otmar issing : the euro – a currency without a state speech by mr otmar issing, member of the executive board of the european central bank, at an event organised by the bank of finland, helsinki, 24 march 2006. * * * after more than seven years, the euro is firmly established as the currency of over 300 million people. its internal stability is evidenced by the fact that inflation has been steadily low from the very start, despite a sequence of negative price shocks ( in particular a continuous surge in oil prices ). as an international currency, the euro is second only to the us dollar. at the same time, the euro represents a unique experience in history. on the one hand, it is based on a clear supranational monetary order, whereby the european central bank has full sovereignty in conducting a single monetary policy for the euro area. on the other hand, political union is still limited and sovereignty remains predominantly national in many policy areas. this asymmetry has raised questions about the sustainability of such an institutional arrangement since well before european monetary union started on 1 january 1999. the “ no ” from the french and dutch people on the treaty establishing a constitution for europe triggered new interest in the prospects for monetary union and the future course of political union. this happened despite the fact that the text of the european constitution does not imply any changes to the role of the ecb, nor does it significantly affect the allocation of responsibilities in most other policy areas. the continuous challenge for europe has been to find the right balance between political, economic and monetary integration. this has been called the “ triangle ” between the state ( or states! ), the market and the currency. economic integration took the lead in september 1946, winston churchill, in his memorable zurich speech, called for the re - creation of the “ european family ”. this included the setting - up of a structure permitting europe to live in peace, safety and freedom. although political integration proved to be over - ambitious, some visionary political leaders decided, nevertheless, to pursue the path of economic integration. this led to the founding of the european coal and steel community in 1952 and the establishment of the european economic community with the treaty of rome in 1957. the first step was a customs union among the six founding countries. at the time, probably nobody could have guessed that economic integration would advance through various phases and over such a long period. but the single european act followed in 1986 and the “ single market programme ” in

. the argument is that more spending will make people better off. more demand encourages more supply, meaning more jobs and more investment. it ’ s supposed to be a virtuous circle. so the government starts spending money – as much as possible. it borrows from people ’ s pension funds. it borrows from the central bank and demands it buys its debt – which means printing money. it spends the foreign exchange reserves. and at first sight, it works. as scholars of populism have noted, the immediate consequence of these policies tends to be an economic boom. people who warn that populism is a disaster will look foolish. there is more growth and big wage increases and more jobs. but it doesn ’ t last. time and time again, the boom turns to bust. inflation shoots up and growth collapses. some populists realise their strategy has failed and change course. others put their countries through even greater pain. during the 1950s, the argentine president juan peron effectively aborted his populist programme when inflation neared 50 %. 2 in peru, alan garcia abandoned his stimulus programme in 1988, with inflation well over 1000 %. 3 in venezuela, inflation is expected to reach one million percent this year, 4 and people are fleeing the country to find food, but the policy direction still hasn ’ t changed. what is it about the populist recipe that goes wrong? the literature focuses on two kinds of constraints : inflation and the balance of payments. now these are things populists probably don ’ t see coming. they don ’ t understand the causes of inflation very well. and they may not even know what the balance of payments is. but these are powerful forces, and ignoring them doesn ’ t mean they will leave you alone. the inflation problem is fairly simple. if a government wants to stimulate demand, it will want low interest rates, and it will demand that the central bank print money to buy its bonds. this extra money does a couple of things. it raises demand, and with the economy running hot, firms and workers put up their prices. it causes the exchange rate to depreciate. and because people see the government is printing money, they start to put a lot of time and effort into figuring out where inflation is going, and raising their prices to keep ahead of it. this process then gets worse over time. in the first year, you get a fair amount of growth and a bit more inflation. in the second year