willem f duisenberg : the path towards a single currency reply by dr willem f duisenberg, president of the european central bank, on the occasion of receiving the grand cross 1st class of the order of merit of the federal republic of germany, frankfurt am main, 24 july 2002 * * * first, i should like to sincerely thank the president of the federal republic of germany, represented here today by the finance minister, mr. eichel, for awarding me the grand cross 1st class of the order of merit of the federal republic of germany. i feel deeply honoured. i would also like to thank the finance minister for his kind words. and i am grateful to all of you here for sharing this special moment with me. to be mentioned in the same distinguished company as karl otto pohl, helmut schlesinger and hans tietmeyer is a great honour for a former president of the dutch central bank. in the early 1970s, de nederlandsche bank and, in particular, my predecessor there, jelle zijlstra, realised that the netherlands, as a relatively small and open economy, had no other option than to orient its monetary policy towards its main trading partner and neighbour, germany. moreover, by doing so, we thought we could ‘ import ’ the credibility of german monetary policy and transfer the internal stability of the deutsche mark to the dutch guilder. this policy was contentious and de nederlandsche bank rather cautiously adopted an exchange rate target policy. indeed, in my early years as president of the dutch central bank, i was confronted - in 1983 - with the decision of the dutch government not to revalue the dutch guilder in the european exchange rate mechanism to the same extent as the german currency ; a decision taken against the explicit advice of the dutch central bank. this decision resulted in a divergence between dutch and german interest rates, which, unfortunately, came to haunt the netherlands for almost eight years. the most important lesson of this event - for me and also for the government - was that to gain credibility in financial markets was very difficult, but to lose credibility was very easy. after 1983, the exchange rate of the guilder was more or less pegged to the exchange rate of the deutsche mark. and as was expected in the 1970s, price developments in the netherlands very much mirrored those in germany. the success of dutch monetary policy became very obvious during the upheaval in the european monetary system in july 1993, when it was decided to widen

of a repo rate increase some time next year appear reasonable. as i see it, this conclusion is supported by the strong growth in the real economy and the increased risks that follow on from a continued rise in house prices, ” continued mr heikensten. ” let me conclude with a few more general reflections. it is quite natural given the current situation with extremely low interest rates and stimulation from monetary policy that the time for a repo rate increase is approaching. there have been increases in the repo rate on a number of previous occasions since inflation targeting was introduced, without any dramatic consequences. this is essentially a natural consequence of the strong economic growth and something that could contribute to safeguarding continued stable development in the swedish economy during coming years, ” concluded mr heikensten. 2 / 2