The euro - four weeks after the start

Prof. Otmar Issing, Member of the Executive Board of the European Central Bank, Speech delivered to the European-Atlantic Group, House of Commons, London, 28 January 1999

1. Introduction

The birth of the euro on 1 January 1999 was an event of historic proportions. After months and years of practical preparations and testing, the new currency was delivered smoothly, if not entirely painlessly. The irrevocable euro conversion rates for the participating currencies had been adopted by the EU Council in the early afternoon of 31 December 1998. This was the starting shot for the "changeover weekend". During this time, billions of electronic records had to be converted from national currencies to the euro and final tests for the new payments and securities settlement infrastructure were conducted. Several thousand staff members were at work or on call within the Eurosystem, which comprises the European Central Bank and the national central banks of the euro area. Tens of thousands more - not least in the City of London - laboured intensively in financial institutions across the globe.

When the markets opened on the morning of 4 January 1999, the baptism of the new currency followed swiftly. In fact, trading in euro had already started in the Sydney market at 6 p.m. (Central European Time) on 3 January. A total of 944 banks participated in the first main refinancing operation of the Eurosystem at a fixed interest rate of 3%, which was successfully completed on 5 January and settled on 7 January. In order to assist the adaptation of financial institutions to the new environment of the euro area money market, a relatively narrow corridor for the ECB's standing facilities was set, as a transitional measure, for the period between 4 January and 21 January.

The launch of the euro occurred in an environment of price stability that few observers would have imagined only a few years back. The year-on-year increase in the Harmonised Index of Consumer Prices stood at just below 1% (the last available figure for November 1998), which is consistent with our definition of price stability. Long-term interest rates have hit record lows, which points to a high level of confidence in the ability of the Eurosystem to maintain price stability in the future. At the same time - according to current data - real activity in the euro area has, overall, held up reasonably well in the face of considerable turbulence in the global economy.

The euro, which represents an economic area of 290 million people - in terms of the share of world GDP second only to the United States - will, from the very beginning, play an important international role. The health of the new-born currency will be under constant observation and critical scrutiny, both by global financial markets and by the public at large. Let me assure you that the euro's immediate parents and guardians will do their utmost to see to it that the new currency will prosper and flourish and will not stray from the path of stability.

With all the attention and apprehension surrounding the introduction of the euro on 1 January, it is easy to forget that this was just one, albeit very important, step on the long road of European integration. The first four weeks since the launch of the euro have made for a promising start, but this is evidently a far too short time span to assess its prospects for the future. In order to understand European Economic and Monetary Union, which has now become a reality, and in order to gauge its prospects, promises and risks, it is necessary to take a longer-term view and to look back in history. This perspective comes naturally in premises as illustrious as those in which we find ourselves this evening. Only future generations will be able to judge whether the newly born European Central Bank can pass the test of time even remotely as convincingly as the institutions of British democracy have done over the centuries.

2. A look back in history

The long process of European integration started in the immediate aftermath of World War II. It has been characterised by a combination of grand political vision and a succession of small pragmatic steps to reap the concrete benefits of bringing the economies and the people in Europe closer together. The balance between vision and realism has not always remained constant and progress has not always been steady. British leaders over the decades have made substantial contributions to the process of European integration, frequently injecting healthy doses of realism, but also, at various times, providing new ideas and leadership for Europe. Indeed, it was none other than Sir Winston Churchill who first expressed the vision of "a United States of Europe" in his famous speech in Zürich on 19 September 1946. As you know, however, he did not envisage that the United Kingdom, whose place would remain in the Commonwealth, would take part.

As you will be equally aware, the process of integration unfolding on the continent later proved to develop a seemingly irresistible force of attraction for many countries not involved initially. This appears to confirm a general principle already noted by Aristotle. In his Politics (Book V, Chapter 6) he writes, if you allow me to quote, "and constitutions of all forms are broken up sometimes from movements initiating from within themselves, but sometimes from outside, when there is an opposite form of constitution either nearby or a long way off yet possessed of power." [Aristotle's Politics, Book V, Chapter 6, translated by H. Rackam MA (Heinemann, 1932).]

To avoid any misunderstandings: The mechanism described by Aristotle in general terms need not work only in one direction. Indeed, in the case of Europe, integration has been a process of mutual adaptation and reciprocal influences. The continuous process of integration has, moreover, been compatible to date with a considerable degree of variation in constitutional arrangements. It is not clear to me why this should not continue to be possible in the future, as long as sufficient common ground is guaranteed.

At the time of Churchill's speech, most of Europe still lay in ruins. Memories of the ferocious wars and destruction that have savaged our continent this century provided powerful political inspiration for closer European integration. This was particularly true for the immediate post-war years, but it appears to hold to this day. The long shadow of the past has, in fact, also been prominent on both sides of the debate over European Economic and Monetary Union. No doubt most of you will recall the arguments raised in some quarters about monetary union as a "question of war and peace", on which opinions differ. The existence of such debates supports the view that monetary union cannot be understood in isolation. It must be seen in the context of the wider economic and political process of European integration.

Having learned their lesson from history, Europeans - starting with the formation of the European Coal and Steel Community in 1952 - turned early to the creation of common, supranational institutions as an engine of integration. This was regarded as the best way to overcome national divisions in a lasting manner and to ensure that integration would be robust in the face of crises. Thus, from the inception of the ECSC to the present day, Europe has embraced a unique mixture of supranational characteristics and insistence on national sovereignty, which is perhaps quite adequately captured by the term "European Community".

Rather than pursuing grandiose political designs, European leaders quickly focused on concrete economic issues, especially after the agreement on a European Defence Community had to be abandoned when it was not ratified in the French National Assembly in 1954. The ideal of European integration as an "ever closer union" was nevertheless enshrined in the preamble to the Treaty of Rome in 1957, which created the European Economic Community (and also Euratom), with the objective of creating a customs union and a common market among Member States. After this had largely been achieved in the late 1960s, the first attempt at monetary union was launched, culminating in the "Werner Report" of 1970, which envisaged that monetary union would be in place by 1980. This first attempt at monetary union in Europe came to nothing in the face of the world wide currency turmoil of the 1970s.

As we now know, the next attempt met with success. It started with the foundation of the European Monetary System in 1979. The Single European Act and the single market programme then prompted increasing calls for further monetary integration in the late 1980s following the logic of "one market - one money". To a non-negligible number of observers, at the time, this logic appeared anything but compelling and a single currency anything but inevitable. Strong commitment on the part of leading European politicians brought this process, once set in place, finally to a successful conclusion. With the benefit of hindsight, the exchange rate crises of 1992-93, which for a moment had seemed set to derail the whole project, actually served to contribute to its success. In the aftermath of this experience, efforts to achieve greater economic convergence intensified and, in the end, allowed a timely launch of the single currency.

The most fundamental precondition for European Economic and Monetary Union, however, was a broad consensus that monetary policy must be unambiguously focused on the objective of price stability and that this is best entrusted to a central bank that is independent from political interference.

3. Price stability and central bank independence

Central bank independence and an unequivocal commitment to price stability are the common tenets of both the monetary policy framework enshrined in the Maastricht Treaty and that currently in place in the United Kingdom. It is now widely accepted - in this country and around the world - that price stability is a common good that is best safeguarded by independent central banks, which are not subject to the usual short-term pressures that characterise the political process. The Chancellor of the Exchequer, Gordon Brown, expressed this very eloquently in his statement on 6 May 1997 when he announced that the Bank of England was to be granted independence. "A fully credible framework for monetary policy can only be built", he said, "if the long-term needs of the economy, not short-term political considerations, guide monetary decision-making. We must remove the suspicion that short-term political considerations are influencing the setting of interest rates". In the words of the Chancellor, "price stability is an essential precondition for the Government's objectives of high and sustainable levels of growth and employment".

These two fundamental lessons reflect the experience in Britain and elsewhere over recent decades. In the case of Britain, like in many other countries, there had been growing disillusionment with the perpetuation of stop-and-go policies. A great number of British Chancellors have been associated with short-lived booms that later turned out to be unsustainable. As a consequence, Britain has now moved a long way towards the philosophy and institutional set-up underlying the Maastricht Treaty. In particular, it is now accepted that the appropriate objective for monetary policy is to maintain price stability over the medium term, rather than to attempt short-run macroeconomic fine-tuning.

Both theoretical considerations and the empirical evidence accumulated over the years suggest that high rates of inflation are, on average, detrimental to growth and employment in the longer run. At the very least, nobody seems to be arguing that inflation is good for growth at any level. An environment of stable prices is a principal precondition for the efficient functioning of a free market economy and sustainable increases in both the standard of living and productive employment. The proposition that monetary policy should have price stability as its primary objective is not only enshrined in the Maastricht Treaty, but has become increasingly consensual across the industrial world and beyond.

A substantial body of research also confirms that independent central banks tend to be more successful in the pursuit of price stability than dependent central banks, without any identifiable costs in terms of output growth or volatility. In the words of Nobel laureate Robert Lucas, "long-run price stability is one of the few legitimate 'free lunches' economics has discovered in 200 years of trying. It (...) can be had for the asking." The principle of central bank independence is firmly entrenched in the Statute of the European System of Central Banks and of the European Central Bank. It is an important precondition for the successful pursuit of price stability in the euro area, but the task of the ECB will no doubt be greatly facilitated if other policy areas follow a stability-oriented course as well.

The Maastricht Treaty provides for a clear division of responsibilities among policy-makers in Europe. In this context, the ECB has been created as an independent supranational institution and given the unambiguous primary objective of maintaining price stability. This set-up reflects the well-founded view that, in this way, the ECB can best contribute to the shared broader objectives of the Community, including growth, employment and social cohesion.

4. Central bank independence and accountability

While the fundamental approach to monetary policy-making is now fairly similar in the United Kingdom and in the euro area, some notable differences remain. The British public, in keeping with its long and proud parliamentary tradition, has - understandably - been particularly concerned with the issue of democratic accountability in the context of central bank independence. From this perspective, some commentators have criticised the ECB as being "too powerful", "undemocratic" and "accountable to no one". You will not be surprised to hear that I should like to take issue with that characterisation.

As explained above, it makes good economic sense to take the responsibility for the common good of price stability outside the direct, day-to-day influence of partisan politics. Moreover, it is perfectly democratically legitimate for society to delegate authority for a particular policy area to an institution outside the regular political process. Such an institution can and will only be held accountable effectively if it is given a clear and limited mandate. If monetary policy were instead to be called upon to serve a multitude of - usually competing - goals, the status of independence would be much harder to justify and the related accountability difficult to achieve.

The economic rationale for the democratic act of granting independence to central banks is the recognition that monetary policy can and should only be held responsible for the single overriding objective of medium-term price stability. If (and only if) it is agreed that price stability is a common good that should and must not be subject to the normal kind of trade-offs and value judgements which are the domain of the regular political process, would such delegation of authority appear to be wise and democratically legitimate.

In the case of the ECB, the primary objective of maintaining price stability is enshrined in an international Treaty, which would be rather difficult to change. Its quasi-constitutional character, while offering greater protection from political interference, does not mean that the ECB's mandate carries less democratic legitimacy. On the contrary, a Treaty concluded by 15 national governments and ratified by 15 national parliaments, in some cases endorsed in addition by a popular referendum, confers a profound and robust degree of democratic legitimacy. Once it is accepted that price stability is a lasting value and not simply a short-term objective, it appears quite legitimate to afford the ECB, as the institution entrusted with maintaining price stability, a high degree of legal protection.

Accountability is the reverse side of the coin of independence. Accountability in a democracy must ultimately be achieved vis-à-vis the supreme sovereign, i.e. the people whose interests the institution must be seen to serve. The accountability of an independent institution that is not subject to the regular political process, as argued before, requires, in particular, that the institution's mandate should be limited and clearly defined. Only under these circumstances can the performance of the central bank be monitored and evaluated effectively by the public. The Maastricht Treaty has assigned the ECB the single, overriding, primary goal of price stability as the basis for accountability. Moreover, the Governing Council of the ECB adopted in October 1998 a quantitative definition of price stability as "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%". The clear definition of the ECB's final objective provides the European public with a precise benchmark against which to judge its performance, for which it can and will be held accountable.

The issue of accountability for the ECB's performance with respect to its clearly defined mandate needs to be logically separated from concerns over the transparency of the policy-making process itself (as opposed to the outcomes of this process). Transparency, openness and clarity about how the central bank sets out to achieve its mandate are also desirable, since they reduce the degree of uncertainty in the monetary policy process and help the public to understand and assess the central bank's actions.

Criticism that the ECB will not be accountable for, nor transparent about, its actions is misplaced, to my mind in most cases arising purely from a lack of information. Clearly, the ECB will not and cannot be held formally and directly accountable by governments. This would contradict the very notion of full institutional independence embodied in the Treaty. Besides, of course, a European government does not exist. Given that the ECB has a clear European mandate, any formal accountability vis-à-vis national governments and even national parliaments would run counter to the logic of a single and supranational European monetary policy. The ECB is, however, committed to a high degree of accountability for its monetary policy decisions and its performance in achieving price stability vis-à-vis the European public and its elected representatives.

The Treaty mandates the ESCB to submit quarterly reports as well as an annual report to the European Parliament, the Council of Ministers and the European Commission. These reports will be debated by the European Parliament. Furthermore, the ECB's President and Members of the Executive Board of the ECB can be questioned before the European Parliament's Committees. In addition to the reporting requirements foreseen in the Maastricht Treaty, which are among the most stringent for any central bank, the ECB is committed to going even further in ensuring transparency and accountability. Most importantly, the President will hold an extensive press conference immediately following the first Governing Council meeting of every month. A thorough assessment of the economic environment together with special articles on topical issues are also provided in a Monthly Bulletin. The first issue of the Bulletin appeared last week. In addition, there will be working papers and occasional papers presenting the analysis and research conducted by ECB staff for scientific review. The members of the Executive Board and other members of the Governing Council will further communicate with the public very actively through regular speeches and interviews.

The decision by the Governing Council of the ECB not to publish the minutes of its meetings and not to make public the voting behaviour of its members has been criticised in some quarters as a lack of accountability and transparency. In this context, one should recall that, for the purpose of accountability, what matters most will be the ECB's actual track record of stability performance. Moreover, the Governing Council will strive for a maximum degree of accountability and transparency regarding its operation as a collegiate/collective body and not with respect to individual members.

For that purpose it is essential to convey to the public a sense of the reasoning behind the decisions of the Governing Council and a coherent summary of the information upon which decisions are based. On the occasions of the President's press conferences, a detailed assessment of the economic situation and the outlook for price developments will be given every month followed by a question and answer session. A summary of all relevant information that would normally be expected to be contained in published minutes will therefore - for all practical purposes - be immediately available, together with an opportunity to pose further questions. This goes far beyond what most central banks are prepared to do in terms of communicating with the public.

It is not quite obvious to my mind that the legitimate and important cause of transparency would be advanced if central banks were to make available to the public the maximum amount of information at their disposal. You could perhaps imagine all data and records continuously being put on the Internet. You could, in addition, imagine live broadcasts of all Governing Council meetings, committee meetings, perhaps including the coffee breaks and all words uttered in the halls and corridors of power. George Orwell in reverse, if you will. Apart from all practical difficulties, would such complete openness really enhance the general public's (and even the specialists') understanding of monetary policy? Moreover, could the public ever be sure that some important information was not withheld, some ulterior motives hidden, some decisions not revealed?

The Statute of the European System of Central Banks and of the European Central Bank stipulates that the proceedings of the meetings of the Governing Council shall be confidential, whereas the outcome of its deliberations may be made public. This is a wise decision both for reasons of internal efficiency of the decision-making process and the public's perception of it. Efficient decision-making requires a frank and open discussion (and subsequent voting) based on maximum objectivity in judging the available information and policy options with respect to fulfilling the Treaty mandate. Experience shows that if individual statements during meetings are made public with the names attributed to them, a tendency simply to exchange carefully drafted - and possibly lengthy - statements can emerge. Thereby the free flow of discussion is likely to be inhibited. Similarly, voting behaviour may become more heavily influenced by tactical considerations and peer pressure rather than be based on the best judgement of the situation at hand.

Perhaps more importantly, the publication of individual votes would lead the public and financial markets to focus on individual voting patterns. The Maastricht Treaty prescribes that all members of the Governing Council serve in a personal capacity as representatives of the System as a whole and on a purely European mandate. National considerations must therefore play no role in the decision-making process. It would be unrealistic to assume, at least for the initial years, that there would not be a risk that, in the public's perception, individual central bank governors would still be associated with their country of origin. This would inevitably invite pressures on individual members generated by national or local interests. Such pressures would be detrimental, even if they were firmly resisted. In fact, distortions in voting behaviour to "prove" that one was immune from national interests and pressures could be just as damaging.

Neither a "personalisation" of monetary policy in general, nor the specific risks of its "renationalisation" in the perception of the public would be helpful for establishing the reputation of the ECB as an independent and genuinely European institution which is collectively responsible and accountable for the health and stability of the single currency. I can assure you that the ECB will continuously strive for the maximum possible degree of openness and transparency in its monetary policy. This is in the interest of accountability vis-à-vis the European public. This is also in the interest of the effectiveness of monetary policy itself, which should be clearly understood by the public and the financial markets.

5. Transparency and the ECB's stability-oriented monetary policy strategy

The ECB's efforts to provide a high degree of both accountability and transparency are clearly reflected in its choice of monetary policy strategy. The importance of a precise definition of price stability as the basis for accountability with respect to the final goal of the ECB has already been discussed. I shall briefly review the other main aspects of the ECB's strategy below. Let me first point out, however, why we feel that a central bank needs a monetary policy strategy at all. This has a lot to do with accountability and transparency, but it also concerns the internal decision-making process of a central bank.

Monetary policy is not a simple task. The transmission from the monetary policy instruments through short-term interest rates and a variety of channels to the price level is complex and may vary over time. A monetary policy strategy provides a conceptual framework that structures the processing of the vast amount of information in order to provide guidance and decision criteria to policy-makers. In terms of communication with the public, the monetary policy strategy should help the public to understand and assess monetary policy actions.

The simple point to be made in this context is that openness will always be a matter of degree. It need not by itself necessarily lead to greater transparency, let alone be helpful for clarity and understanding. In the present information age we are all too aware of this. Anyone having "surfed the Internet" knows that the mere availability of information is not enough, the least that is required is a powerful "search engine" and then an ability to process and interpret the information properly. This is also a problem faced by central bankers when deciding on the appropriate stance of monetary policy, and this is why a monetary policy strategy is required. This is also the reason why - thankfully - we central bankers (and human beings in general) cannot entirely be replaced by computers. The key for the degree of transparency and clarity is therefore not the amount of information made available to the public, but the degree to which the monetary policy strategy followed within central banks truthfully corresponds to what can be communicated intelligibly to the public. An old-fashioned word for this degree of correspondence would be "honesty".

The Governing Council of the ECB has adopted a monetary policy strategy which is neither conventional monetary targeting nor direct inflation targeting, nor a simple combination of the two. The manifold uncertainties in economic relationships accentuated by the very transition to a single currency pose substantial difficulties both for the stability of money demand as well as for the accuracy of inflation forecasts. Making a strict commitment to adjust monetary policy mechanistically in response to deviations from pre-announced monetary targets (or inflation targets at some particular horizon) in a situation of such great uncertainty would have been unwise, misleading and not credible. There would have been a great likelihood that targets would either have to be frequently missed or ignored. Despite the virtue of simplicity, it is, moreover, doubtful whether all relevant information can be usefully summarised in a single indicator like a monetary aggregate or a single inflation forecast.

The "stability-oriented monetary policy strategy" decided by the Governing Council of the ECB comprises two pillars. First, a prominent role for money, in relation to which a quantitative reference value of 41/2% for the growth rate of M3 was announced in December, and, second, a broadly based assessment of the outlook for price developments. Given that inflation is ultimately a monetary phenomenon, monetary aggregates are a natural first choice as a "nominal anchor" and guidepost for monetary policy. In the early years of monetary union, however, the relationships between money, prices and interest rates are likely to be subject to an exceptional degree of uncertainty. While the basic longer-run relationship between money and prices has been shown to be robust across a wide range of policy regimes, it would be risky for monetary policy, in such a situation, to respond to short-term developments of monetary aggregates in a mechanical way. The notion of a reference value for money, as distinct from a monetary target, will provide an important benchmark against which to assess monetary developments and to judge and explain policy actions.

As the second pillar and in parallel with the analysis of monetary conditions, a comprehensive "broadly based assessment of the outlook for price developments and the risks to price stability" will be conducted. Some observers have wrongly taken this to be synonymous with an inflation forecast, which is customarily at the centre of direct inflation targeting strategies, and have called upon the ECB to publish such a forecast. However, the broadly based assessment undertaken under the second pillar of the strategy will comprise an analysis of a wide range of indicator variables as well as the use of various forecasts of the outlook for price developments. Publishing any single "official inflation forecast" would, therefore, not adequately reflect the actual decision-making process in the Governing Council of the ECB and - rather than enhancing transparency and clarity - would actually be confusing and mislead the public. Besides, the assumptions underlying various inflation forecasts may not be fully understood by the public and the markets and could, under those circumstances, actually undermine the central bank's anti-inflation credibility.

For all the manifold uncertainties associated with the transition to Monetary Union, it is paramount that the ECB is understood to be strongly committed to and very clear about the final objective of price stability. This is the basis for its accountability vis-à-vis the general public. At the same time, the ECB will need to retain the necessary flexibility in interpreting and reacting appropriately to the available economic data. As described before, the ECB will go to great lengths to explain its policy decisions and the reasoning behind them to the public and thus will also aspire to the highest standards of transparency upheld by any central bank.

6. Looking ahead

The Maastricht Treaty provides the necessary foundations for a successful monetary policy. It has enshrined the principle of central bank independence, endowed with a high degree of political legitimacy, and it has assigned the ESCB the clear mandate of maintaining price stability. The Governing Council of the ECB has presented its stability-oriented monetary policy strategy, which provides a coherent framework for its policy decisions and - together with the quantified definition of its overriding objective of price stability - furnishes a clear and "honest" basis for its accountability vis-à-vis the European public. At the same time, it takes account of the unique challenges and uncertainties facing the euro area. One should add that, of course, the ECB also has at its disposal the necessary policy instruments to implement its strategy and to attain its primary objective of price stability over the medium term. The Governing Council of the ECB has already demonstrated that it can act decisively with the co-ordinated interest rate move in early December even before the euro was born. This has reduced the uncertainty in the markets and cleared the way for a smooth start of the new currency. The past four weeks have made for a promising beginning.

Thus, looking ahead, what will be the principal concerns regarding the longer-term health of the euro? There can be no doubt in anybody's mind that the ECB is determined and well-equipped to maintain price stability successfully in the euro area over the medium term. It will thereby do its part in contributing to the wider objectives of the Community. In particular, safeguarding the value of the currency is a crucial precondition for long-term investment, sustainable growth and employment creation. The maintenance of price stability is a task that should never be underestimated. The appropriately forward-looking assessment of future risks of inflationary or deflationary pressures in the economy will tend to be finely balanced at any point in time. Those commentators who call for monetary policy to be simultaneously directed at objectives other than price stability often forget this. We always need to be clear about what monetary policy can do and equally what it cannot do.

This brings me to the possible risks inside Monetary Union. The ECB will do its job, but can we be equally confident that everybody else will do theirs? Europe suffers intolerably high rates of unemployment. For the most part, this unemployment is structural in nature and needs to be addressed urgently through labour market reforms and increased flexibility in the wage-setting process. It is a dangerous and counterproductive illusion that any of this could be helped by printing money, quite on the contrary. Monetary Union should take away that illusion once and for all. National governments and social partners must shoulder their responsibilities and one can only hope that the introduction of the euro serves as a "catalyst for change" and triggers the badly needed structural reforms at the national level.

There have recently been calls for greater policy co-ordination among the euro area countries. Much has been made of the clear asymmetry in the Maastricht construction, i.e. the combination of a centralised single monetary policy alongside continued national responsibilities for most other areas of economic policy-making. While this may be a reflection of political realities and the requirements of subsidiarity, it would be premature to conclude that the Maastricht construction was devoid of economic logic. On the contrary, Monetary Union, above all, calls for a greater need for flexibility as well as discipline in wage-setting and budgetary policies and a better functioning of market adjustment mechanisms.

Precisely because monetary policy can no longer respond to national conditions, the exact opposite of greater centralisation and harmonisation may be required in other areas. Talk of uniform European wage-setting or an ambitious social union is going in the wrong direction; different productivity and real economic conditions across the euro area must be taken into account more than ever. Following similar reasoning, there is a strong case for retaining and even strengthening national (and in some cases "sub-national") responsibilities for fiscal policies. Indeed one reason for the Stability and Growth Pact being aimed at budgets that are close to balance or in surplus in normal times is to recover the room for manoeuvre for fiscal policy required to let automatic stabilisers operate effectively to smooth out national and regional business cycles.

As long as the letter and the spirit of the Stability and Growth Pact are respected, national fiscal policies are free to use the remaining room for manoeuvre as best fits national circumstances and preferences. This should also be sufficient to prevent gross imbalances in the aggregate monetary-fiscal policy mix. Beyond that, it is not quite clear to me what any further "co-ordination", over and above the regular exchange of views and data, could possibly achieve. In particular, it would seem highly unrealistic, impractical and counterproductive if attempts were to be made at European-wide "Keynesian-style" fine-tuning and demand management among 11 Finance Ministers. Such attempts have proven a failure in the past, even at the national level, where the institutional preconditions would appear to be much more congenial.

The Maastricht Treaty provides for a clear assignment of responsibilities. Monetary policy is centralised at the European level and has been given the single overriding objective of price stability. Fiscal policy and most other areas of economic policy-making remain largely rooted at the national level. Nevertheless, it is obvious - and the Treaty recognises this - that monetary policy does not operate in a vacuum. Unfavourable developments in other policy areas, in particular wages and fiscal polices, can place additional burdens on monetary policy and make the maintenance of price stability more difficult for the ECB. Therefore, it is natural that the ECB will participate in a continuous dialogue with European and national officials in a number of institutional settings, and we shall not hesitate to engage actively in the wider economic debate in Europe. However, this dialogue or any form of co-operation must not at any time blur the respective fundamental responsibilities. Without a clear assignment of responsibilities, policies are unlikely to be conducted in an effective and credible manner. Moreover, without it, there can be no meaningful accountability towards the ultimate sovereign - the people of Europe.

7. Monetary Union and political union

In European Economic and Monetary Union sovereignty, which in any democracy ultimately belongs to the people, is delegated to a new supranational European institution as far as monetary policy is concerned. At the same time, the Eurosystem has been assigned a clear and limited mandate, i.e. to maintain price stability in the euro area, which it is to pursue free of political interference. This "twin transfer of sovereignty" in the monetary field - pooled at the European level and exercised through an independent central bank - is at the heart of the Maastricht Treaty. To be successful over the longer term, the ECB as the guardian of the euro, like any institution in a democracy, will have to win and maintain the trust and support of the European public.

Historically, currency jurisdictions and national borders have tended to coincide. This reflects the simple fact that the right to issue money has always been a key attribute of national sovereignty and therefore monetary union would not appear to be just a small and innocuous step of a primarily technical nature. One is indeed hard pressed to find any precedent in history, where sovereign nation states voluntarily ceded sovereignty in the monetary field to a genuinely supranational body. It is therefore clear that European Economic and Monetary Union has been and will continue to be not just an economic, but also a political project. Indeed, as I mentioned at the beginning of my speech, the European integration process as a whole has been characterised by an interplay of political and economic forces and motivations.

Perhaps in no other Member State of the European Union is the political dimension of EMU debated as fiercely as in the United Kingdom. The perceived "loss of sovereignty" has raised fears that the single currency might open the floodgates to a centralised European "super state" run by unelected and "faceless bureaucrats". Baroness Thatcher has famously called the Maastricht Treaty a "treaty too far". Others make no secret of their view that, on the contrary, it is a treaty "not far enough". They believe that the single currency can be used as a vehicle towards the ultimate objective of greater political union and that further integration in other policy areas would be required to make European Economic and Monetary Union work.

I have always found the idea that a single currency could be used as a "pace-setter", which would itself trigger further political integration, to be highly doubtful and extremely risky. The stability of the currency is too important a goal in itself and must not be overburdened with not strictly related political ambitions, however worthy these may be. Indeed, some commentators, such as the Berkeley economist Maurice Obstfeld, have warned that Europe "has taken a gamble in placing monetary unification so far ahead of political unification". However, in this whole debate the precise meaning of political union and the link to monetary union often remain unclear. It is certainly hard to draw a direct line from monetary union to, say, a common foreign policy.

What is required, to my mind, for a successful monetary union is a sufficient degree of political commitment by all participating countries, the leading economic actors and the wider public to accept fundamentally and genuinely the political and economic constraints that a single and stable currency represents. The deeper underlying commitment to make European integration a success even in the most difficult of times in history gives some general grounds for hope on this count. Some degree of political unity (not necessarily union), or rather a sense of common responsibility would appear to be important for the long-run health of EMU. However, it is not a substitute for the right economic conditions for lasting success.

The Maastricht Treaty, together with the Stability and Growth Pact adopted subsequently, provides the necessary foundations for stable money, sound economic policies and a flourishing free market economy in Europe. In particular, a single European monetary policy is compatible with responsibilities for many other policy areas, remaining firmly rooted at the national level, as long as the minimum set of common objectives, principles and rules established in the Treaty are followed in letter and in spirit. Most importantly, the delegation of monetary policy to an independent and European institution does not at all contradict the basic principles of democratic legitimacy. On the contrary, because the ECB is given a precise and limited mandate, ratified by all 15 national parliaments, it can and will be held accountable effectively for its performance by the European public and its elected representatives.

My conviction that the Maastricht Treaty offers a sound and convincing framework for economic policy-making in Europe, even with the presently very limited degree of political integration in other areas, does not mean that current institutions and structures in the European Union will and should be cast in stone. All durably successful institutions need to adapt as circumstances change, as has been the case for the institutions of British democracy. This has been and will continue to be true for the further evolution of European integration. The birth of the euro four weeks ago, on 1 January 1999, is certainly not the end of history, nor is it the sudden dawn of an entirely new age. It is, however, an important milestone on the road of European integration. It is a vision that has become reality. But it is now a reality that requires a constant vigil against manifold risks and, more prosaically, continued plain hard work to turn it into a lasting success. The ECB is prepared to do its part.

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