes that the overall outlook for price stability

remains favourable, with no major risk that HICP inflation will exceed 2% in

the near future, but there is nevertheless a balance of conflicting

influences. To reach this judgement, the Bulletin assesses the latest GDP

data (slower growth in the provisional Eurostat figures for GDP in the 4th

quarter of 1998; declining manufacturing output), the labour market

(unemployment falling slightly; some signs of rising pay settlements), and

confidence indicated by opinion surveys (business confidence weak; the

consumer mood rather optimistic). The economic developments section supports

the overall conclusion, and analyses in more detail price and cost

developments and of output, demand and the labour market. It concludes with

analysis of the fiscal position in the euro area in 1998, and a preview based

on fiscal plans for 1999. I am drawing your attention to this to show the

variety of material supporting the ECB's assessment of the economic and

financial position and prospects. Although we pay particular attention to

certain items - the monetary statistics, with an emphasis this time on

influences contributing to recent faster growth, and to the rather rapid

growth of credit, and the HICP - we draw on a wide range of information in a

continuous monitoring exercise. The establishment of an institution

responsible for monetary policy in the euro area has caused a fundamental

change in the use of macroeconomic statistics at European level, very much as

anticipated by the Implementation Package nearly 3 years ago.

Priorities for further improvement of statistics

I would like to take this opportunity to thank Eurostat for their efforts to

improve the quality and comparability of economic statistics relating to the

euro area, and to deliver them to the ECB on a timely manner. They have given

this high priority and much progress has been made in the last year or so.

Further improvement will come with the introduction of the new European

System of Accounts [ESA95] starting next month (although we must expect some

temporary confusion following the introduction of a new system). Experience

suggests that substantial statistical changes initially bring classification

problems. Although, of course, provision has been made for back data to be

available on the closest possible approximation to the new basis, we must

also expect some discontinuity in important series. Implementation of last

year's short-term Statistics Regulation will bring improvements across a wide

range of conjunctural statistics not covered by ESA95. There are also

initiatives to improve labour market statistics. With Eurostat, who are

responsible for all these areas of statistics at European level, we do our

best in the ECB to promote better data. Perhaps I should underline our

support here for the priorities established last year by a working group of

the Monetary Committee (the current Economic and Financial Committee), in

which Yves Franchet and two of my ECB colleagues participated (Peter Bull and

Gert Jan Hogeweg): in addition to quarterly GDP and short-term conjunctural

statistics, these were government finance statistics, data relating to the

labour market (including labour costs), and the balance of payments. At

present the lack of comparable national statistics during the course of the

year makes it difficult to monitor the fiscal stance in the area as a whole,

and so to assess the balance of fiscal and monetary policy. Better labour

market statistics are important, not only for the ECB's assessment of

possible inflationary pressure, but also to improve understanding of the

structure of labour markets in our countries, and the rigidities which impede

the achievement of fuller employment. Balance of payments statistics - a

shared responsibility of the ECB and Eurostat at European level - require a

new approach in compiling data for the euro area as a whole. We intend to

publish the first monthly data for the euro area following the new

methodology next month, and to begin joint publication of a quarterly euro-

area balance of payments with Eurostat in the summer. But there are deeper

questions about future needs for balance of payments statistics in the new

circumstances which are currently being addressed. Principally, the question

arises of the usefulness for policy purposes of national balance of payments

statistics for Member States participating in Monetary Union. There is no

question, of course, that certain data in this area are needed within the

ESA95 framework of national and financial accounts.

The organisational, legal and technical infrastructure

I have talked mainly about statistical requirements and their provision, but

this is only part of the story. The Treaty (specifically in Article 5 of the

Statute of the ESCB and the ECB) clearly envisaged that the ECB would perform

statistical functions, assisted by and in co-operation with national central

banks, other national authorities, the Commission (meaning in this context in

particular Eurostat), and international organisations. A large part of the

preparatory work carried out by the EMI consisted of sorting out who would do

what, avoiding so far as possible duplication, wasted effort and conflicting

data, and keeping the whole development consistent with international

statistical conventions. Much of this had to be framed in legal instruments,

which would complete the statutory framework provided by the Treaty and the

ESCB/ECB Statute. Although work on an EU Council Regulation concerning ECB

statistics began as early as 1996, the Regulation could not be finalised

until last autumn and the ECB could not adopt legal instruments on statistics

in advance of that event - much work in this area therefore had to be done at

the last minute.

Information Technology is another of my responsibilities at the ECB. I am

glad to say that essential elements of our data transfer and statistical

processing systems were in place when I arrived, or brought into operation

soon afterwards. But here, too, there is room for further improvement - the

EMI and the ECB in these early months have had so much to do in relation to

the resources available that, broadly speaking, only the essentials have been

provided so far.

Conclusion

"Nothing is more important for monetary policy than good statistics." The

formation of Monetary Union has shifted the focus of interest on to data

covering the euro area as a whole. This has required substantial changes to

statistics, which need time to settle down and are some way short of

completion. At the same time, the adoption of the single currency is itself a

massive structural change. This will surely affect economic and financial

relationships and make any data harder to interpret, although these deeper

effects may occur over a period and take some time to become apparent. What

is clear, however, is that the ECB must take policy decisions and explain

them publicly in terms of the data available relating to its policy

responsibility. What we continue to strive to do, through our own efforts and

with the help of Eurostat, is to improve the quality of the data underlying

policy decisions, which are so important in gaining public understanding and

acceptance for them.

***

The tasks and limitations of monetary policy

Speech delivered by Christian Noyer

Vice-President of the European Central Bank,

at the Volkswirtschaftliche Tagung of the Oesterreichische

Nationalbank,

on 10 June 1999 in Vienna

Ladies and Gentlemen,

It is a pleasure for me to be here in Vienna today and I should like to start

by thanking the conference organisers for giving me the opportunity to

elaborate on the tasks and limitations of monetary policy.

This topic is extremely important. Looking back over the history of economic

thought, it is clear that the perception of what monetary policy can do and

what it cannot or should not do has changed. This has clearly shaped the role

of monetary policy in economic policy. In the 1960s economic theories

suggested a long-run trade-off between inflation and output. These theories

provided the intellectual basis for policy-makers to pursue monetary policies

biased towards higher inflation. The high inflation experience of the 1970s

together with new theoretical findings, especially on the role of

expectations, led policy-makers to move towards lowering and stabilising

inflation.

Theoretical considerations as well as empirical evidence over several decades

suggest that high rates of inflation are clearly unhelpful - indeed

detrimental - to growth and employment in the long term. A large number of

economic arguments point to the benefits of price stability for economic

growth and employment prospects. Stable prices eliminate economic costs such

as those arising from unnecessary uncertainty about the outcome of investment

decisions, the distortionary effects on the tax system, rising risk premia in

long-term interest rates and the reduced allocative effectiveness of the

price and market systems. To quote Alan Greenspan, chairman of the United

States Federal Reserve, "Price stability is achieved when the public no

longer takes account of actual or prospective inflation in its decision-

making." Monetary policy must take into account the fact that the horizon for

decisions by economic agents is rather long-term in nature. By guaranteeing

price stability, monetary policy supports the efficient functioning of the

price mechanism, which is conducive to the allocation of scarce resources.

Price stability is a means of promoting sustainable economic growth and

employment creation and of improving productivity levels and living

standards.

Against this background, the predominant view has emerged that the best and

most lasting contribution that monetary policy can make to long-term economic

welfare in the broader sense is that of safeguarding price stability. Central

banks throughout the world have been moving towards adopting long-term price

stability as their primary goal.

In order to achieve this goal most successfully, independence from political

interference and a clear legal mandate for price stability are of the utmost

importance. A lack of central bank independence and an ambiguous mandate can

easily force central banks to focus on the short term and, thus, fail to

adopt the forward-looking, medium-term orientation that is crucial for a

successful monetary strategy.

All these issues were taken into consideration by policy-makers when drafting

the Treaty establishing the European Community and designing the blueprint

for the European Central Bank. Both central bank independence and an

unequivocal commitment to price stability are therefore tenets of the

monetary policy framework enshrined in the Treaty. There can be no doubt that

the European Central Bank (ECB) is determined and well-equipped to tackle its

main task, namely, that of maintaining price stability in the euro area over

the medium term. It will thereby make a significant contribution to the

achievement of other Community objectives such as high employment and

sustainable non-inflationary growth. In this connection, the pursuit of sound

macroeconomic policies by the EU Member States would considerably facilitate

the task of the ECB. The room for manoeuvre in monetary policy and the degree

of success in terms of maintaining price stability are crucially dependent on

the support of sound fiscal policies and responsible wage settlements in the

euro area.

The Treaty establishing the European Community states that the primary

objective of the European System of Central Banks (ESCB) is to maintain price

stability. Without prejudice to this objective, the ESCB shall support the

general economic policies in the European Community. It shall operate in a

manner that is consistent with the establishment of free and competitive

markets. The Treaty states explicitly how the ESCB shall set its priorities.

Price stability is the first goal of the monetary policy of the Eurosystem,

and a contribution to the achievement of the other objectives of the European

Community can only be made if this primary objective is not compromised.

However, there is ultimately no incompatibility between maintaining price

stability and pursuing these other objectives. By maintaining price

stability, the ECB will also contribute to the achievement of other Community

objectives.

Of course, the ECB is concerned about the intolerably high level of

unemployment in Europe, but we should realise that the role of monetary

policy in reducing unemployment in Europe can only be very limited. Many

empirical studies show that the high unemployment rate is mostly the

consequence of structural rigidities within the European labour and product

markets. The European unemployment rate has, indeed, been high and stable

over the business cycles in the past decade. Only structural reforms,

preferably of a comprehensive nature, can therefore tackle the underlying

impediments to employment growth.

The monetary policy of the Eurosystem is geared towards the euro area as a

whole and, thus, cannot take into account purely national and regional

developments. The cyclical positions of participating countries have not yet

completely converged, although, with the single currency in place, some

national differences may disappear over time. This requires national policies

and labour and goods markets to be increasingly flexible in order to be able

to respond effectively to economic shocks. Well-functioning labour and

product markets are therefore needed to allow adjustments to wages and prices

to be made if local economic conditions change.

Budgetary policies play a major role in conditioning monetary policy.

National fiscal authorities have to demonstrate their commitment to the

maintenance of price stability in the euro area over the medium term. In this

context, the Stability and Growth Pact is a crucial element. Its aim is to

encourage the pursuit of disciplined and sustainable fiscal policies by the

participating EU Member States and the prospective members. Sound public

finances, with lower public debt and tax burdens, contribute to a lowering of

long-term interest rates, reduce uncertainty and increase private capital

formation. They not only facilitate the task of monetary policy with regard

to the maintenance of price stability, but also strengthen the conditions for

sustainable growth conducive to employment creation. Conversely, unsound

fiscal policies tend to increase inflation expectations and force monetary

policy to keep short-term rates higher than would otherwise be necessary.

The single monetary policy has to be conducted independently of the short-

term political considerations of national governments. In this context, the

ECB cannot commit itself to move its interest rates in a certain way in

response to specific actions or plans of other policy-makers. Monetary policy

has to take into account the overall economic situation to assess the risks

to price stability. Direct ex ante co-ordination with fiscal authorities

might endanger meeting the primary objective and would set the wrong

incentives for the conduct of sound macroeconomic policies. This does not, of

course, exclude a constructive dialogue between the Eurosystem and government

authorities which clearly respects the independence of the ECB.

When dealing with one of the major world currencies and with the currency of

one of the two main world economies, it is inconceivable that price stability

might be maintained by setting an exchange rate target as an intermediate

objective. However, external developments including the exchange rate are

taken into account in accordance with our strategy, as they may have an

impact on domestic economic developments and thereby on price stability.

Referring to recent exchange rate developments in this context, it is

appropriate for me to quote the President of the ECB, Dr. W. F. Duisenberg,

who recently said that "the euro is a currency firmly based on internal price

stability, and therefore has a clear potential for a stronger external

value".

The absence of exchange rate targets for the euro vis-а-vis other major

currencies should not be misunderstood. For smaller, very open economies,

fixed exchange rates may be a very reasonable choice. The Austrian example is

one of the most prominent in this respect. By pegging the Austrian schilling

to the Deutsche mark for over twenty years, it proved possible to import

credibility and price stability. The increasingly close pegging of the

Austrian currency to the currency of its main trading partner was, among

other features of the Austrian policy mix, the driving force behind the

economic convergence process in the run-up to Stage Three of Economic and

Monetary Union (EMU). The credibility of the Austrian exchange rate target

was also underpinned by an income policy aiming at relatively high real wage

flexibility and a fiscal policy geared towards consolidation. All in all, the

Austrian model, which set out to guarantee stability in nominal and real

terms, has turned out to be very successful.

The example given by past Austrian experience is, I believe, very valuable.

It shows that the achievement of sustainable convergence with the euro area

can be assisted by means of an exchange rate target. The new Exchange Rate

Mechanism of the European Union, ERM II, may play a similar role for those

current and prospective EU Member States which have not yet joined Stage

Three of EMU.

The achievement of price stability is also of high importance for the

stability of the financial system. The financial system of the euro area

showed a high degree of stability during last year's period of financial

turbulence as well as during the rather dramatic structural shift connected

to the changeover to the euro. At the ECB, we play our part in the evolution

of the euro area financial system by providing it with stable monetary

conditions. By creating an environment of price stability, we allow private

sector agents to focus their attention on the questions that are most

relevant to their activities and to take advantage of benefits of this stable

environment, such as the lengthening of their planning horizons. There is a

lot of empirical evidence that safeguarding price stability is the optimal

contribution that a central bank can make to the maintenance of financial

stability and that those two goals are actually complementary.

I should like to conclude by saying that the main contribution of the single

monetary policy to the welfare of the people in the euro area will be the

maintenance of price stability in the medium term. The ECB is determined to

tackle this task and is well-equipped to do so. Our conviction is that the

economic performance of the euro area will benefit significantly from price

stability. This will ultimately facilitate the achievement of those

objectives, which underlie the general economic policies of the European

Community and the individual governments at the national level. However, the

economic problems in the euro area cannot be tackled by monetary policy

alone. We have to be realistic about the goals which can be achieved by

monetary policy. Neglecting the limitations of monetary policy and promising

too much could, in the long term, be detrimental to the establishment of a

stability culture in Europe, and could also lead to delays in implementing

the economic reforms that are crucial to achieving high growth and

employment.

***

European Central Bank

Press Division

Kaiserstrasse 29, D-60311 Frankfurt am Main

Tel.: 0049 69 1344 7455, Fax: 0049 69 1344 7404

Internet: http://www.ecb.int

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