doubt or the least suspicion that the institution might have an incentive to surprise them by allowing high inflation, they might adjust their behaviour as a precaution and thus “ create ” higher inflation by increasing their wage claims, thereby triggering a wage - price spiral ; or by demanding greater returns on their savings, which pushes up long - term interest rates and weighs on growth. independence, which is particularly well established among euro area central banks, prevents this problem ; as you know, the treaty specifies that the eurosystem and the members of its decision - making bodies may not take instructions, in particular from governments of a member state. in practice, central banks achieve their objectives through the performance of tasks, notably implementing monetary policy. to do this, we use our main policy instrument, the setting of the key interest rate, which is the very short - term interest rate at which commercial banks obtain refinancing from the central bank. monetary policy impulses are transmitted to the economy via the interest rate channel in conjunction with the bank lending channel that is of particular importance in the euro area economies, which have high levels of intermediation. we know the traditional workings of these transmission channels : the central bank sets the very short - term risk - free rate and then the markets determine, for all maturities and issuers, the value of assets based on their expectations concerning the future path of this interest rate and their assessment of risks : solvency of debtors, liquidity of assets, and uncertainty surrounding all parameters. the markets construct in this way a set of yield curves that establish the supply and demand for financing balance on financial markets and bank lending markets. in a world in which the credibility of the central bank to keep inflation low is well anchored, the solvency of most agents is taken for granted and markets are well organised and hence liquid, interest rates remain low across the whole maturity spectrum and valuations high ; changes in key rates do not affect inflation expectations that remain low and changes in real interest rates allow monetary policy decisions to be effectively transmitted to the economy. in normal times, interactions between central banks and markets are therefore important but fairly unintrusive : central banks influence markets through changing the level of short - term interest rates ; they explain the rationale behind their interest rate decisions in order to improve the quality of economic agents ’ expectations ; they put in place technical mechanisms to promote liquidity on certain key market segments, for example by establishing the list of assets eligible as collateral in their ref

the main adjustment tool. in this context, fiscal criteria were designed in order to assess the ability of the government to conduct sound fiscal policies. is the euro a model of monetary cooperation for other regions in the world? what is happening in europe is triggering a lot of interest in other parts of the world. many countries to day, especially in asia, are confronted with the same challenges we faced, in europe, fifteen years ago : first, is it possible to reconcile greater economic integration with exchange rate volatility? and, if not, can fixed or pegged exchange rates regimes be sustained in an environment of full capital mobility? taken together, these two questions led european countries to forgo monetary autonomy. is this always advisable? this is a very difficult question. my own answer would be to progress towards closer monetary cooperation with determination and caution. a strong degree of political determination is necessary because, clearly, full monetary autonomy becomes more and more problematic when economic integration has reached a certain stage. with greater economic openness, it is no longer an option, for small and medium size economies, to be indifferent to their exchange rates. on the other hand, independent management of their exchange rates by countries with close trade and investment links can lead to undesirable outcomes. thus, cooperation is warranted. monetary union, however, is a demanding endeavor. i have alluded earlier to the theory of optimum currency areas. while it is debatable in some of its details and developments, the main message is clear : the exchange rate remains an essential adjustment tool whenever economies are faced with asymmetric shocks and markets are insufficiently flexible to absorb them internally. this is still the case in many regions of the world where regional economic integration moves at a rapid pace, but between countries whose economic structures and specialization are very different. in such circumstances, it would be extremely penalizing to give up the possibility of real exchange rate adjustments. this shows that there is no single model of monetary cooperation which could be duplicated around the world. it is up to each group of countries to find their own sustainable path to economic integration. will monetary union evolve towards closer political union? as you well know, these are difficult times for european political integration. the treaty creating a constitution for europe was not ratified by two founding members of the european community. as a consequence, the future of political integration is fraught with uncertainties. these raise several important questions for the future. has the process of political integration