At the same time, it gives due consideration to the unique situation which will prevail in the early years of Monetary Union. BIS Review 9/1999  –3–  The stability-oriented monetary policy strategy rests on two “pillars”. The first pillar is a prominent role for money. This is deemed to be important on account of the essentially monetary origins of inflation over the longer term. The second pillar of the monetary policy strategy is a broadly based assessment of the outlook for price developments and the risks to price stability in the euro area as a whole. The Governing Council recognises that it is important, in parallel with the assessment of monetary growth, to look at a wide range of financial and other economic indicators, including economic forecasts. This systematic analysis of all other relevant information about economic and financial conditions will ensure that the Governing Council is as well-informed as possible when taking monetary policy decisions. Monetary developments can reveal useful information about future price developments and thereby offer an important compass for the conduct of monetary policy. Therefore, it is absolutely essential for any central bank entrusted with the task of keeping prices stable to analyse and monitor the developments of monetary aggregates closely. Consequently, the Governing Council of the ECB has announced a quantitative reference value for broad monetary growth as measured by M3, which should, under normal circumstances, give some indication of future inflationary pressure.

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.