lucas papademos : globalisation, inflation, imbalances and monetary policy speech by mr lucas papademos, vice - president of the european central bank, at a conference on “ the euro and the dollar in a globalized economy ” jointly organised by the department of economics, washington university, the weidenbaum center on the economy, government, and public policy, and the federal reserve bank of st. louis, and sponsored by the european union delegation to the usa, st. louis, 25 may 2006. the references and charts for this speech can be found on the ecb website at www. ecb. int. * * * introduction reflecting on the venue and the theme of this conference on my way to st. louis, it struck me that the combination is very fitting indeed. it was from here that lewis and clark set off to explore the unknown american west, reaching the columbia river on the pacific coast more than 200 years ago. today, our exploration is more of the intellectual type, and what we are investigating and seeking to understand better encompasses the whole world, or rather “ a globalised economy ”, as the title of the conference says. it is a great pleasure for me to be here and share with you and the distinguished members of this panel some thoughts on the implications of globalisation for monetary policy. the themes of this conference, the challenges of globalisation for the advanced economies, the severity and correction of global imbalances, and the evolving roles of the dollar and the euro in the international financial system, have been the subject of enriching and stimulating discussions during the previous sessions today. in my remarks, i will try to bring together these three themes from the perspectives of the euro area and of the central banker. what are the challenges of globalisation for the euro area economies and for the conduct of the ecb ’ s monetary policy? in answering this question, i will address the following specific issues : • the consequences of globalisation for inflation and its dynamics ; • the implications of globalisation for the size and sustainability of global imbalances ; • the appropriate policies, globally and in the euro area, in order to effectively contribute to the orderly correction of global imbalances ; and • the role and conduct of the ecb ’ s monetary policy in a globalised economy. globalisation : definition and measurement let me start by defining the term globalisation. various definitions have been proposed which overlap and differ somewhat in terms of scope and emphasis. i

of the intensified and prolonged financial market turmoil, the most recent data clearly confirm that economic activity in the euro area is weakening, with contracting domestic demand and tighter financing conditions. the fall in oil prices from their peak in july and ongoing growth in emerging market economies might support a gradual recovery in the course of 2009. in the view of the governing council, the economic outlook is subject to increased downside risks, mainly stemming from a scenario of ongoing financial market tensions affecting the real economy more adversely than currently foreseen. other downside risks relate to the possibility of renewed increases in highly volatile energy and food prices, disorderly developments owing to global imbalances and rising protectionist pressures. with regard to price developments, annual hicp inflation has remained considerably above the level consistent with price stability since last autumn, standing at 3. 6 % in september according to eurostat ’ s flash estimate, after 3. 8 % in august. this still worrying level of inflation is largely the consequence of both the direct and indirect effects of past surges in energy and food prices at the global level. moreover, wage growth has been picking up rather strongly in recent quarters, in spite of a weaker growth momentum and at a time when labour productivity growth has decelerated. this resulted in a sharp increase in the year - onyear unit labour cost – to 3. 4 % – in the second quarter of this year, after several years of more moderate increases in the order of 1 - 1½ %. looking ahead, on the basis of current commodity futures prices, annual hicp inflation rates are likely to remain well above levels consistent with price stability for some time, moderating gradually during the course of 2009. at the policy - relevant medium - term horizon, taking into account the weakening in demand, upside risks to price stability have diminished somewhat, but they have not disappeared. they include the possibility of previous commodity price rises having further and stronger indirect effects on consumer prices, as well as a renewed increase in commodity prices. in particular, there is a very strong concern that the emergence of broad - based second - round effects in price and wage - setting behaviour could add significantly to inflationary pressures. moreover, unexpected rises in indirect taxes and administered prices could occur. against this background, it is imperative to ensure that medium to longer - term inflation expectations remain firmly anchored at levels in line with price stability. this is all the more the case in an environment of very high uncertainty. broad - based second - round effects