culture of stability, was chosen as a founding model for the eurosystem. an independent central bank is necessary for stable prices, but more than that is needed. price stability is also jeopardised by unsound public finances. if public finances get out of hand, the central bank can come under overwhelming pressure to jump to fiscal policy ’ s rescue and, in so doing, can undermine its primary objective of price stability. this lesson is not just derived from theoretical models, it has been evidenced time and time again in the past. a particularly good example from history is the latin monetary union comprising italy, france, belgium, switzerland and greece. even before the treaty of union came into force, italy ’ s debt exploded owing to the war with austria. on 1 may 1866, the government took out a loan with the banca nazionale to finance this debt for which italy departed from the bimetallic standard and imposed an enforced rate of exchange for its bis central bankers ’ speeches banknotes. this enforced monetary financing of war debts triggered the first severe crisis of the latin monetary union and fuelled a permanent mistrust between the member states. the recent past – notably the financial crisis – also has important lessons for monetary policy. one example is asymmetrical monetary policy, which provides strong counter - measures when speculative bubbles burst. this can inflate the risks for financial stability. in an environment where market participants can pocket the full return on a risky investment if it is successful but only have to bear part of the costs if it is unsuccessful, risk appetite can take on a harmful dimension for the economy. when considering the future role of monetary policy and its relation to other policy areas, we do not have to go back to the drawing board but can draw on a wealth of experience and economically proven evidence. this we can do, and this we should do. although the outstanding political significance of the monetary union was – and still is – undisputed, a political project must also be economically sustainable ; in the long term, it cannot be enforced against economic conditions. economic mechanisms, such as the risk of moral hazard, may not be laws of nature ; however, they are relevant constraints which politicians cannot ignore forever. thus, in order to overcome the crisis and to prevent it from happening again, it is essential to apply a coherent approach : the short - term emergency measures and institutional changes must not stand in the way of the long - term stability objective. and the interaction between

jens weidmann : everything flows? the future role of monetary policy speech by dr jens weidmann, president of the deutsche bundesbank, at the 2012 zew economic forum, mannheim, 12 june 2012. * 1. * * introduction professor franz, ladies and gentlemen, i am delighted to be able to speak to you here today at the zew economic forum. professor franz, thank you very much for the invitation. at first glance, the title may have left a few of you slightly puzzled. “ everything flows? the future role of monetary policy ” conjures up a number of associations. the title could be alluding to the massive increase in liquidity as a result of non - standard measures taken by many central banks. some of you may also have thought of the pre - socratic philosopher, heraclitus, who is known for his dictum of constant flow and the passing of all things. “ everything flows ” thus also refers to changes in the role and general conditions of monetary policy. both associations are correct and are inter - connected. the central banks ’ contribution to combating the crisis is one of the reasons why the current role of monetary policy is being debated so intensely. this is true across the globe, but especially in the euro area with its specific set - up and the unique situation posed by the sovereign debt crisis. there is no doubt that the crisis has delivered important findings for monetary policy and for monetary union. however, my key message today is to make clear that the paradigms that have been valid to date have by no means suddenly lost their validity. on the contrary, given the challenges that we are facing today, we should not recklessly throw long - held principles overboard and turn our backs on the lessons from the past. ultimately, monetary union in its current institutional form was created as a result of lessons learned from past errors. and by that, i do not so much mean german hyperinflation at the beginning of the 1920s, as is all too often assumed by foreign observers. instead i mean the monetary policy experience gained in the 1970s and 1980s with the extremely heterogeneous development of inflation in europe. countries with politically independent central banks and a clear primary objective of price stability, such as germany, had much lower inflation rates than countries in which central banks were obliged to follow politicians ’ instructions and were additionally called upon to pursue fiscal and economic policy goals. this is one of the reasons why the bundesbank, with its