## Mr Duisenberg offers his view on the role of the European Central Bank in a united Europe
Speech by the President of the European Central Bank, Dr W F Duisenberg, at the National B Poland in Warsaw on 4 May 1999.
## Introduction
First and foremost, I should like to congratulate the National Bank of Poland (the NBP) o anniversary. The age of the NBP already suggests that as the President of the European Cent (ECB), an institution that is even less than one year old and has only been conducting monet since January this year, I should be modest. I am aware that the role of the NBP has not be over these 75 years and that in the past decade, in particular, the NBP has gone through a restructuring process. My previous central bank, de Nederlandsche Bank, has, together w International Monetary Fund and many national central banks, been involved in assisting the its efforts to adapt to the role of a central bank in a market economy. Of course, the rea be done by you yourselves and I believe you can be proud of what has been achieved over t decade.
Today in my speech I should like to focus on the role of the ECB, as a truly European i First of all, I shall explain the background against which the introduction of the eu establishment of the ECB should be considered. Thereafter, I shall discuss the main featu institutional structure that determines monetary policy-making. I shall then turn to ou policy strategy and the role of accountability and transparency in this strategy. I shall briefly addressing the issue of EU enlargement.
## The process of European integration
On 1 January of this year the euro was introduced in 11 countries with a combined popul almost 300 million. The ECB started to conduct a single monetary policy for the so-called Former national currencies, such as the French franc and the German Mark are no longer auto currencies, but subdivisions of the euro. Euro banknotes and coins will only be introduced i
The voluntary transfer of monetary sovereignty from the national to the European level is history. However, it should not be seen as a single, isolated event. The introduction of th of the process of European integration. This process started shortly after the second Worl has now been under way for more than half a century. The aims of European integration are n or even primarily, economic. Indeed, this process has been driven and continues to be driv political conviction that an integrated Europe will be safer, more stable and more prosper fragmented Europe. It is true that economic integration has been the main engine of this p that, although it has had its ups and downs, integration has delivered important economic b balance it has been successful.
The introduction of the euro and the establishment of the ECB are important new steps in th of European integration. They are not the completion of this process, for at least two re the launch of the euro can be compared to the launch of a rocket. A good launch is crucia the beginning of the mission. The euro has been launched successfully. The challenge now is it a success. This will not happen automatically, but will require effort on the part of man institutions and people. Second, four EU Member States have not (yet) introduced the euro that this will happen in the future. Moreover, as you are aware, the EU itself is likely membership over time, also to include Poland. Ultimately, this is bound to extend the euro process, too, is already requiring and will continue to require great efforts: no pain, often the case.
## The institutional framework of the single monetary policy
Let me now turn to the institutional framework for the conduct of the single monetary policy. was laid down in the Treaty establishing the European Community, the so-called Maastricht Treat and the Statute of the ESCB, which is an integral part of this Treaty. According to the Treaty t has the primary objective of maintaining price stability. Without prejudice to this objective, support the general economic policies in the Community, with objectives such as economic growt and high employment.
Decisions on monetary policy are made by the Governing Council of the ECB. This body comprises the six executive directors of the ECB and the 11 governors of the national central banks (NCBs the Member States which have introduced the euro. These 17 people meet every fortnight at the EC in Frankfurt am Main. Decision-making on monetary policy is fully centralised. All members of t Governing Council have one vote, whether they come from Germany or Luxembourg. This is because of an important principle. They are not representing their country, but are obliged to take deci the basis of euro area-wide considerations. Regional or national monetary policy does not and ca exist in the euro area. There is only one, single monetary policy for the euro area as a Therefore, the ECB should develop into a truly European institution. This is a process that inevitably take some time, but my feeling is that we are already making good progress.
The execution of monetary policy is to a great extent decentralised. It is in large part carri the NCBs. The ECB and the 11 NCBs together are referred to as the Eurosystem. If we refer to t ECB and the 15 NCBs of all EU Member States, we speak of the European System of Central Banks (ESCB). The General Council of the ECB meets quarterly and comprises the President and VicePresident of the ECB and the 15 governors of the NCBs of all the EU Member States. This body doe not make decisions on monetary policy, but discusses issues concerning the relationship between 'ins' and the countries I prefer to call 'pre-ins', such as exchange rate issues. The third d making body of the ECB is the Executive Board of the ECB, comprising the six executive directors the ECB. The Executive Board is responsible for current business and the implementation o monetary policy as decided by the Governing Council. The staff of the ECB will, in the course of year, reach a level of between 750 and 800 and is likely to grow further in the years ahead.
The ECB is one of the most, if not the most, independent central bank in the world. Its indepen and that of the participating national central banks are firmly enshrined in the Maastricht Members of the Governing Council are not allowed to take or seek instructions from anybody politicians included. Politicians are not allowed to give such instructions. Members of the Gov Council have a term of office of at least five years. The ECB is financially independent.
The independent status of the ECB fits into the recent worldwide trend of granting independenc central banks. This tendency is evidenced by both practical experience and academic research. shielding monetary policy decisions from political interference, price stability can be main without having to give up economic growth. Indeed, in that sense having an independent central b is a good thing for all concerned. The reason for central bank independence is that monetary po making under the influence of politicians tends to focus too much on short-term considerations. can easily lead to temporary, non-sustainable increases in growth, but inevitably results in increases in inflation with no lasting gains in growth and employment at all. Politicians all world have come to realise this and have decided to remove the temptation to pursue short-term g and to make their central bank independent. It should be underlined that granting this independen as it should be, a political decision. An independent central bank needs a clear legal mandate.
## The monetary policy strategy
The ECB has, as I mentioned earlier, such a mandate. However, the Treaty does not specify ECB should pursue its primary objective of maintaining price stability; in other words: it what is called the monetary policy strategy. The ECB therefore formulated its strategy in half of last year. That was no easy task. The introduction of the euro constitutes a stru which may change the behaviour of firms and individuals and make it less predictable. To extent it is comparable to what Poland experienced when it embarked on its reform process. of the game change and this makes policy-making more complicated. Our monetary policy str has taken these specific circumstances into account. It is tailored to this unique pe introduction of the euro, although it has elements of both monetary targeting and inflation
In the context of this strategy the ECB has provided a quantitative definition of price s stability is defined as a year-on-year increase in the harmonised index of consumer prices below 2% for the euro area as a whole. Price stability is to be maintained in the medium ter
The strategy consists of two pillars. The first pillar is a prominent role for money. inflation is a monetary phenomenon. It is in the end result of too much money chasing too f Therefore, we have formulated a reference value for the growth of a broad monetary aggrega of 4 ½% on an annual basis. Growth of the money stock at this pace would provide the econom sufficient liquidity for growth in activity in line with trend growth, without inflation. this year this figure will be reviewed. It should be emphasised that we did not define money growth. The reason for this is the structural break that the introduction of the euro calling this a reference value, it is made clear that money is one variable which we lo carefully in order to examine whether inflationary or deflationary pressures are tending to do not, however, react mechanistically to changes in money growth.
The formulation of the second pillar is also prompted by the potential changes in economic on account of the introduction of the euro. It is a broadly based assessment of the outlo developments on the basis of an analysis of monetary, financial and economic developments. context interest rates, the yield curve, wage developments, public finance, the output gap economic sentiment and many other indicators are analysed. Use is also made of forecasts p by other bodies and internally for inflation and other economic variables.
This brings me to the role of the exchange rate of the euro in our strategy. Since o objective is price stability and since the euro area as a whole is a relatively closed eco export share of 14% of gross domestic product, we do not have a target for the exchange r euro, for example, against the US dollar. This does not mean, and it is good to underlin more, that the ECB is indifferent to the external value of the euro or even neglects it. value of the euro is one of the indicators we look at in the broadly based assessment of th price developments. Within that framework, we constantly monitor exchange rate developm analyse them and shall act on them, if and when this becomes necessary. However, such acti never be mechanistic, nor will it be isolated. The external value of the euro and its dev analysed and considered in the context of other indicators of future price developments. The tries to assess international confidence in the still very young euro. Of course, t international confidence in the euro is not the only factor determining its external valu exchange rate the only indicator of confidence in the euro. It is, for instance, encouragin the euro has been received on the international money and capital markets. I am sure that an stable euro will also strongly underpin international confidence in this currency, as it currencies in the past.
As the currency of a very large area, the issue of the international role of the euro na The ECB takes a neutral stance regarding this role. It will neither be stimulated, nor hind one hand, an international currency has advantages for citizens in the euro area, on the o sometimes complicate the conduct of monetary policy when a large amount of euro is circ outside the euro area. We shall leave the development of the international role of the eur
participants and market forces. If history is a guide as to what will happen, there will be a process whereby the euro will have an increasingly international role. Such a gradual developm would also be a welcome development, if only to prevent the euro from becoming too strong externally at some point in time. It is likely and understandable that interest in the euro i considerable in those countries aspiring to join the EU, including Poland. I shall elaborate issue at the end of my speech.
Coming back to our monetary policy strategy, I should like to point out that it is important t clear what monetary policy can and cannot do. Monetary policy can maintain price stability, but in the medium term. In the short term prices are also influenced by non-monetary development Moreover, monetary policy measures only have an impact on prices with long, variable and no entirely predictable time-lags of between 1.5 and 2 years. Therefore, monetary policy-making sho have a forward-looking character. Today's inflation is the result of past policy measures, and policy measures only affect future inflation. The uncertainty of the economic process in a m economy is another reason for policy-makers to be modest. The ECB does not pursue an activis policy. Precise steering of the business cycle or a cyclically-oriented monetary policy are not and are likely to destabilise rather than stabilise the economy. Some commentators have interpr our recent interest rate reduction as a change to a more cyclically-oriented monetary policy st This is not true. Our strategy was, is and shall remain medium term-oriented and firmly focuse maintaining the price stability which currently prevails in the euro area.
Monetary policy should be supported by sound budgetary policies and wage developments in lin with productivity growth and taking into account the objective of price stability. Otherwise, stability can only be maintained at a high cost in terms of lost output and employment. This explains why independence should not mean isolation. It is important to have a regular exchange information and views with other policy-makers. The Maastricht Treaty stipulates that the Presi of the ECB is invited to meetings of the EU Council meeting in the composition of the Minister Economy and Finance whenever there are issues on the agenda which are relevant to the ECB' s tasks. The President of the Council of Ministers and a member of the European Commission may attend meetings of the Governing Council, although they do not have the right to vote. The Presi of the Council of Ministers may submit motions for deliberation. Apart from these formal conta there are many informal contacts, for example in the context of the so-called Euro-11 group of fi ministers from the euro area countries. I regularly attend meetings of this group.
Monetary policy cannot be used to solve structural problems, such as the unacceptably high lev unemployment in the euro area. Structural problems call for structural solutions, in this case m targeted at making labour and product markets work more flexibly. The best contribution the ECB monetary policy can make in this context is to maintain price stability. In this way one o conditions for sustainable growth in incomes and employment is created. As important as this i should be realised that jobs are created by firms which are confident about the future and n central banks.
## Accountability and transparency
Accountability for policies is the logical complement to independence in a democratic society. Maastricht Treaty includes a number of provisions in this respect. First, there is the mandate to price stability. This provides a qualitative measure against which the ECB's performance can measured. As I have already mentioned, we have decided to enhance this by providing a quantitat definition of price stability. One of the aims of publishing our monetary policy strategy is to m policy decisions transparent.
The ECB has to publish an annual report in which, inter alia, the monetary policy of the previo current year are discussed. I present this Annual Report to the EU Council and to the Europ Parliament, which may hold a general debate on the basis of it. The President and other members
the Executive Board of the ECB may be heard by the competent committees of the Europ Parliament. I have agreed to appear before the European Parliament at least four times a ECB has to report on its activities at least quarterly. It has been decided to go beyond th and to publish a monthly bulletin.
It is my view that the main way to achieve accountability is through being transparent an passing, I should like to note that transparency also enhances the effectiveness of a centr better it is understood, the more successful a central bank is. Apart from the activities mentioned, transparency is achieved in several ways. Every month, after the first meeti Governing Council, the Vice-President and I give a press conference. I start the conferen comprehensive introductory statement, in which I explain the decisions taken by the Go Council and the underlying analysis and arguments for and against. This introductory sta published immediately on the ECB's Internet Web site. This is followed by a question and session attended by several hundred journalists. The questions and answers are also publis Internet shortly afterwards. All the members of the Governing Council frequently make speech interviews and contribute to journals and books. Thousands of people visit the ECB and the central banks each year and, for our part, we and our staff attend many conferences and ot events.
## EU enlargement
The European integration process continues. The euro should be made a success. I have explained how we have started the process of doing that. Some observers have criticised the 'obsession with its own internal dynamics', in particular in the context of European Econ Monetary Union (EMU). With all energies focused on meeting the convergence criteria and preparation for the launch of the euro, Europeans outside the EU have wondered whether EMU enlargement are not mutually exclusive objectives.
Let me briefly comment on this issue. After the historic decision to complete the Europe Market in the 1980s, it was felt that economic integration should not stop at that point. the rewards of economic integration within the Community, a single currency was felt nece logic pointedly encapsulated in the title of one report: 'One market, one money'.
Hence, the underlying idea of EMU was to advance European integration and to ensure that would be made of the economic potential of the Single Market. This idea continues to be the European policy-makers, as evidenced by the association agreements and the ongoing acce negotiations with a number of European countries, Poland among them. Good and mutually benef economic relations with third countries in Europe and further afield are a pillar of orientation. Recognising this, the principles of an open market economy with free compet enshrined in the Treaty on European Union. EMU will not weaken this commitment, but ra reinforce it. Closer co-operation in Europe and the respect of common principles in the economic and social fields are likely to form the basis for further integration. The contribute to this process within the scope of its responsibility.
Countries wishing to deepen their monetary co-operation to the ultimate extent possible by monetary union will have to adapt their economic and legal systems to the standards requir Treaty and aim at a sufficient degree of economic convergence. In the absence of these co adjustment costs for both current and new participants could be high. Any premature decisi adoption of the euro could have severe repercussions on a country's competitiveness and painful economic adjustments. Therefore, implementation of the necessary institutional ref of a sufficient degree of convergence should not be considered as an obstacle preventin integration in Europe, but rather as an essential means of ensuring the lasting success o existing and new participants alike. Looking at the impressive progress made in a relatively
in this country, there is no reason to be pessimistic about Poland' s chances of meeting standards and convergence criteria. I shall not venture, however, to predict when this will be th
Even at the current juncture, though, EMU in one part of Europe is already having an impact on whole region. Let me briefly mention two aspects:
- If the euro emerges, as I believe it will, as a strong and stable currency, it will pro countries in the region with an important reference currency, an anchor towards which, sho the intention arise, monetary policy could credibly be oriented.
- Furthermore, EMU is set to bring about the development of a truly unified European financi market, close to that of the United States in depth and sophistication. The competitive pre of this euro area financial market will create more favourable financing conditions for borro A number of central and eastern European countries have already successfully tapped thi market.
In view of these effects, it is altogether natural that the ECB has started to follow with gre economic and financial developments in the wider Europe, particularly in those countries which h applied for EU membership. Moreover, the ECB monitors closely the exchange rate developments with those countries which have established some form of exchange rate link to the euro.
The euro has the potential to become more than just a new currency for almost 300 million peopl 11 countries. It may also become a unifying symbol, standing for all that the peoples of Europe in common. Consequently, the public perception of the euro could endow the single currency with role in the European integration process reaching beyond monetary policy in the strict sense. Ma euro contribute to the establishment of what the preamble to the Treaty Establishing the Euro Community calls: 'an ever closer union among the peoples of Europe' .