Importantly, there was also for EU members an explicit prohibition concerning fiscal dominance, i.e. a prohibition against fiscal policy being financed by monetary expansion. Of course, the amount of work depends crucially on what type of institution is to be built. Will monetary policy be a joint decision between the participating countries’ central banks, institutionalised through the creation of a common central bank, or some alternative in between? Although centralisation is a natural part of a common monetary policy, decentralisation is pivotal through its role in accountability and acceptance. The national central banks will in this respect continue to play an important role. The convergence criteria for the euro area concern price stability, government finances, exchange rates and long-term interest rates. Each member state must satisfy all four criteria in order to be able to participate. More generally, the criteria could be described as an absolute as well as a relative measure of macroeconomic health. Absolute, since no economy benefits from, for instance, an excessive fiscal deficit or a high rate of inflation. Relative, since differences between member countries should not be too large. Of course, a common monetary policy would be made much more  BIS Review 73/2006  3  difficult, if inflation rates were to diverge substantially already at the outset. In this respect, the development among the EAC countries is very promising, as is the harmonization of statistical practices. The size of the fiscal deficits in Uganda and Tanzania, on the other hand, is less promising.

Public and political acceptance will be more likely if voters are not only given the possibility, but being helped, to form an opinion and to express it in general elections. Summing up Perhaps somewhat counterintuitive but in line with today’s seminar topic, I would like to end this speech by questioning its underlying assumption. Is it necessarily a problem having to give up national monetary policy when joining a monetary union? The assumption presupposes that what is to be stabilised is mainly driven by factors that can be affected by national policy instruments. Is this really the case? A recent cross-country study suggests that determinants of inflation have become less “country-centric” and increasingly “globe-centric” (Borio and Filardo, 2006). Of course, national stabilization policy still plays an important role, but global factors are becoming increasingly important. At the same time, business cycles in the G7 countries seem to have become increasingly synchronised, thereby narrowing the difference between domestic and global determinants of inflation. 7 As integration increases and differences diminish, monetary unions will have a greater chance of success. This chance will increase further if countries prepare their economies from a stabilizing as well as a structural perspective. Institutionally, frameworks for monetary and fiscal policy, at country and union level alike, should strive for consistency, commitment, transparency and accountability, coupled with independence of policy makers. Most importantly, the aim should be long-term stabilization rather than short-term fine-tuning. Against this back-drop, it is my belief that the advantages of a monetary union outweigh the disadvantages.