An institutional glossary of the Eurosystem

Article by Tommaso Padoa-Schioppa, Member of the Executive Board of the European Central Bank, at the conference on "The Constitution of the Eurosystem: the Views of the EP and the ECB", 8 March 2000

Table of contents

  1. Introduction

  2. Mission

  3. Independence

  4. Accountability

  5. Transparency

  6. Predictability

  7. Communication

  8. Conclusion

I . INTRODUCTION

Since 1 January 1999, the euro has been a reality. The management of this new currency has been entrusted to the Eurosystem - comprising the European Central Bank (ECB) and the eleven National Central Banks of the participating Member States. This new institution has assumed the tasks and competencies attributed to it under the Treaty establishing the European Community (the "Treaty"), most notably the conduct of a single monetary policy for the whole euro area, or, as it is often called, Euroland. This historic step has fundamentally changed the economic constitution under which both European and national economic policies are conducted. It is against this distinctive political and economic background that the institutional profile of the Eurosystem should be discerned.

In the debate about the institutional profile of the Eurosystem, a number of important notions regularly recur such as independence, accountability, transparency or predictability. In particular the dialogue between the European Central Bank and the European Parliament has provided a privileged setting for their use. Although these terms interrelate and even overlap, they cannot and should not be used interchangeably. Due care should be taken to identify their conceptual distinctiveness, to avoid blurring the indispensable debate about the central bank with confusion and misperceptions.

The objective of this article is to contribute to the debate about the institutional profile of the Eurosystem by clarifying some of these notions. The article is structured in the style of a glossary. It starts with a brief outline of the Eurosystem's mission (Section II), and a short treatment of its independence prerogative (Section III). It then attempts to define and discuss each of the following terms: accountability (Section IV); transparency (Section V); predictability (Section VI). Communication, which is to be seen as a means to an end, is discussed in Section VII. As could be expected in a glossary, each section will start with a dictionary-based definition, after which the meaning of the concept will be explored with reference to the Eurosystem's institutional profile. A short conclusion closes the article (Section VIII).

II. MISSION

The New Oxford Dictionary of English defines a mission as a "strongly felt aim, ambition or calling", or as "important assignment" . The Eurosystem's mission is more than a "important assignment", it is a legal mandate stipulated in the Treaty. At its heart is the primary objective to "maintain price stability" in the euro area. In my view, the Treaty language is only one way of expressing the concept of a public good that is very broad and comprehensive in its meaning. The traditions of the national central banks supply a wide range of formulations for such a broad concept, be it "die Währung zu sichern" as in Germany , or "la difesa del risparmio" as in Italy.

The fact that the maintenance of stable prices has been made the centrepiece of the Eurosystem's mission derives from the history and experience of Europe's economies. Throughout the 20th century, but especially during the 1970s and 1980s, many European economies suffered from high inflation and its accompanying consequences, i.e. the distortion of price signals in the economy, the erosion of savings and the arbitrary redistribution of wealth. While these experiences have fostered the emergence of a political consensus on the desirability of stable prices and responsible macroeconomic policies, advances in economic research have provided the analytical framework for stability-oriented monetary policies. The recognition that - in the long run - money is neutral, meaning that monetary policy cannot permanently influence growth, investment and employment, provides a cogent argument to steer monetary policy towards the goal of maintaining stable prices.

In order to make the pursuit of the mission possible, the Treaty assigns to the Eurosystem a number of tasks and competencies, with the formulation and implementation of monetary policy at the core. Beyond that, the Eurosystem is mandated to conduct foreign exchange operations, to hold and manage official reserves, to promote the smooth operation of payment systems, to contribute to the conduct of national policies in the fields of prudential supervision and financial stability, and to authorise the issuing of euro banknotes. Furthermore, it is called upon to give advice on a number of policies related to its competencies.

When preparing the Treaty, the Member States sought to provide an optimal framework to allow the Eurosystem to fulfil its mission. In so doing, two requirements had to be satisfied: democratic control and policy effectiveness. In a society based on democratic and market principles, both these requirements are crucial. However, as they are partially conflicting, clear definitions and an appropriate balance in their implementation need to be found. Let me explain.

The policy decisions of the Governing Council of the ECB affect the lives and welfare of the almost 300 million people living in Euroland . This is why the transfer of such substantial power into the hands of independent, non-elected central bankers can only be legitimate if effective democratic control and accountability are in place. Meanwhile, the Eurosystem has to be in a position to effectively carry out its mission, i.e. to actually "safeguard the currency" and deliver price stability. This may set conditions, and even a limit, to the way in which democratic control is exercised. The forward-looking character of monetary policy, the long time lags with which monetary policy works, the sensitivity of relevant information and the powerful market reactions to policy announcements all have to be taken into account in designing the methods of democratic control that are appropriate for the central bank.

It should be borne in mind that monetary policy and central banking are by no means the only fields in which the institutional framework for the exercise of a public policy function has to combine effectiveness and democratic control. While the classic example is the military field, other areas can also be cited such as scientific research or internal security.

In recognition of the specific requirements of a successful policy, the Treaty removes monetary policy-making from the realm of executive actions directly conducted by governments, and hence from the pressures of the day-to-day political debate, and endows the Eurosystem with substantial independence. It is precisely the need to ensure an effective and successful pursuit of its mission that requires, and at the same time justifies, the independence prerogative in the Eurosystem's institutional profile.

III. INDEPENDENCE

A dictionary definition of independence refers, inter alia, to the "freedom from outside control", the "absence of influence by others" and the "capability of thinking and acting for oneself" . In the institutional profile of the Eurosystem, the concept of independence is translated into the prohibition for the ECB and National Central Banks to take or seek instructions from any external body. The Community's public authorities, for their part, commit themselves not to seek to exert influence on the Eurosystem. Through its inclusion into the Treaty, the Eurosystem's independence prerogative has been given a solid constitutional basis.

Independence manifests itself also in a number of concrete institutional features of the Eurosystem. First, collegiality. The Eurosystem's main decision-making bodies (the Executive Board and the Governing Council) are both collegiate, as it is the case with most modern central banks today. Collegiality reinforces independent decision-making for the simple reason that a group can defend itself better than a single person from various kinds of pressures and influences, be they economic, psychological, political or intellectual. Second, the majority principle. Only superficial thinking would suggest that unanimity ensures a better recognition of all views. On the contrary, unanimity is conducive to non-decisions or to biased decisions, two evils that an independent central bank must avoid. This is why the Statute of the European System of Central Banks and the European Central Bank lay down that decisions be made by adopting the majority principle. Due to this stipulation the Governing Council cannot be held hostage by a single member who might have misguided motivations. Third, the one person - one vote rule. This fundamental institutional feature relates to the Eurosystem's independence insofar as it is essential to gear the decisions of the Governing Council towards the fulfilment of the Treaty mandate. The members of the Governing Council of the ECB are represented in a personal capacity, i.e. precisely not as representatives of their home countries and central banks. Since they explicitly do not represent a particular country it would be illogical to assign weights to their votes. By attending in a personal capacity, the members of the Governing Council do not stand for a particular national interest, but rather for their expertise and experience. Therefore, the Governing Council should not be perceived as a body that balances competing interests. On the contrary, solely on the basis of its "accumulated expertise" is the Governing Council in a position to act in full independence with the aim to fulfil its mission.

Independence is not an absolute notion, rather it should be understood as goal-related. It is relative to the fulfilment of the task for which it has been granted. The Eurosystem is independent to fulfil its mission to safeguard the currency. Consequently, any abuse of the independence prerogative, e.g. for activities which go beyond the boundaries of the clearly defined mission are inappropriate and even counterproductive, because they are likely to lead sooner or later - and understandably so - to calls to restrict independence. In order to protect their independence central banks have to "know how to behave".

In more detail, the relationship between the independence of the ECB and National Central Banks and the successful pursuit of their mission should be framed in terms of a functional requirement. The complete severance of any link between paper currencies and gold has brought about a situation in which the total quantity of money is entirely at the discretion of human decisions. Therefore, independence ultimately means to remove the decision to create money from those who have an interest in spending it, be they the business community, the banks or the State. Efforts to gain this independence pervade the history of central banking.

Originally, central banks sought gain independence from other banks and from the business community, as a means to bolster their role and credibility as the issuers of fiduciary money. One way of achieving such independence was to transfer ownership of the central bank into the hands of the state. However, in the second half of the 20th century, expanding welfare states took on a more substantive role in the national economies, using the public purse to actively direct and intervene in line with the government's political objectives. The hitherto balanced budgets disappeared, and substantial and prolonged deficit spending exposed central banks to new pressures. Central banks were obliged to grant governments privileged access to credit and came under pressure to "inflate away" the governments' debt burdens. The well-know results, high inflation and low credibility, led to increased calls to remove central banks also from the direct influence of the State. On the "long march" towards independence from economic and political interests, the creation of the Eurosystem represents a further step, taking central banking and money creation throughout Euroland out of the sphere of the State.

Historical experiences have thus borne out the validity of the vital link between independence and the successful pursuit of the mission to safeguard the currency. This is furthermore underpinned by extensive theoretical analysis and empirical evidence which reveals a strong correlation between central bank independence and a successful record of maintaining price stability.

At the same time, the clear-cut description and delimitation of the Eurosystem's tasks and competencies in the Treaty also provides a justification for the independence prerogative. This is because all individual decision pertaining to the actual policy implementation can be considered as merely instrumental to the effective attainment of the assigned objective, an objective that has been previously agreed upon in a constitutional process such as the stipulation and ratification of the Treaty. Interpreting the Eurosystem's role as a primarily technical one, the role of accomplishing a commonly agreed objective is based on the fundamental proposition that - in the medium and long run - there is no trade-off between inflation and output. It follows from this proposition that the central bank ultimately has no fundamental influence over the level of output and employment in the economy.

A recognition of this insight is particularly relevant with respect to repeated demands - voiced, inter alia, in the dialogue between the European Central Bank and the European Parliament - for monetary policy "to do more" to support growth and employment. However, the independent Eurosystem with its clearly assigned price stability mandate is not in a position "to do more". If it were to follow the misguided demands to actively promote short-term growth, e.g. through an expansionary monetary policy, the Eurosystem would be compelled to take an essentially political decision. Any such erroneous politicisation of the decisions of the central bank would in fact weaken the very basis of its independence. If a stability-oriented monetary policy really were to imply political choices - which I believe it does not - it should be subject to the normal political process of democratic societies, and not be put into the hands of independent central bankers. It is in this sense that the fundamental long-term orientation and objective of stable prices justifies the central bank's independence.

Independence as both a required and justified precondition of a successful pursuit of the given mission thus shields the Eurosystem from the short-term political considerations of various interests in society. However, this is by no means the same as the absence of democratic control. Independence and accountability are two sides of the same coin.

IV. ACCOUNTABILITY

In its dictionary definition "to be accountable" means not only to be held responsible for one's actions, but also to be required to "justify and explain actions and decisions". Accountability is an essential and constituent element of a democratic political order. In such an order, institutions and bodies with the power to affect the lives and welfare of the community must be subject to the scrutiny of the citizens or of their elected representatives. This is particularly relevant for those policy fields - such as central banking - where decisions are consciously removed from the day-to-day influences of the political arena. Thus, accountability pertains to a civic and moral obligation inherent in the political order, and is not directly related to what could be termed the "economic order".

As explained in Section III, independence implies the absence of direct influence of external actors on the policy-making process, i.e. the impossibility to interfere in the policy-making in a way that would make it deviate from the statutory mission. It is precisely because the Eurosystem has a statutory mission and has been granted independence to fulfil it, that it has to be held accountable, and that it is obliged to ex post explain and justify its decisions. Accountability is the counterweight of independence, but the latter sets a limit to the role of the institutions to which the central bank is accountable. If, say, the European Parliament were to be in a position to exercise a direct influence on the Eurosystem's decisions, this would necessarily imply a shared responsibility and the Eurosystem's obligation to explain and justify its decisions to the European Parliament would appear absurd and devoid of any meaning.

Having established the ex post character of accountability , two further questions need to be addressed in order to render this concept operational for our purposes: accountable for what? accountable to whom?

First: accountable for what? The simple answer is that the Eurosystem should be held accountable for the fulfilment of its mandate. In this context, the maintenance of price stability, and hence the formulation and implementation of the single monetary policy, is at the centre of attention. The Treaty itself provides a yardstick, the maintenance of price stability, against which the Eurosystem's actions should be measured. However, in order to further clarify this mandate, and also to facilitate the external evaluation of the Eurosystem's performance, the ECB has adopted a quantitative definition of price stability: a year-on-year increase of the Harmonised Index of Consumer Prices of below 2%, to be achieved over the medium term. Beyond being accountable with reference to its success in fulfilling its primary objective, the Eurosystem is held accountable also in relation to its other tasks. Not least in the dialogue with the European Parliament, the ECB was called upon to explain its actions and decision, inter alia, relating to payment systems, euro banknote design and production, etc.

Second: accountable to whom? As the currency is one of the most pervasive components of the social system, and given that price stability is a public good par excellence, it should be clear that the Eurosystem is, in the broadest sense, accountable to the European citizens at large. The fact that the European citizens place their trust in the Eurosystem to "safeguard the currency" and to "defend their savings" makes them the ultimate addressee of the Eurosystem's accountability.

In the political order of the European Union, the only institution that directly derives its role and legitimacy from the citizens is the European Parliament. Irrespective of the county and constituency where he or she was voted, each member of the European Parliament has been elected to pursue the European public interest, just as parliamentarians of Member States are entrusted with the national interest. The European Parliament is the institution of Europe's democratically elected representatives, which represents the interests of the peoples of Europe. This is why accountability quite appropriately relates, first and foremost, to the European Parliament andthe dialogue between the ECB and the European Parliament represents the principal means to exercise accountability. Beyond that, the ECB is engaged in a dialogue with all the bodies that play a role in the European political process: the Council of Ministers and the European Commission in the first place, but also the Economic and Social Committee. The ECB participates in meetings of the Euro-11 Group, the ECOFIN Council and the Council President and a member of the European Commission are invited to attend the meetings of the ECB Governing Council. The Eurosystem also reaches out to other relevant groups in society, such as the social partners, by joining, for example, the discussions of the Macroeconomic Dialogue. These contacts allow the ECB to explain its decisions, to share its analysis and to receive political feedback and thus be connected to the European political process. At the national level, the National Central Banks relate to their national parliaments and entertain links of communication with their national governments.

The Eurosystem thus fulfils its accountability obligation, inter alia, by way of a comprehensive dialogue with political bodies . Since Eurosystem officials take to explaining and justifying decisions in persona, the Eurosystem follows a path which differs from other central banks that have chosen to publish the minutes (and in some cases also the voting record) of the meetings of their decision-making bodies. There are a number of good reasons for the Eurosystem's choice. As I shall explain below (in Section V.), we consider the extended statements and press conferences given by the ECB President in the immediate aftermath of Governing Council meetings a more appropriate means to explain and justify the policy decisions. This is because the Eurosystem conveys its message in real-time and is thus in a position to send a timely signal to the markets and the media as well as to the public at large. The ex post justification and explanation of decisions as contained in published minutes usually become available after a number of weeks, i.e. at a time when the relevant "action" in the markets is already matter of the past. As for the publication of the voting record, the Eurosystem is opposed to this proposition, not least in order to shield the members of the Governing Council from undue influence from the Member States. In my view, a publication of votes harbours the danger of encouraging an interpretation of the Governing Council as a collection of "national factions". It is encouraging to observe a growing recognition and appreciation for the Eurosystem's distinct method of accountability, which derives not only from the specificity of the Eurosystem's institutional profile but also from the environment in which it is embedded.

It should be clear from the above that the Eurosystem neither operates in an institutional vacuum, nor does it wish to do so. Being held accountable is not a burden for the Eurosystem, on the very contrary it is a safeguard. It is through discharging its accountability tasks, through exchanges of views and opinions within the European public sphere, including open criticism and controversy, that the Eurosystem can earn its independence every day, and grow in stature. By explaining and justifying its decisions the Eurosystem will be called to face up to challenges and master difficulties. I am confident that in this way, Europe's new and still young central bank will further build the credibility it needs to carry out its complex tasks with success.

V. TRANSPARENCY

The next notion in the glossary is transparency, which to many observers and critics is the foremost aspect of the institutional profile of a central bank today. A meaningful discussion of transparency should start by clearly distinguishing this notion from that of accountability. Obviously, if the two notions coincided no separate discussion of transparency would be called for. Admittedly, accountability and transparency to a large extent share the same "object", i.e. the Eurosystem's tasks and actions. However, related as they may be, they should by no means be used interchangeably, as it is often done in public discourse. In particular, certain quite legitimate criticisms of the ECB's transparency record should not be mixed up with claims of insufficient accountability.

For our purposes, I shall adopt a conceptual classification, which, albeit subjective, appears to me rather helpful in clarifying the distinction between transparency and accountability. As set out above, accountability refers to a political duty, based on the need for democratic control over the exercise of power. It also refers to an ex post explanation and justification of decisions taken independently. Transparency, on the other hand, could be conceived as an economic requirement. It should be seen as a means to a successful implementation of the Eurosystem's mission, as an essential ingredient of policy-making in a complex environment.

The view of the Eurosystem can be summarised as follows. The price formation mechanism, and hence price stability, is influenced by many economic actors, such as businesses, trade unions, governments, financial institutions and households. The price decisions of millions of economic agents in the economy can support or hinder the Eurosystem's efforts to effectively "safeguard the currency". Such decisions are based, inter alia, on the perceived and expected attitude of the central bank. By being transparent, i.e. by communicating its policy decisions in real-time, or even by making its intentions known beforehand, the central bank can promote a better understanding of its policy decisions, which, in turn, enhances the effectiveness of its policy. Therefore, I regard transparency as a notion that belongs to the economic order rather to the realm of the political order, i.e. as aimed at increasing the effectiveness of policy rather than fulfilling a democratic obligation.

Relating transparency to the effectiveness of policy is consistent with the dictionary, which defines it, in its figurative sense, as "ease of assessment of information" . In line with this reading of the term, transparency clearly cannot consist of a constant stream of information releases and policy announcements. Since financial markets react highly sensitively to messages sent out by the Eurosystem and its officials, overburdening them with information would in fact lead to less transparency, since the key policy messages would become difficult to discern among the flood of releases. Even worse, it could lead to confusion and disorder in the markets with severe consequences for stability itself.

In practical terms, the Eurosystem's transparency record could be considered outstanding, not least by international standards. In its attempts to be as transparent as possible, the Eurosystem has established - and continues to develop - a novel framework to provide information to markets and observers (see also section VII.). The ECB holds extended press conferences once a month after a Governing Council meeting, at which the ECB President delivers a comprehensive introductory statement which explains the monetary policy decisions taken, and outlines in detail the reasoning and the main arguments which have led to the decision. A question and answer session allows the media and the public to gain further insights into the deliberations of the Governing Council. Both are made available on the ECB web-site before the end of the day. In so doing, the Eurosystem provides real-time information; the markets, the media and the public are not left guessing as to what have been the main reasons for any particular decision. By way of this immediate and substantive communication, the Eurosystem provides a high degree of transparency, and fosters the effectiveness of its policy.

By contrast, other central banks follow a different practice, whereby a brief statement regarding the monetary policy decisions taken is immediately released to the public. The underlying reasoning and the arguments that have led to the decision can be found in the minutes, which are made public six to nine weeks after the actual decision. Thus, the actual decision is transmitted to the markets in real-time, while any substantive explanation of reasons behind the decision - and precisely this is the information which the markets call for in order to find out how the central bank 'ticks' - will become available some weeks later.

Conceptualising transparency (i.e. providing real-time information) and accountability (explaining and justifying decisions ex post) as two ends of a continuum, the Eurosystem's has positioned itself more towards the ends of transparency, not least for reasons of policy effectiveness. The Eurosystem has chosen to reveal to the markets and the public at large a comprehensive explanation of its policy decisions immediately after they have been taken, but does not publish minutes of the meeting. In other countries the decision was to provide less information in real-time (i.e. to be less transparent), but to explain and justify decisions by making public deliberations in their entirety within several weeks.

Another criticism with which the Eurosystem has been confronted relates to its monetary policy strategy. Most recently, for example, a widely quoted report observed that the "Eurosystem's monetary policy framework, with its emphasis on two pillars, seems better designed to conceal strategy than to help the public understand it." Aware as it is that being independent does not mean to be infallible, the ECB certainly takes such criticism seriously. At the same time, I do not agree with the criticism and - for the sake of transparency itself - I would like to explain why. My disagreement is rooted in the way the very concept of a monetary policy strategy should be understood. The contention of opaqueness, or lack of transparency, is based on an understanding of the notion of a strategy with which I do not concur.

It should be borne in mind that a strategy is, in the first place, an instrument to prepare and take policy decisions. We regard it as a useful instrument, although we have to recognise that highly successful and reputed central banks have not felt the need to adopt a frame of reference as explicitly formulated as ours. To our mind, such frame of reference helps to structure discussions and to guide and orient policy decisions.

A monetary policy strategy should not be seen as a machine that automatically delivers decisions. It is not a substitute for judgement nor for the act of will that constitutes the essence of any decision, and that makes decision fundamentally different from analysis. Any policy-making process can be seen as a process in which the degrees of freedom are gradually "used up" until they are reduced to zero at the moment of the "final" decision. In the case of the Eurosystem's this process starts in the Treaty (with the assignment of price stability as the primary policy objective) and ends in each of the periodic meetings of the Governing Council where interest rates are set. Of the numerous stages that lie between these two extremes, one is the definition of price stability. Another one has been the adoption of a strategy, which the dictionary defines a "plan of [] policy designed to achieve an overall aim" .A strategyaims atproviding an orderly framework for the deliberations of the Governing Council. It is no rigid screenplay in which any room for discretion has been suppressed. Members of the Executive Board or the Governing Council of the ECB may, as they do, fully agree on the strategy and yet disagree on what should be done today or next week. Within the strategy there must be, and there is, scope for a diversity of views, for deliberation and judgement. Why would collegiate decision-making bodies otherwise be needed?

As such, a strategy does not need to be disclosed. By making public and explicit its monetary policy strategy, the Eurosystem set itself apart from a number of central banks around the world. As a matter of fact, the central banks of the other major world currencies do not have a publicly disclosed strategy.Even within Europe, the Bundesbank's openly communicated policy framework of monetary targeting was more an exception than the rule. The Eurosystem has decided to make public and explain its strategy because it believes, as explained above, that that the effectiveness of monetary policy is enhanced if it is understood by the markets, the media and the public at large. In this respect, the Eurosystem's transparent mode of monetary policy-making indeed represents a "new European type of central banking."

Why does our disclosed strategy draw criticism and at times even appears to be the very cause of an alleged lack of transparency? My answer to this intriguing question is twofold. Firstly, our strategy is not a single variable (we would say single pillar) strategy. Unlike all those strategies previously promulgated by other central banks, our strategy does not select just the money stock, or the inflation rate, or the exchange rate (these are the three options that dominate the camp today) as its exclusive reference. Somewhat surprisingly, even some sophisticated observers find it difficult to grasp this difference. Secondly, although it represents a contribution to the transparency, and hence the effectiveness, of monetary policy, a disclosed strategy is not a substitute for a "track record" of successful policy-making.

For the sake of greater transparency, the ECB has also been called upon, inter alia, by the European Parliament, to publish its internal forecasts and projections. While the ECB certainly takes an open-minded approach to this issue, it should be recognised that the explanatory or even predictory power of such forecasts is limited. Forecast are a synthetic and necessarily simplified representation of a complex economic reality. They also contain a static element, in that they assume that the current policy stance remains unchanged. However, as new information becomes available everyday, the appropriateness of the current policy stance will have to be continuously reappraised. In view of these limitations of forecasts and projections, which have an impact on their usefulness for the actual formulation of monetary policy and its outside evaluation, the Eurosystem has so far taken a rather cautious approach.

When dealing with a new phenomenon such as the single currency and single monetary policy in Euroland, not only the Eurosystem, its monetary policy strategy and forecasting exercises, but also the financial markets and the public at large are necessarily moving along a learning curve.

VI. PREDICTABILITY

The criticism related to the Eurosystem's transparency record could also be fuelled from a further misperception of the concept of transparency. Even a very transparent central bank that, like the Eurosystem, communicates its policy decisions in real-time and explains in detail why certain decisions have been made, cannot be entirely predictable.

Predictability implies that it can be "estimate[d] that (a specified thing) will happen in the future or will be a consequence of something" . In the case of monetary policy, any such precise estimation of future decisions is not only impossible, it is also undesirable, for the following reasons.

First, demands to pursue an exclusively rules-based - and thus entirely predictable - approach to policy, voiced in the name of transparency or predictability, reflect a misperception of what I would discern as the "art" of monetary policy-making. It is an overly simplistic view to conceive monetary policy as a mechanistic process whereby certain pressures on one side, say, aggregate demand, always generate quasi-automatic and fully predictable responses on the other side, say, in the form of interest rate moves. The "art" of monetary policy will continue to entail a large degree of judgement and as such necessarily contains an element of surprise.

Secondly, I believe that full predictability would imply a "waste of information". If the Governing Council of the ECB announced today what monetary policy decision it intends to take in two weeks' time (at, say, the next Governing Council meeting), this would imply wasting the information that might become available in the meantime (the inter-meeting period). If the members of the Governing Council were absolutely sure what they would have to decide in two weeks' time, then they should not postpone the respective decision and wait for the next Governing Council meeting.

Thirdly, since the Governing Council is a collective body, it is impossible to know in advance what information the members of the Governing Council bring to the table, and how the discussion will proceed. Any prediction as to the outcome would imply a pre-empting of the eventual decision, which is, in itself, the result of the discussion.

It follows that monetary policy, although as transparent as possible, cannot - and I my view, should not - be fully predictable. The "art" of monetary policy-making continues to include a degree of judgement which cannot be foreseen, and at times might generate surprises - though it should be restated at this point that it is not a policy of the Eurosystem to surprise the markets with its interest rate decisions.

Greater predictability - even if it were possible - does not generate credibility. The Eurosystem’s credibility should not be conceived as a simple function of its predictability. In fact, if the Eurosystem's monetary policy decision were entirely predictable to the markets, the media and the citizens, there would be no need for credibility. Establishing and fostering credibility is a continuous task which relates to the Eurosystem's capacity to deal with the uncertainty which monetary policy faces in a complex economic environment. In this process, communication plays a vital role.

VII. COMMUNICATION

The dictionary defines communication as the "imparting or exchanging of information by speaking, writing or by using some other medium", with the clear aim of a "successful conveying of ideas". Thus, communication should be conceived as a vehicle, a means to an end. As such communication is extremely important because it aids the Eurosystem to be transparent and to satisfy the need to effectively explain policy decisions.

Communication is the third and last phase in the policy process; it follows after decision and implementation. For the Eurosystem, it is also the most difficult of these phases. This can be explained with reference to the specific set-up and history of the Eurosystem.

When defining its mode of decision-making and implementation, the Eurosystem was able draw on the experience and examples of existing central banks, even though the chosen model of a consequent decentralisation of implementation tasks could be considered rather novel.

However, in terms of communication, none of the existing models could simply be adopted. Due to its set-up and functioning, the Eurosystem is faced with a number of challenges that can help to understand some of the difficulties we have experienced and to explain the criticisms voiced in this important part of the policy process. First, the Eurosystem operates with a plurality of languages , which clearly differs from the context of the communication experience of all other existing central banks. Secondly, the Eurosystem is faced with a plurality of communication conventions. One and the same message, even if perfectly translated, carries different meanings and is differently perceived in the various national contexts, stemming from the differing traditions and conventions. Thirdly, the Eurosystem addresses the market and the public with a plurality of communicators. Against the background of the inherited traditions of the National Central Banks within the Eurosystem, and not least due to the Eurosystem's institutional set-up, the tasks of communicating to markets and the public cannot - and should not - be confined to, say, the ECB President alone. A diversity of communicators need not necessarily be perceived as a disadvantage. The examples of the Federal Open Market Committee or the Bank of England's Monetary Policy Committee reveal that a free expression of multiple - and sometimes even diverging - views regarding the monetary policy stance and the decisions taken is being perceived by the markets and the media as a "healthy" reflection of the wide spectre of relevant opinions. In these cases, such breadth of views is seen as a guarantee for thorough and comprehensive deliberations of the decision-making bodies. With respect to the Eurosystem's task to conduct a single monetary policy for a currency area which is still rather heterogeneous, a similar richness of views of the members of the Governing Council certainly represents an essential advantage. It is somewhat surprising to see this point being well-recognised by critics for other central banks, and sometimes overlooked in the case of the Eurosystem. I am confident that this valuable "asset" will over time find the recognition of the markets, the media and the public at large.

Moreover, in all communication there is a sending and a receiving end. The Eurosystem is a novel monetary policy arrangement, a true change of regime. This novelty also requires some understanding and some adaptations by those to whom the Eurosystem's communicates: the markets, the media, the public at large. It would be underestimating the significance of this change in the monetary environment, if previously held standards and conventions were simply transferred and applied to the conditions of this rather unique set-up. A process of adaptation is currently underway. However, the Eurosystem is likely to face some criticisms of its communication policy also in the future, not least because the new institutional and policy framework will sometimes be seen entirely from a national perspective.

VIII. CONCLUSION

The advent of the euro and the Eurosystem has opened an entirely new chapter for Europe's economic policy constitution as well as for the evolution of central banking. It would be a fallacy to believe this regime shift - fundamental as it was - represents a "one off" event. On the contrary, the current process of adaptation to this new set-up implies a dynamic, though certainly not uncontroversial, evolution. While the institutional profile of the Eurosystem, its mission and independence, should be considered as a given in this process, Europe's new central bank is also "embedded" in the wider process of European integration.

The Eurosystem has achieved an advanced stage of integration, not only in terms of policy action, but also in terms of attitude, outlook and identification of its constituent units. However, the achievement of a similar capacity for coherent action and a unified collective vision is still underway on the part of economic policy-makers. Since the strength of a currency - and the public's confidence in it - is closely related to the political structure that supports it, the current imbalance and the Eurosystem's "institutional loneliness" will need to be addressed. As the European Union proceeds towards its objective of an "ever closer union" , the Eurosystem's interrelations with economic actors, political institutions, the media and the public at large will evolve, too.

This discussion of the Eurosystem's institutional profile, its accountability and transparency intended to provide a assessment of the status quo. However, as could be expected from a central banker, a forward-looking perspective necessarily implies making use of information that will become available in this process. As the European Union, its institutions and its common currency evolve, certain aspects of the terms defined and discussed in this glossary might well become subject to a justified re-interpretation.

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