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 Bank of
Poland in Warsaw on 4 May 1999.
Introduction
First and foremost, I should like to congratulate the National Bank of Poland (the NBP) on its 75th
anniversary. The age of the NBP already suggests that as the President of the European Central Bank
(ECB), an institution that is even less than one year old and has only been conducting monetary policy
since January this year, I should be modest. I am aware that the role of the NBP has not been constant
over these 75 years and that in the past decade, in particular, the NBP has gone through a remarkable
restructuring process. My previous central bank, de Nederlandsche Bank, has, together with the
International Monetary Fund and many national central banks, been involved in assisting the NBP in
its efforts to adapt to the role of a central bank in a market economy. Of course, the real work had to
be done by you yourselves and I believe you can be proud of what has been achieved over the past
decade.
Today in my speech I should like to focus on the role of the ECB, as a truly European institution.
First of all, I shall explain the background against which the introduction of the euro and the
establishment of the ECB should be considered. Thereafter, I shall discuss the main features of the
institutional structure that determines monetary policy-making. I shall then turn to our monetary
policy strategy and the role of accountability and transparency in this strategy. I shall conclude by
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 population of
almost 300 million. The ECB started to conduct a single monetary policy for the so-called euro area.
Former national currencies, such as the French franc and the German Mark are no longer autonomous
currencies, but subdivisions of the euro. Euro banknotes and coins will only be introduced in 2002.
The voluntary transfer of monetary sovereignty from the national to the European level is unique in
history. However, it should not be seen as a single, isolated event. The introduction of the euro is part
of the process of European integration. This process started shortly after the second World War and
has now been under way for more than half a century. The aims of European integration are not only,
or even primarily, economic. Indeed, this process has been driven and continues to be driven by the
political conviction that an integrated Europe will be safer, more stable and more prosperous than a
fragmented Europe. It is true that economic integration has been the main engine of this process and
that, although it has had its ups and downs, integration has delivered important economic benefits. On
balance it has been successful.
The introduction of the euro and the establishment of the ECB are important new steps in this process
of European integration. They are not the completion of this process, for at least two reasons. First,
the launch of the euro can be compared to the launch of a rocket. A good launch is crucial, but only
the beginning of the mission. The euro has been launched successfully. The challenge now is to make
it a success. This will not happen automatically, but will require effort on the part of many authorities,
institutions and people. Second, four EU Member States have not (yet) introduced the euro. I hope
that this will happen in the future. Moreover, as you are aware, the EU itself is likely to increase its
membership over time, also to include Poland. Ultimately, this is bound to extend the euro area. This
process, too, is already requiring and will continue to require great efforts: no pain, no gain, as is
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. This
was laid down in the Treaty establishing the European Community, the so-called Maastricht Treaty,
and the Statute of the ESCB, which is an integral part of this Treaty. According to the Treaty the ECB
has the primary objective of maintaining price stability. Without prejudice to this objective, it is to
support the general economic policies in the Community, with objectives such as economic growth
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) of
the Member States which have introduced the euro. These 17 people meet every fortnight at the ECB,
in Frankfurt am Main. Decision-making on monetary policy is fully centralised. All members of the
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 decisions on
the basis of euro area-wide considerations. Regional or national monetary policy does not and cannot
exist in the euro area. There is only one, single monetary policy for the euro area as a whole.
Therefore, the ECB should develop into a truly European institution. This is a process that will
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 carried out by
the NCBs. The ECB and the 11 NCBs together are referred to as the Eurosystem. If we refer to the
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 does
not make decisions on monetary policy, but discusses issues concerning the relationship between the
"ins" and the countries I prefer to call "pre-ins", such as exchange rate issues. The third
decisionmaking body of the ECB is the Executive Board of the ECB, comprising the six executive directors of
the ECB. The Executive Board is responsible for current business and the implementation of
monetary policy as decided by the Governing Council. The staff of the ECB will, in the course of this
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 independence
and that of the participating national central banks are firmly enshrined in the Maastricht Treaty.
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 Governing
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 independence to
central banks. This tendency is evidenced by both practical experience and academic research. By
shielding monetary policy decisions from political interference, price stability can be maintained
without having to give up economic growth. Indeed, in that sense having an independent central bank
is a good thing for all concerned. The reason for central bank independence is that monetary
policymaking under the influence of politicians tends to focus too much on short-term considerations. This
can easily lead to temporary, non-sustainable increases in growth, but inevitably results in lasting
increases in inflation with no lasting gains in growth and employment at all. Politicians all over the
world have come to realise this and have decided to remove the temptation to pursue short-term gains
and to make their central bank independent. It should be underlined that granting this independence is,
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 how the
ECB should pursue its primary objective of maintaining price stability; in other words: it is silent on
what is called the monetary policy strategy. The ECB therefore formulated its strategy in the second
half of last year. That was no easy task. The introduction of the euro constitutes a structural break,
which may change the behaviour of firms and individuals and make it less predictable. To a certain
extent it is comparable to what Poland experienced when it embarked on its reform process. The rules
of the game change and this makes policy-making more complicated. Our monetary policy strategy
has taken these specific circumstances into account. It is tailored to this unique period of the
introduction of the euro, although it has elements of both monetary targeting and inflation targeting.
In the context of this strategy the ECB has provided a quantitative definition of price stability. Price
stability is defined as a year-on-year increase in the harmonised index of consumer prices (HICP) of
below 2% for the euro area as a whole. Price stability is to be maintained in the medium term.
The strategy consists of two pillars. The first pillar is a prominent role for money. Ultimately,
inflation is a monetary phenomenon. It is in the end result of too much money chasing too few goods.
Therefore, we have formulated a reference value for the growth of a broad monetary aggregate, M3,
of 4 1⁄2% on an annual basis. Growth of the money stock at this pace would provide the economy with
sufficient liquidity for growth in activity in line with trend growth, without inflation. At the end of
this year this figure will be reviewed. It should be emphasised that we did not define a target for
money growth. The reason for this is the structural break that the introduction of the euro creates. By
calling this a reference value, it is made clear that money is one variable which we look at very
carefully in order to examine whether inflationary or deflationary pressures are tending to emerge. We
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 behaviour
on account of the introduction of the euro. It is a broadly based assessment of the outlook for price
developments on the basis of an analysis of monetary, financial and economic developments. In this
context interest rates, the yield curve, wage developments, public finance, the output gap, surveys of
economic sentiment and many other indicators are analysed. Use is also made of forecasts produced
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 our primary
objective is price stability and since the euro area as a whole is a relatively closed economy with an
export share of 14% of gross domestic product, we do not have a target for the exchange rate of the
euro, for example, against the US dollar. This does not mean, and it is good to underline this once
more, that the ECB is indifferent to the external value of the euro or even neglects it. The external
value of the euro is one of the indicators we look at in the broadly based assessment of the outlook for
price developments. Within that framework, we constantly monitor exchange rate developments,
analyse them and shall act on them, if and when this becomes necessary. However, such action will
never be mechanistic, nor will it be isolated. The external value of the euro and its development are
analysed and considered in the context of other indicators of future price developments. The ECB also
tries to assess international confidence in the still very young euro. Of course, the level of
international confidence in the euro is not the only factor determining its external value, nor is the
exchange rate the only indicator of confidence in the euro. It is, for instance, encouraging to see how
the euro has been received on the international money and capital markets. I am sure that an internally
stable euro will also strongly underpin international confidence in this currency, as it has for other
currencies in the past.
As the currency of a very large area, the issue of the international role of the euro naturally arises.
The ECB takes a neutral stance regarding this role. It will neither be stimulated, nor hindered. On the
one hand, an international currency has advantages for citizens in the euro area, on the other, it may
sometimes complicate the conduct of monetary policy when a large amount of euro is circulating
outside the euro area. We shall leave the development of the international role of the euro to market
participants and market forces. If history is a guide as to what will happen, there will be a gradual
process whereby the euro will have an increasingly international role. Such a gradual development
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 is already
considerable in those countries aspiring to join the EU, including Poland. I shall elaborate on this
issue at the end of my speech.
Coming back to our monetary policy strategy, I should like to point out that it is important to make
clear what monetary policy can and cannot do. Monetary policy can maintain price stability, but only
in the medium term. In the short term prices are also influenced by non-monetary developments.
Moreover, monetary policy measures only have an impact on prices with long, variable and not
entirely predictable time-lags of between 1.5 and 2 years. Therefore, monetary policy-making should
have a forward-looking character. Today's inflation is the result of past policy measures, and current
policy measures only affect future inflation. The uncertainty of the economic process in a market
economy is another reason for policy-makers to be modest. The ECB does not pursue an activist
policy. Precise steering of the business cycle or a cyclically-oriented monetary policy are not feasible
and are likely to destabilise rather than stabilise the economy. Some commentators have interpreted
our recent interest rate reduction as a change to a more cyclically-oriented monetary policy strategy.
This is not true. Our strategy was, is and shall remain medium term-oriented and firmly focused on
maintaining the price stability which currently prevails in the euro area.
Monetary policy should be supported by sound budgetary policies and wage developments in line
with productivity growth and taking into account the objective of price stability. Otherwise, price
stability can only be maintained at a high cost in terms of lost output and employment. This also
explains why independence should not mean isolation. It is important to have a regular exchange of
information and views with other policy-makers. The Maastricht Treaty stipulates that the President
of the ECB is invited to meetings of the EU Council meeting in the composition of the Ministers of
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 President
of the Council of Ministers may submit motions for deliberation. Apart from these formal contacts,
there are many informal contacts, for example in the context of the so-called Euro-11 group of finance
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 level of
unemployment in the euro area. Structural problems call for structural solutions, in this case measures
targeted at making labour and product markets work more flexibly. The best contribution the ECB's
monetary policy can make in this context is to maintain price stability. In this way one of the
conditions for sustainable growth in incomes and employment is created. As important as this is, it
should be realised that jobs are created by firms which are confident about the future and not by
central banks.
Accountability and transparency
Accountability for policies is the logical complement to independence in a democratic society. The
Maastricht Treaty includes a number of provisions in this respect. First, there is the mandate to pursue
price stability. This provides a qualitative measure against which the ECB's performance can be
measured. As I have already mentioned, we have decided to enhance this by providing a quantitative
definition of price stability. One of the aims of publishing our monetary policy strategy is to make our
policy decisions transparent.
The ECB has to publish an annual report in which, inter alia, the monetary policy of the previous and
current year are discussed. I present this Annual Report to the EU Council and to the European
Parliament, which may hold a general debate on the basis of it. The President and other members of
the Executive Board of the ECB may be heard by the competent committees of the European
Parliament. I have agreed to appear before the European Parliament at least four times a year. The
ECB has to report on its activities at least quarterly. It has been decided to go beyond this requirement
and to publish a monthly bulletin.
It is my view that the main way to achieve accountability is through being transparent and open. In
passing, I should like to note that transparency also enhances the effectiveness of a central bank. The
better it is understood, the more successful a central bank is. Apart from the activities I have already
mentioned, transparency is achieved in several ways. Every month, after the first meeting of the
Governing Council, the Vice-President and I give a press conference. I start the conference with a
comprehensive introductory statement, in which I explain the decisions taken by the Governing
Council and the underlying analysis and arguments for and against. This introductory statement is
published immediately on the ECB's Internet Web site. This is followed by a question and answer
session attended by several hundred journalists. The questions and answers are also published on the
Internet shortly afterwards. All the members of the Governing Council frequently make speeches, give
interviews and contribute to journals and books. Thousands of people visit the ECB and the national
central banks each year and, for our part, we and our staff attend many conferences and other public
events.
EU enlargement
The European integration process continues. The euro should be made a success. I have already
explained how we have started the process of doing that. Some observers have criticised the EU for its
"obsession with its own internal dynamics", in particular in the context of European Economic and
Monetary Union (EMU). With all energies focused on meeting the convergence criteria and the
preparation for the launch of the euro, Europeans outside the EU have wondered whether EMU and
enlargement are not mutually exclusive objectives.
Let me briefly comment on this issue. After the historic decision to complete the European Single
Market in the 1980s, it was felt that economic integration should not stop at that point. To fully reap
the rewards of economic integration within the Community, a single currency was felt necessary; a
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 full use
would be made of the economic potential of the Single Market. This idea continues to be the focus of
European policy-makers, as evidenced by the association agreements and the ongoing accession
negotiations with a number of European countries, Poland among them. Good and mutually beneficial
economic relations with third countries in Europe and further afield are a pillar of EU policy
orientation. Recognising this, the principles of an open market economy with free competition are
enshrined in the Treaty on European Union. EMU will not weaken this commitment, but rather
reinforce it. Closer co-operation in Europe and the respect of common principles in the political,
economic and social fields are likely to form the basis for further integration. The ECB shall
contribute to this process within the scope of its responsibility.
Countries wishing to deepen their monetary co-operation to the ultimate extent possible by forming a
monetary union will have to adapt their economic and legal systems to the standards required by the
Treaty and aim at a sufficient degree of economic convergence. In the absence of these conditions,
adjustment costs for both current and new participants could be high. Any premature decision on the
adoption of the euro could have severe repercussions on a country's competitiveness and trigger
painful economic adjustments. Therefore, implementation of the necessary institutional reforms and
of a sufficient degree of convergence should not be considered as an obstacle preventing further
integration in Europe, but rather as an essential means of ensuring the lasting success of EMU, for
existing and new participants alike. Looking at the impressive progress made in a relatively short time
in this country, there is no reason to be pessimistic about Poland' s chances of meeting these
standards and convergence criteria. I shall not venture, however, to predict when this will be the case.
Even at the current juncture, though, EMU in one part of Europe is already having an impact on the
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 provide the
countries in the region with an important reference currency, an anchor towards which, should
the intention arise, monetary policy could credibly be oriented.
• Furthermore, EMU is set to bring about the development of a truly unified European financial
market, close to that of the United States in depth and sophistication. The competitive pressures
of this euro area financial market will create more favourable financing conditions for borrowers.
A number of central and eastern European countries have already successfully tapped this
market.
In view of these effects, it is altogether natural that the ECB has started to follow with great interest
economic and financial developments in the wider Europe, particularly in those countries which have
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 people in
11 countries. It may also become a unifying symbol, standing for all that the peoples of Europe have
in common. Consequently, the public perception of the euro could endow the single currency with a
role in the European integration process reaching beyond monetary policy in the strict sense. May the
euro contribute to the establishment of what the preamble to the Treaty Establishing the European
Community calls: "an ever closer union among the peoples of Europe" .