andreas dombret : the future of europe and the euro – what monetary policy can and cannot do speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the university of pretoria, pretoria, 14 august 2017. * * * ladies and gentlemen, amongst economists there is an old saying : " when america sneezes, the world catches a cold ". in fact, this saying is now so commonplace that it is impossible for me to trace its origins. over the years, countless variants have been invented. if you look it up on the internet you will find that the same has been said about germany, china and many other countries. in my view, the fact that this saying has become so widespread does not mean that the world has become an unhealthier place or that economic commentators lack inspiration. what it does say is that the world has become increasingly interdependent over the past decades. with more and more goods being transported from one continent to another and with ever more capital flowing freely across borders, what happens on one side of the world very much matters to the other, and vice versa. and this brings with it a need to engage in dialogue, to exchange views about local developments and global challenges. so let me first and foremost thank the south african institute of international affairs and the chair of monetary policy here at the university of pretoria for providing me with this opportunity for such dialogue today. i believe one issue currently being discussed in many countries is whether the successful role that central banks around the world have played in mitigating the consequences of the financial crisis might, in the long run, undermine the pillars of their success. and this question certainly is not confined to just the advanced economies, which have seen the largest central bank interventions in the past few years. but before i get to that topic, i will first say a few words about the economic situation in the euro area. 1. economic situation in the euro area policymakers in europe learned what increased global interdependencies meant during the past few years when they had to deal with the sovereign debt crisis. the poor economic performance in europe contributed to the world economy not recovering as fast as some wished. so whenever i attended international policy meetings, i was pressed on what solutions european policymakers had in store for solving the crisis. i always responded that the only sustainable solution was to correct the macroeconomic imbalances in the euro area, and that this adjustment process would take

- standard measures. at least i understand that, in south africa, too, some are calling for a more expansionary monetary policy in order to support socio - economic transformation. i am following all these developments with some concern. this year, the bundesbank is celebrating its 60th anniversary. this occasion has also provided us with an opportunity to take a look back at the 1970s, when many of the advanced economies were plagued by double - digit inflation rates. one reason for this malaise was the prevalent economic thinking of that time. the belief in many countries was that cheap money could be used to fight rising unemployment. it was german chancellor helmut schmidt who famously put this thinking in a nutshell : " i would rather have 5 % inflation than 5 % unemployment, " he once said. this view was met with opposition in the bundesbank. former bundesbank president otmar emminger once warned : " if you flirt with inflation, you ’ ll end up marrying it. " and unfortunately, that ’ s precisely what happened. in many countries, rising unemployment was caused by structural factors – and there was little that monetary policy could do about these. the attempt to use accommodative monetary policy to tackle structural problems was bound to fail – and so it did. this resulted in high inflation rates and high unemployment – a phenomenon that later came to be known as stagflation. germany and switzerland got through the 1970s with comparatively low inflation and unemployment rates. politicians and central bankers in other countries gleaned from this that a stability - oriented monetary policy ultimately needs to be free from political interference and that central banks should set policy, first and foremost, with the goal of price stability in mind. by that time, economists had arrived at this conclusion on purely theoretical grounds. jan tinbergen, who was later awarded the first nobel prize in economic sciences, had already argued back in 1952 that, for each policy target, there must be as many instruments as policy objectives. for monetary policy, whose only instrument is the interest rate, the tinbergen principle means that there may be also only one target : price stability. in the three decades prior to the outbreak of the financial crisis in 2007, many countries did indeed issue their central banks with narrower mandates geared towards price stability. at the same time, monetary policy - making institutions became more independent. major central banks brought their models increasingly into line with that of the bundesbank, which has always enjoyed a large degree of independence