is defined as a year - on - year increase in the harmonised index of consumer prices ( hicp ) for the euro area as a whole of below 2 %. by referring to increases in the hicp it was made clear from the beginning, in 1998, that deflation is excluded from the definition of price stability. the governing council also specified that price stability is to be maintained over the medium term. in the light of past experience, it is clear that the announcement of the quantitative definition of price stability was an extremely valuable element of the ecb ’ s strategy. first, the ecb ’ s definition of price stability has been instrumental in enhancing the transparency of the policy framework and thereby the accountability of the ecb. the anchoring of long - term inflation expectations second, with its quantitative definition the ecb has made a very significant contribution to the firm anchoring of inflation expectations. the definition of price stability permits all economic agents and the public at large to build expectations of future inflation outcomes. by providing a benchmark for inflation expectations, the quantitative definition of price stability has considerably facilitated the conduct of monetary policy by the ecb. indeed, if the public can trust the ecb, we can assume that the setting of wages and prices will be compatible with the ecb ’ s definition. this significantly reduces the likelihood of temporary bouts of inflation triggering harmful wage and price spirals, as was the case in previous decades. in our evaluation of the strategy we analysed particularly closely the experience with euro area inflation expectations. we were very pleased to see that the volatility of long - term inflation expectations in the euro area is as low as in the best performing industrialised countries in this respect. since january 1999, medium and long - term inflation expectations, as measured by survey data, have remained stable most of the time within the range of 1. 7 to 1. 9 %, thus at a level compatible with the definition of price stability. this is all the more remarkable given that the ecb started without a track record of its own and was faced with a number of sizeable, mainly upward, price shocks hitting the euro area economy. in mid - 2000 the price of the brent oil barrel denominated in u. s. dollar was four times higher than at the start of the single monetary policy, in january 1999. since then, average oil prices have stayed at a considerably higher level than the average over the previous ten years. in 2001, when the indirect effects

markets in the euro area are sufficiently flexible to respond efficiently to supply and demand shocks. this assessment was confirmed in a recent and comprehensive study by the eurosystem ’ s staff on inflation differentials in the euro area. [ “ inflation differentials in the euro area : potential causes and policy implications ”, european central bank, september 2003, publications. ] this study noted, interestingly, that the size of the inflation differentials within the euro area is broadly comparable to that in the united states, although in the united states inflation differentials show somewhat lower persistence over time. this study highlights the inadequacy of using monetary policy to address such differentials, which primarily reflect transitory effects of monetary integration in europe and also relate to the persistent differences in economic structures across countries. among the possible structural factors underlying lasting inflation differences, the balassa - samuelson effect has been often singled out. the balassa - samuelson effect relates inflation differentials to differences across economies in the relative sectoral productivity trends between the tradable and non - tradable sectors. empirical studies indicate that the magnitude of the balassa - samuelson effect is very limited in the group of countries forming the euro area. furthermore, the size of the balassasamuelson effect for these countries is diminishing over time, given that there has been substantial convergence among countries in terms of per - capita gdp and productivity levels. the size of the balassa - samuelson effect could well be more important for the acceding countries. however, its overall impact on the euro area should be limited, not least on account of the relatively small size of these economies. moreover, it should be recalled that, in order to adopt the euro, the acceding countries will have to fulfil the treaty convergence criteria, which in particular require the sustainability of a low inflation environment. all this points to a more limited impact of the balassa - samuelson effect than is sometimes claimed. in sum, aiming for inflation rates below but close to 2 % offers an additional safeguard against the rather remote but undesirable event that nominal interest rates could hit their lower bound at zero. at the same time, it is also fully sufficient to cover the possible presence of a measurement bias in the hicp and the implications of inflation differentials of a structural nature within the euro area. the format of the price stability objective as regards the form in which our inflation objective is expressed, i am aware that here in germany some observers