mr noyer reports on monetary policy - making in europe speech presented by mr christian noyer, vice - president of the european central bank, to the spanish association of corporate treasurers ( asset ), held in barcelona, on 19 november 1999. * * * ladies and gentlemen, it is a pleasure for me to be here in barcelona today. i should like to thank the organisers of this congress very much for giving me the opportunity to speak to you on the subject of “ monetary policy - making in europe ”. it is now nearly 11 months since the eurosystem, consisting of the european central bank ( ecb ) and the 11 national central banks ( ncbs ) of those eu member states that introduced the euro on 1 january 1999, assumed its tasks, i. e. deciding and conducting the single european monetary policy. 11 months of practical experience is, of course, not long enough for a conclusive stocktaking exercise, but it certainly seems appropriate, at this stage, to review some of the lessons we have learned. let me start by recalling what, in essence, monetary policy - making in europe is about. the maastricht treaty ( formally the treaty on european union, which has now become part of the treaty establishing the european community ) assigns to the single monetary policy the primary objective of maintaining price stability in the euro area. in order to achieve this goal successfully, both a high degree of central bank independence and the prohibition of monetary financing by the government are tenets of the monetary policy framework enshrined in the treaty. there is no doubt concerning the overriding importance attached to the primary objective of price stability. by safeguarding price stability in the euro area over the medium term, the single monetary policy is supposed to make the best possible and most lasting contribution to the achievement of other community objectives, such as high employment and sustainable non - inflationary growth. among central bankers and economists, the predominant view is that a long - run trade - off between inflation and output growth does not exist. attempting to use monetary policy to increase real economic activity above its sustainable level will, in the long run, simply lead to higher inflation and will not foster economic growth. moreover, theoretical considerations as well as empirical evidence over several decades suggest that high rates of inflation are clearly unhelpful - indeed detrimental - to growth and employment in the long term. a large number of economic arguments point to the benefits of price stability for economic growth and employment prospects. stable prices eliminate

or reduce economic costs such as those arising from inflation as a result of uncertainty about the outcome of investment decisions, the distortionary effects on the tax system, rising risk premia in long - term interest rates and reduced allocative efficiency of the relative price mechanism and market systems. monetary policy must take into account the fact that the horizon for decisions by economic agents is rather long - term in nature. by guaranteeing price stability, monetary policy provides an anchor for economic decision - making. this clearly supports the efficient functioning of the price mechanism, which is conducive to the best allocation of scarce resources. price stability is hence a means of promoting sustainable economic growth and the creation of employment, and of improving productivity levels and living standards. this discussion also sheds light on what is certainly the greatest economic challenge facing the euro area at present, namely, the need to reduce the current unacceptably high level of unemployment in europe. in the light of this problem, we have to realise that even in an ideal situation where monetary policy is very successful in maintaining price stability, the contribution of monetary policy to reducing unemployment in europe can only be a limited one. many empirical studies show that the high unemployment rate is mostly the consequence of structural rigidities within the european labour and goods markets. the european unemployment rate has, indeed, been high or even rising over the business cycles in the past decade. only structural reforms, preferably of a comprehensive nature, can therefore tackle the underlying impediments to employment growth. when deciding on monetary policy, the eurosystem must acknowledge the capabilities and limitations of monetary policy implied both by general economic principles and by the structure of the euro area economy. this is also reflected in the formulation of the eurosystem ’ s monetary policy strategy, which is designed to maintain price stability in the euro area. the strategy was announced by the governing council on 13 october 1998. it is designed to fulfil two important functions. first, it structures the monetary policy - making process so that the governing council of the ecb is provided with all the information and analysis it requires to take appropriate monetary policy decisions. second, the strategy ensures that policy decisions, including the economic rationale on which they are based, can be presented in a clear, coherent and consistent way to the public. by providing a stable framework for making and explaining monetary policy decisions, the strategy bolsters the credibility and effectiveness of the single monetary policy. in designing the monetary policy strategy of the euros