to maintain price stability, as stipulated in the treaty on european union. as has long been argued by central bankers and academic economists, inflation is costly, both economically and socially. 1 nobel prize - winner milton friedman expressed this well in 1980, when he said : “ inflation is a disease, a dangerous and sometimes fatal disease, a disease that if not checked in time can destroy a society ” 2. the same could be said about deflation. in my view, emu is a tool to consolidate the progress made towards price stability in recent years and to firmly anchor expectations in line with price stability, and thereby establish the necessary framework to seize the opportunities of monetary union. the eurosystem enjoys full independence to determine the appropriate level of interest rates in order to satisfy its primary objective of price stability. moreover, the members of the ecb governing council have long terms of office and are only dismissible for serious misconduct or inability to perform their duties. these provisions imply that the concept of monetary stability benefits from explicit legal statutes and that the credibility of the eurosystem will be safeguarded by protecting the monetary policymaking process from political interference. s. fisher, “ why are central banks pursuing long - run price stability?, ” revised version of a paper prepared for the federal reserve bank of kansas city symposium ( achieving price stability ), august 1996. m. friedman and r. friedman, free to choose : a personal statement, harcourt brace jovanovich, 1980, p. 253. a further important benefit of emu is that it has greatly reduced the risk of real exchange rate misalignments within the euro area. this fosters economic growth and avoids a misallocation of resources. in fact, it enables the european single market to function smoothly to the advantage of producers and consumers. emu has eliminated nominal exchange rate volatility and exchange rate risks within the euro area. this benefits not only trade between, and economic growth in, the euro area countries but also the economic development of other european and non - european countries. in addition, foreign direct investments into the euro area economies should be promoted, as these investments are negatively affected by exchange rate volatility. the advantages of economic integration afforded by the single market process are enhanced by the elimination of the transaction costs of exchanging different currencies, the direct result of the introduction of the euro. furthermore, the single currency will make prices across the euro area directly comparable, which should increase competition and hence efficiency and economic growth in

like to emphasise that the true benefits of emu derive from the unique opportunity to shape a macroeconomic environment conducive to stability, growth and employment, and to foster structural change which is needed to maintain medium to long - term dynamism in the european economies. the full benefits of the single currency will arise only if there is appropriate support from other stability - oriented policies, especially fiscal and labour market policies, and if structural reforms are carried out in these areas. thus, price stability is a necessary, but not a sufficient condition for grasping all the opportunities of emu. as regards fiscal policy, it is of the utmost importance that the governments of the eu member states pursue in implementing fiscal policies that aim at a budgetary position close to balance or in surplus. this condition is stipulated by the stability and growth pact, to ensure lasting compliance of fiscal policies with the requirement of budgetary prudence. from the perspective of a central banker, a prime reason for the establishment of the pact is that a lack of fiscal discipline would negatively impact on the eurosystem ’ s policies to maintain price stability. let me elaborate on this. the institutional framework of emu and the eurosystem has been designed so as to prevent any direct link between an increase in public sector deficits and a monetary expansion, and thereby inflation. this is ensured by assigning to the eurosystem the primary objective of price stability, banning direct financing of government deficits by central banks and precluding any influence by governments or other institutions on monetary policy decisions. however, even in this setting, the conduct of fiscal policies has a clear bearing on the objective of price stability. in particular, doubts about the soundness of fiscal policy can influence the effectiveness of monetary policy instruments and undermine the credibility of monetary policy. for decades – and until very recently – fiscal policies have followed a trend of ever - growing public sector and government debt levels. in emu, without binding fiscal rules, countries might have even less incentive to pursue prudent fiscal policies. the main reason is that risk premia offsetting inflation and exchange rate expectations disappear on a country - specific basis and may not be fully outweighed by default risk premia. hence, the treaty establishing the european community contains a number of provisions on the conduct of fiscal policies, which have been further clarified by the stability and growth pact. in this sense, the stability and growth pact is an essential safeguard to ensure that price and fiscal stability remain the cornerstone