lorenzo bini smaghi : the euro area's exchange rate policy and the experience with international monetary coordination during the crisis speech by mr lorenzo bini smaghi, member of the executive board of the european central bank, at a conference entitled “ towards a european foreign economic policy ”, organised by the european commission, brussels, 6 april 2009. * * * introduction ladies and gentlemen, it is a pleasure to be here today. the title of today ’ s conference “ towards a european foreign economic policy ” could hardly be more topical. indeed, the world is facing challenges not seen for decades – challenges that are truly global. the solutions will thus need to be global too. inevitably, the political power and economic weight of individual states and regions will matter when designing these global solutions. if europe wants to punch in proportion to its economic weight, moving towards a common foreign economic policy is essential. i have expressed my preference for such a policy on various occasions. in the area of exchange rate policy – the topic of my speech today – the euro area has already achieved unity. it speaks with one voice. exchange rate policy is the exclusive competence of the community. hence, the individual member states can no longer act autonomously in this field. at the same time, in its resolution of 1997, the european council stated that “ exchange rates should be seen as the outcome of all other economic policies ”. this represents a general feature of exchange rate policies, as the exchange rate cannot be determined by one single actor. it always depends on the decisions and actions of at least two parties. indeed, any bilateral exchange rate depends on the actions and policies of both sides. moreover, this rate can also be influenced by the actions and policies of third countries. as a consequence, exchange rate policy is by nature international and needs to operate in a context of international cooperation. the euro area ’ s exchange rate policy cannot be seen in isolation from those of the us, japan, china, and many others. the international dimension of exchange rate policy and its implications for global economic stability came sharply into focus during the 1930s, when a series of competitive devaluations plunged the world into an economic depression. for this reason, the bretton woods conference assigned a central role to the imf in the monitoring of exchange rate policies. given the deepening integration of the world economy over the last decade, the imf decided in 2007 to strengthen its surveillance of exchange rate developments, in particular to ensure that exchange rate policies

: the aftermath of the asian crisis in the late 1990s ; the bursting of the dot. com bubble ; 9 / 11 ; and sharp rises in oil and food prices worldwide. over this same period, the euro area has also had internal imbalances to contend with. an issue that was intesively discussed yesterday. these imbalances remain a challenge. while emu highlights the need for flexible economies, the euro cannot be blamed for the emergence of those imbalances. rather, this largely reflects a lack of adjustment in a number of member states. this is particularly true for those euro area countries whose adjustment mechanisms and responsiveness to exogenous shocks is still rather slow. to allow euro area economies to develop their growth potential and to reap the full economic benefits of emu, it remains indispensable that the countries concerned bring their structural reforms and fiscal consolidation measures more into line with the conditions and rules of monetary union. overall, the ecb has done well to overcome these difficulties. however, the current global financial distress poses challenges of a significant and unprecedented nature to the ecb and other central banks around the globe. with this crisis, emu is now ultimately experiencing a real test. in these demanding times, some widely - recognised core principles have helped the ecb to weather the storm. the maastricht treaty assigns a clear and unambiguous mandate to the ecb to maintain price stability. it also grants the ecb full independence from political influence to fulfil this mandate. besides these institutional safety belts, monetary policy needs to be forward - looking, medium - term oriented and underpinned by a comprehensive analytical framework. given the monetary nature of inflation over the longer term, such a framework must include a thorough analysis of monetary and credit developments to allow for wellinformed and consistent decision - making. finally, one principle – that has gained much attention during the current crisis – is to keep the determination of the monetary policy stance distinguished from the management of liquidity in money markets. all these principles are captured in the ecb ’ s monetary policy strategy. and globalisation does not fundamentally alter these principles – which give guidance, in particular, in critical times. to weaken or even abandon these principles would undermine our commitment and credibility. and, in the end, we would risk losing orientation. our strategy has provided a consistent and coherent framework not only for internal analysis and policy decision - making but also for external communication. using the same framework for internal