forward - looking manner. the advantages of our strategy have become more and more obvious over time. the strategy, with its medium - term orientation and its monetary pillar, ensures that longer - term risks to price stability – emanating from the well - documented close link between monetary developments and trend inflation – are duly taken into account in the conduct of monetary policy. moreover, it is increasingly recognised that our strategy represents a pragmatic solution to the challenges faced by central banks to look beyond standard forecasting horizons, notably when confronted by inflated asset prices and evolving financial imbalances. the empirically evident link between monetary developments and evolving imbalances in asset and credit markets implies that our strategy, with the importance it confers on monetary analysis, enables us to detect these imbalances at an early stage and to respond to the implied risks to financial, economic and price stability in a timely, forward - looking manner. all in all, the strategy has served us well! based on its assessment of the risks to price stability, the governing council of the ecb decides, based on consensus, on the level of policy rates it deems consistent with mediumterm price stability in the euro area. the governing council of the ecb is composed of the six members of the ecb ’ s executive board and the governors of the national central banks of the eurosystem. the committee - structure of the governing council, which reflects the federal nature of the eurosystem, benefits the sound conduct of monetary policy in the euro area. the academic literature shows that monetary policy making by committee leads in general to better informed policy decisions by bringing together information and expertise from people with different backgrounds. for the euro area, this argument is of particular relevance due to its characteristic feature of cultural and economic diversity. indeed, the composition of the governing council enhances the gathering and sharing of information on economic developments in the euro area and ensures that this information is duly and effectively reflected in our monetary policy decisions. another important feature of the eurosystem is that monetary policy decision - making is centralised, while its implementation is decentralised. the executive board of the ecb is then responsible for the implementation of the policy decision of the governing council by adjusting the liquidity situation in the money market in a way that steers short - term money market rates towards the level of the ecb ’ s policy rate. these monetary policy operations are normally carried out by the national central banks of the eurosystem under the

, prosperity and social stability. this insight has been established by historical evidence in europe, it has been widely accepted in policy circles and confirmed by a large number of academic studies. why is price stability crucial? • price stability allows people to concentrate on productive activities rather than on strategies to protect their wealth and income against inflation. this is of particular benefit to the weakest groups of society, which have only limited possibilities for hedging against inflation. in this sense, price stability also makes an important contribution to social stability. one should never forget that history is littered with episodes of inflation or deflation that paved the way for social upheavals and political instability, and even chaos. • another important benefit of price stability is that it reduces inflation risk premia in long - term interest rates. however, it is occasionally heard that a monetary policy geared to price stability will result in excessively high real interest rates. the contrary is true. a price stability - oriented monetary policy will actually lead to lower real interest rates, thereby increasing the incentives to invest. in addition, over time inflation leads to an increase in the real incidence of taxes and social security contributions. in the medium term, such inflation - induced decreases in the real aftertax salary and in the real after - tax return on savings will lead to a diminished incentive to supply labour and capital, which will ultimately curtail the economy ’ s long - run growth perspectives. • finally, the credible achievement of price stability fosters overall macroeconomic stability. a clear and credible focus on price stability ensures that inflation expectations are firmly anchored such that increases in inflation are not expected to be long - lasting. in addition, the medium - term orientation of the ecb ’ s monetary policy strategy is instrumental in ensuring that price stability is pursued without introducing unnecessary volatility in economic activity and financial conditions in response to exogenous shocks, such as an increase in oil prices. the ecb ’ s monetary policy can thus afford a more moderate and steady course of policy, creating a more predictable environment which supports economic activity. thus, in fulfilling its mandate to maintain price stability in the euro area, the ecb eliminates a large number of inflation - related distortions, thereby enhancing the growth potential of the euro area economy and the living standards of euro area citizens. the ecb ’ s independence let me now focus on the second feature of the institutional framework for the single currency. in order to ensure that the single monetary policy will effectively pursue price stability