Mr Duisenberg reports on the current position and future prospects of the European System of Central Banks  (Central Bank Articles and Speeches, 27 Nov 98)
Central bank: ecb | Type: speech | Date: 1998-11-27

## Mr

Duisenberg reports on the current position and future prospects of the European System of Central BanksKeynote address to the President of the European Central Bank, Dr W.F.

Duisenberg, conference organised by the Royal Institute of International Affairs on European Econo Monetary Union Markets and Politics under the euro in London on 27/11/98.

## IntroductionLadies and Gentlemen, I should like to express my appreciation at being invited to speech at this conference organised by the Royal Institute of International Affairs. pleasure for me to be here, in London, today.The topic I am going to address relates to the current position and the future prosp European System of Central Banks.

I feel that this topic provides me with an opportunit with the objective of the ESCB and its contribution to the other policies in the Commun also briefly touch upon the decision-making in the ESCB, recall the main features monetary policy strategy and talk about our regard for openness and transparency.

The f of my talk will cover the views of the ESCB on recent economic developments and the outlook for price stability in the euro area.

## Independence, transparency and accountabilityIn

the Maastricht Treaty the ESCB has been given an independent status.

The reason politicians all over the world have come round to the view that monetary policy decisi with too close a political involvement tend to take too short a time horizon into co The consequence is that in the longer term such decisions do not support sustainable employment and income, but only lead to higher inflation.

This view is confirmed by a economic research.Independence, however, requires a clear mandate.

The ESCB has such a mandate.

Its pr objective is to maintain price stability.

Without prejudice to the objective of price ESCB will support the general economic policies in the Community.

Price stability is no in itself:

it creates the conditions in which other, higher-order, objectives can b particular, I share the deep concerns about the unacceptably high level of unemploy Europe.

The ESCB will do what it can to contribute to the solution of this prob maintaining price stability inflation expectations and interest rates can be kept at This creates a stability-oriented environment which fosters sustainable growth, a hig employment, a fair society and better living standards.

Moreover, in specific circums production, inflation and employment all move in the same direction, monetary policy c some role in stabilising output and employment growth without endangering price st However, the contribution from monetary policy can generally be only limited.

Give structural nature of the unemployment problems the solution is to be found, above structural reforms aimed at well-functioning labour and product markets.An independent central bank does not only need a clear mandate.

It has also to be an transparent institution, for at least three reasons.

First, transparency enhances the e monetary policy by creating the correct expectations on the part of economic age predictable monetary policy contributes to achieving stable prices without significant costs and with the lowest interest rate possible.

The second reason is that in a democrthe central bank has to account for its policies.

Finally, transparency towards the o can also structure and discipline the internal debate inside the central bank.Let me now turn to the ways and means of achieving transparency.

As a first element th has defined a quantitative objective for price stability.

It reads as follows: price st on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of 2%.

Although I do not consider deflation to be likely in the current environment, I may situation of falling prices would not be consistent with price stability.The Governing Council has made it clear that 'price stability is to be maintained medium term'.

The ESCB cannot be held accountable for short-run deviations from p stability, for example due to shocks in import prices or specific fiscal measures. policy reaction to short-run fluctuations in the price level would provide the wrong si market and cause unnecessary interest rate volatility.

In summary, the ESCB will rea appropriate, measured and, when necessary, gradualist manner to economic disturbance threaten price stability in the medium term, rather than in an abrupt way, in orde unnecessary disruptions of the process of economic growth.

That said, the ESCB will, w necessary, openly discuss and explain the sources of possible deviations from the qu definition of price stability.In addition, let me remind you that by focusing on the HICP for the euro area, the ESCB clear that it will base its decisions on monetary, economic and financial developments area as a whole.

The single monetary policy has to take a euro area-wide perspective: react to specific regional or national developments.The institutional implication is that the ESCB should develop into a strong unity, wi centre and strong national central banks.

It should become a truly European instituti truly European outlook.

Of course, it may take some time to arrive where we ultimately be.

We have to get used to thinking in euro area-wide terms.

In the ECB Governing Coun are already 'practising' that approaches and are making progress.

I am confident that will indeed act as a unity.Transparency and openness will be apparent from the way in which the ESCB communicat with the public.

The ESCB will regularly present its assessment of the monetary, econo financial situation in the euro area and provide information about each specific monet decision, be it a move in interest rates or an absence of change.

This will notably be of press releases, press conferences, publications and speeches.

Press releases are mad immediately after the fortnightly meetings of the Governing Council and, as you may kno always include a precise list of the decisions taken together with background informatioThere will be a monthly press conference.

Such a press conference will start with a introductory statement, as has been the case so far, and these introductory statements published immediately, without delay.

In this statement the Vice-President and I will p Governing Council's view of the economic situation and the underlying arguments fo monetary policy decisions, followed by a question and answer session.The publications of the ESCB will include, in particular, an ECB Bulletin each month a an Annual Report.

As from 1999, a detailed analysis of the economic situation in the will be presented in the monthly Bulletin.

Thematic articles in this Bulletin will incl analyses by the ECB on matters regarding the monetary policy of the ESCB and the economthe euro area.

Further, you may also recall that, as required by its Statute, the ESCB its consolidated balance sheet on a weekly basis.My colleagues on the Executive Board of the ECB and I intend to be very active in speeches dealing with all issues of relevance for the conduct of monetary policy.

I am that the Governors of the national central banks will also play their role in this respSince I am talking about the communication and external relations of the ESCB, I would underline that I am prepared to accept invitations to appear before the European Parl least four times a year to present the activities of the ESCB and the ECB's Annual Finally, it should be noted that the ESCB would have a regular exchange of informat views with Ecofin.

Representatives of the ECB will be invited to Ecofin meetings wh issues of concern to monetary policy are discussed.

A similar relationship will naturall with the euro-11, whose meetings will generally be attended by the President of th whenever matters relevant to the ESCB are on the agenda.

## Monetary policy strategy of the ESCBWe are now approaching the start of stage three of EMU.

The decision-making bodies o ECB have made a certain number of important decisions since the ESCB was established part of these decisions, the monetary policy strategy of the ESCB was recently announ explained to the public.

The selected stability-oriented strategy promotes as much con possible with the existing strategies of national central banks in the EU.

At the sa design is adapted to the unique situation of introducing a single currency in eleven which may to a certain extent change economic behaviour.

Therefore as much continui possible and as much change as required is the thrust of our strategy.Our strategy consists of two pillars.

The first is an important role for money and the broad-based assessment of the outlook for price developments in the euro area.

The mai for assigning a prominent role to money is the empirically well-founded view that inf least in the long run, is a monetary phenomenon.

This simple and obvious observation Governing Council to announce a quantitative reference value for the growth of a broad of money.

This choice will create a 'nominal anchor' for monetary policy and therefo stabilise private inflation expectations at longer horizons.

The reference value will a manner that is clearly consistent with - and serves the achievement of - price stabi be constructed such that, in the absence of special factors or other distortions, d monetary growth from the reference value will signal risks to price stability.However, it has to be clear that the reference value is different from an intermediat target, as the ESCB has not made any commitment to correct deviations of actual mo growth from the reference value over the short term.

In particular, it has been r recognised that the move to a single currency and ongoing financial innovations may g fluctuations in the selected monetary aggregate which are not necessarily associa inflationary or deflationary pressures.

For this reason, it is important to continuousl relevance of temporary factors or even structural changes in order to avoid a mechanis reaction to deviations of the chosen monetary aggregate from the reference value.

The this analysis and its impact on the ESCB's monetary policy decisions will be explaine public.Let me turn now to the second key element of the monetary policy strategy, the broa assessment of the risks to price stability.

The information contained in monetary awhile of the utmost importance, will by no means constitute the whole of the 'informati the hands of the ESCB.

In parallel with the analysis of money growth, a wide range of e and financial variables will be used to formulate an assessment of the outlook developments.

The envisaged strategy will enable the ESCB to perform a crosscheck betwe information coming from the evolution of monetary aggregates and those from other eco and financial indicators.

## Recent economic developments and prospectsLet

me turn to the current economic situation.

The euro area experienced a strength economic growth in 1997, to 2.5%, and a further acceleration has been anticipated for The global environment has, of course, deteriorated in the meantime, but this has not an observable impact on growth, which has, in any event, been increasingly led by d demand.

Inflation has remained subdued and even fallen somewhat over the past year, par result of the impact of weaker global demand on oil and commodity prices.

However favourable pattern of inflation has also been supported by domestic factors, such moderate development in unit labour costs and industrial producer prices.Concerning recent price developments, HICP inflation for the euro area fell to September, due to a strong impact from food prices, but I would not want to read too m this latest decline as some price components can be relatively volatile over short pe significantly, preliminary data suggest that various broad monetary aggregates for the are increasing at between 3 and 5%, and thus do not appear to signal any strong i inflationary or deflationary pressures.

We are in line with the consensus view that inf euro area will rise moderately in 1999, but remain below 2%.

I do not consider deflati serious risk for price stability at present.So far, despite the worsening of the global environment, euro area-wide activity has co expand at a fairly stable rate.

At around 3%, annual real GDP growth was broadly uncha the first half of 1998 from the solid growth seen in the second half of 1997.

Industria growth has slowed somewhat since the spring.

More recent evidence, particularly that area-wide survey data, may also suggest a moderation in the pace of growth and developments in these indicators will continue to be monitored closely.

Area-wide should, however, be supported by a number of domestic factors.

One factor supporting co growth, particularly in private consumption, is the gradual improvement in labour conditions.

Moreover, the lowest short-term interest rates in the euro area current 3.3%, and several countries have cut interest rates towards this level recently as process towards interest rate convergence.

The process of convergence towards this l been gradual, but should imply a reduction in the average short-term interest rate in t of about 0.5 percentage point since July.

Long-term rates also stand at low levels.

An been a marked degree of exchange rate stability among countries participating in the eu undoubtedly a welcome development from the standpoint of encouraging trade and investm Thus, our assessment is similar to that of other international organisations, that international environment deteriorates further, which is not currently expected - grow somewhat weaker in 1999.

Growth should, however, remain high enough to support contin employment creation and, assuming a recovery in the international environment, there sh a pick-up in growth in 2000.

At the meetings in December the ECB Governing Council again assess the outlook for economic and price developments.Although the economic outlook may be less favourable than expected - let us say - hal ago, I believe that the conditions for a successful launch of the euro are in place.

Yo that the ESCB will do its utmost to make the euro a stable currency.