– to the extent that they influence risks to price stability. in this respect, excessive exchange rate volatility is not welcome! turning from currency issues to our second topic, competitiveness, i am tempted to use a play on words and ask : “ does competitiveness still have currency? ” my answer to this is definitely yes! competition should not be understood as a zero - sum game, where winners can only gain what losers lose. a competitive environment might lead to situation where both sides are absolutely better off. more importantly, it is the consumers who are the ultimate beneficiaries of competition. competition gives incentives for self - improvement and produces excellence. competitiveness is linked with the creation, diffusion and application of new knowledge resulting in technological progress. and i do believe that there is still room for further improvement when it comes to the euro area ’ s international competitiveness. extensive global imbalances have built up between major economic regions during the last few years. whatever their presumed causes, either overspending or underinvestment in the usa ; or the saving glut in surplus economies, particularly asian emerging markets and oil exporting countries – current account imbalances have undoubtedly amplified the pressure on currencies, with possible harmful consequences for global financial stability. it is clear that all regions involved have to assume their responsibility for ensuring the sustainability of their external and internal balances, and for enhancing their growth potential. however, for the time being it appears that the euro area takes the major burden of this adjustment process. remarks by chairman alan greenspan at the european banking congress 2004, frankfurt, germany ; november 19, 2004 ; http : / / www. federalreserve. gov / boarddocs / speeches / 2004 / 20041119 / default. htm the g7 meeting of finance ministers and central bank governors of this past october, including the president of the ecb, reaffirmed that “ exchange rates should reflect economic fundamentals. as announced, they “ welcome china ’ s decision to increase the flexibility of its currency, but “ stress its need to allow an accelerated appreciation of its effective exchange rate ” 2. earlier in october, the finance ministers of the euro group noted with great attention that the “ us authorities have reaffirmed that a strong dollar is in the interest of the us economy ” 3 and commented that “ the sustainable recovery path ” of the japanese economy should “ be incorporated in the assessment of risks ”. meanwhile “ the euro area is

between stock, bond and foreign exchange markets. 6. finally, ever more research is devoted to non - fundamental causes of exchange rate instability. the “ overshooting hypothesis ” helps explain why unstable foreign exchange markets can be efficient. yet, looking at the microstructure of foreign exchange markets, individually rational behavior might generate complex dynamics in which bubbles and crashes can occur. so far the debate on determinants of currencies seems to be far from being conclusive. alan greenspan 1 once noted that “ forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss ”. i wonder whether we can derive valuable insights from hindsight. getting answers about the consequences of exchange rate movements for the economy seems to be by no means easier. the impact of the exchange rates changes depends on a set of interrelated transmission channels, of which 1. the trade channel probably is the most obvious way in which currency developments can impact the economy. an appreciation is likely to entail a negative trade balance, as the prices of foreign currency - denominated exports increase while import prices fall. 2. apart from that, there are financial market channels through which currency movements have an impact on the economy : a trend increase in the exchange rate raises the relative attractiveness of assets denominated in that currency while it results in the loss of value of investment abroad. 3. currency fluctuations are also transmitted through the consumer prices channel, according to which exchange rate appreciation would lower consumer prices. in this sense the “ strong euro ” has cushioned our economies from recent crude oil shocks. 4. finally, the confidence channel completes the list. however, consumers and firms can react asymmetrically, since appreciation dampens inflation pressure on the one side but challenges the competitiveness of firms on the other. if exchange rates and their impact on the economy are apparently so difficult to explain, let alone predict, should monetary policy interfere? as for the euro area, the ecb has no exchange rate target. a key implication of flexible exchange rate system is that the external value of the currency is determined by financial markets and hence cannot be an instrument of economic policy. the primary objective of the eurosystem, that is the ecb and the national central banks of the euro area, is to maintain price stability in the medium term. however, when analyzing the economic situation and taking monetary policy decisions the governor council of the ecb considers all parameters – including exchange rates