In this context, the Stability and Growth Pact is a crucial element. Its aim is to foster the pursuit of disciplined and sustainable fiscal policies in the euro area. In so doing, it can make a significant contribution to the establishment of favourable conditions for sustained economic growth and high employment in the medium to long term. It would be counterproductive if national fiscal policies started to discontinue their efforts in the light of the achievement of Monetary Union and the currently positive price outlook. I am not fully convinced that consolidation efforts are currently being undertaken with sufficient determination in all participating Member States. Monetary policy alone - however well designed and implemented - cannot solve Europe’s economic problems. Appropriate structural reforms implemented by national governments are of the utmost importance. Much progress is required in this broad area. Moreover, continued wage BIS Review 9/1999  –2–  moderation in both the public and private sectors would contribute to the reduction of the unacceptably high level of unemployment in many parts of the euro area. Unemployment in the euro area is largely structural in origin. Implementing too lax a monetary policy will not solve this problem, but rather exacerbate it over the medium term, as inflation distorts investment and savings decisions, raises the risk premium in long-term interest rates and undermines the allocative efficiency of the price mechanism. Only effective structural policies that improve the flexibility and efficiency of labour and goods markets can reduce unemployment in a successful and lasting manner.

In other words, in the absence of further disturbances to the economy or the emergence of new and unanticipated threats to price stability, this level of interest rate is considered to be consistent with the primary objective of maintaining price stability over the medium term. Our announcement helped to resolve some uncertainty at a time when the practical, technical and logistical tasks required by the changeover weekend were uppermost in our minds and in those of market participants. The first main refinancing operations of the Eurosystem were successfully settled. While paying due attention to the uncertainties related to the phasing-in of the new system, the decisions were taken on the basis of the liquidity conditions prevailing in the euro area money market as a whole. In addition to the refinancing operations, the Eurosystem offers standing facilities, which can be accessed by credit institutions via the NCBs. The deposit and marginal lending facilities constitute, in normal circumstances, the upper and lower bound for the overnight market interest rate. As a transitional measure, the Governing Council of the ECB had narrowed the corridor established by the interest rates on the Eurosystem’s standing facilities from 4 January until 21 January 1999. The intention was to facilitate the necessary adjustments to the new institutional environment resulting from the transition to Stage Three. BIS Review 9/1999  –6–  At its last meeting, the Governing Council of the ECB confirmed its earlier assessment of the outlook for price stability.