lucas papademos : the euro and economic growth speech by mr lucas papademos, vice president of the european central bank, at the forum des idees economiques, sciences po, paris, 15 april 2005. * * * the euro and the single european monetary policy are now more than six years old. there are many issues that can be addressed concerning the consequences of the euro. in line with the focus of our session, i will concentrate on some key questions concerning the performance of the euro and its role in promoting growth. • has the euro performed well and met the expectations of the european public? • has the european central bank conducted the single monetary policy effectively and fulfilled its mandate? • has the overall performance of the euro area economy and of its individual member states been satisfactory over the past six years? and, if not, what can be done about it? the performance and value of a currency must fundamentally be judged in terms of its purchasing power. consequently, it is the primary objective of the european central bank to safeguard the purchasing power of the euro by maintaining price stability in the euro area – which we have defined as maintaining inflation at close to but below 2 % over the medium term. the statistics speak for themselves. in the first six years ( 1999 - 2004 ) following the introduction of the euro, average annual inflation in the euro area was 2. 0 %. this is a remarkable accomplishment, particularly if we take into account that during this period the euro area economy was subject to a large number of adverse shocks that caused inflation to rise temporarily above 2 % for fairly long periods of time. these inflationary disturbances included oil price shocks, increases in food prices resulting from livestock epidemics, indirect tax increases and the undesirable effects on prices from the cash changeover to the euro. in spite of these sizeable adverse shocks, today we live in an environment of low inflation. the benefits of price stability are fully appreciated by the european public. for the citizens of a number of eu countries, the environment of low inflation should represent a marked change : after all, in the ten years preceding the introduction of the euro ( 1989 - 1999 ), average annual inflation in the 12 countries today forming the euro area was 8 %. what is more significant for the value of the euro and the credibility of the ecb ’ s single monetary policy is that long - term inflation expectations clearly suggest that financial markets are confident that price stability will be maintained in the euro area over the

long run. similarly, from financial market indicators we can deduce that there is general trust in our ability to keep inflation low and in line with price stability over the coming years. at the same time, i admit that public perceptions of current inflation ( as opposed to expectations of future inflation ) have deviated significantly from the inflation recorded in some countries over the past three years following the cash changeover to the euro. this has been a cause for concern, not least because a negative attitude towards the euro could undermine the generally favourable expectations about future inflation. fortunately, this gap between perceived and actual inflation, despite its puzzling persistence, has narrowed recently and should be eliminated soon. all in all, a high degree of price stability has been achieved in the euro area in line with the ecb ’ s mandate. but more than that, our stability - oriented monetary policy has acquired credibility and both short - term interest rates and long - term bond yields are at historically low levels in nominal and real terms. the prevailing favourable financing conditions, the low level of inflation and diminished inflation uncertainty continue to lend support to investment and have established an environment conducive to sustainable growth. as we all know, however, price stability and low interest rates define necessary but not sufficient conditions for faster growth. other factors shaping an economy ’ s growth potential and influencing the dynamics of aggregate demand play a crucial role in determining both growth and job creation. on the growth front, developments have been less positive. output growth and employment creation in the euro area have been unsatisfactory – indeed disappointing when compared with the high expectations which many people had when the euro was launched. countries outside the euro area – especially the united states – have evidently outperformed the euro area. in the six years since the introduction of the euro, the average rate of growth was 1. 9 % in the euro area and 3. 0 % in the united states. furthermore, in the ten years prior to the introduction of the euro ( 1989 - 1999 ), growth in the euro area on average lagged behind that in the united states by almost 1 %. however, it should be noted that the introduction of the euro is not associated with the increase in this growth gap. euro area averages naturally mask a variety of growth performances – outstanding and unsatisfactory – of individual countries within the single currency area. ireland, greece, spain and luxembourg have all recorded more than 3 % growth on average since the introduction of the euro, while