connection between independence and monetary stability. many empirical studies demonstrate that central bank independence allows the monetary authority to pursue price stability more diligently, resulting in lower and less variable inflation. in brief ( with respect to maintaining the intrinsic value of money ) : institutions – in other words, independent central banks – are of key importance. hence, central bank independence is an essential requirement for monetary stability. therefore, all countries wishing to join the european monetary union are required to ensure the compatibility of national legislation – including the statutes of their national central banks – with both the treaty and the statute of the escb. this particularly applies to central bank independence. however, independent monetary policy alone cannot adequately ensure a currency ’ s intrinsic value in the long run. as a general principle, a stability - oriented monetary policy must be accompanied by a stability - oriented fiscal policy. the reason for this nexus is that unsound fiscal policies generally entail the risk of a conflict between monetary and budget policy. given high levels of public debt and associated high interest rate expenses, it cannot be ruled out that politicians will tend to exert pressure on the central bank in order to make it lower the real burden of public debt by easing monetary policy and, thus, allowing inflation to rise. although, in general, central bank independence countervails undue political influence, it does not itself solve the potential for conflict which can harm the credibility of monetary policy. consequently, fiscal discipline is not only a complementary condition of monetary stability, but also of overall macroeconomic stability. given the potential problems associated with fiscal imbalances, the avoidance of excessive deficits represents an essential prerequisite for the maintenance of fiscal policies conducive to monetary and overall macroeconomic stability. the need for sound fiscal policies is especially evident in a monetary union if negative spill - over effects from one member state ’ s budget to the rest of the union are to be avoided. this is the rationale behind the existence of the excessive deficit procedure – laid down in the treaty establishing the european community and further clarified in the stability and growth pact ( sgp ) – which aims to limit the risks to price stability that might otherwise arise from national fiscal policies. finally, having outlined the importance of sound fiscal policies, i would like to emphasise that central bank independence contributes most effectively to monetary stability when it is supported by an overall stability consensus among the general public. this has been the case in germany for many decades. political attempts to undermine the bundesbank

of the eurosystem are also independent in financial terms. this means that they are not dependent on funds being provided to them by other institutions in their respective countries. this also helps to protect central banks from political pressure that might otherwise be placed on them, for example, by limiting the banks ’ financial capabilities. finally, the fourth aspect of central bank independence in the escb is functional independence. the escb ’ s primary objective – to maintain price stability – is enshrined in the treaty establishing the european community. without prejudice to this objective, the escb shall support the general economic policies in the european union. this ranking restricts the scope for potential conflicts that might arise if the escb were obliged to pursue different or even conflicting objectives at the same time. as a result of this transparent prioritisation, monetary policy is clearly geared towards maintaining the intrinsic value of money and, hence, becomes more credible as well as more predictable. 2. 2 the rationale behind central bank independence the independence of the escb is enshrined in the treaty establishing the european community and the relevant protocols. this independence is very well protected since any amendment to the treaty requires a unanimous decision from all member states. but why is central bank independence of such great importance for a stability - oriented monetary policy? what is the reason for the unique institutional arrangement of the escb central banks? first and foremost, the independence of a central bank is not an end in itself. rather, central bank independence helps to … - maintain a long - term stability orientation of monetary policy by insulating decision - making bodies from short - term - motivated political influence … - and, thus, contributes to enhancing monetary policy ’ s credibility, which can be measured by inflation expectations, for instance. suffice it to say that the importance of central banks ’ independence for the maintenance of price stability can scarcely be overestimated. in this context, the track record of my institution, the deutsche bundesbank and its former currency, the d - mark, is a good example of central bank independence definitely being conducive to maintaining price stability. the credibility - enhancing effect of the bundesbank ’ s independence was probably best encapsulated by jaques delors, who in the 1990s famously remarked that “ not all germans believe in god, but they all believe in the bundesbank ”. this remark has to be taken with a pinch of salt, but there are other examples which support the strong