helmut schlesinger, one of my predecessors as president of the bundesbank held the eighth homer jones memorial lecture. in his speech on “ on the way to a new monetary union ” he explained to the european central bank ( 2010 ), reinforcing economic governance in the euro area, http : / / www. ecb. int / pub / pdf / other / reinforcingeconomicgovernanceintheeuroareaen. pdf, p. 4. bis central bankers ’ speeches audience in st. louis the historic dispute between “ monetarists ” and “ economists ”. 19 in the particular context of european monetary integration, these terms had a totally different meaning to our general understanding. “ monetarists ”, he explained, “ believed that monetary integration has to start first and that economic and political integration would follow. ” “ economists ”, however, “ believed that economic convergence between the national economies must occur before … a monetary union. ” the “ monetarists ” prevailed, but they erred in their belief that the introduction of the single currency would automatically act as a locomotive for the political union of europe. there is no political union so far and there is little expectation that this might change significantly in the foreseeable future. therefore, national executive and legislative branches will remain responsible for economic and fiscal policies over the medium to long term. intergovernmental fiscal transfers beyond the rather moderate and earmarked payments from the eu budget ( approximately 1 % of gnp ) are hardly acceptable ; overburdening the financial solidarity of the people might jeopardise the idea of european integration. the “ economists ”, on the other hand, had a point in demanding more economic convergence. their worries were, by the way, taken into account by the implementation of convergence criteria that have to be fulfilled before a country can join the euro area. the underlying problem of the current crisis is, however, not a lack of convergence ex ante or heterogeneity per se ; rather it is the lack of willingness on the part of a number of member states to meet the requirements of the membership in a monetary union. if they fail to correct these deficiencies swiftly and thoroughly, stability oriented monetary policy in emu will become increasingly difficult, all the more so as monetary policy has been profoundly challenged by the financial crisis. the major lessons that central bankers in the euro area and elsewhere should take to heart are the following : firstly, monetary

a a weber ( 2010 ), der iwf spielt mit dem feuer ( the imf is playing with fire ), financial times deutschland, 25 february, 2010 ( available in german only ). see c walsh ( 2010 ), the future of inflation targeting, university of california, santa cruz, mimeo. see deutsche bundesbank, price - level targeting as a monetary policy strategy, monthly report, january 2010, pp 31 – 45 ; c gerberding, r gerke and f hammermann ( 2010 ), price - level targeting when there is pricelevel drift, deutsche bundesbank research centre, discussion paper, series 1, no 23 / 2010. bis central bankers ’ speeches of unconventional measures during the crisis give no cause for viewing the lower bound of the interest rate as a binding restriction on the effectiveness of monetary policy. 3. particular lessons for monetary policy in the euro area all the issues i have been talking about up to now concern more or less all central banks and every monetary policymaker. for the remainder of my speech, i would like to focus on the particular challenges for monetary policy in the euro area. these arise from the sovereign debt crisis, which is the major challenge for economic and monetary union. the circumstances surrounding the debt crisis are aggravating the conduct of the eurosystem ’ s common monetary policy, which is geared towards maintaining price stability in the euro area as a whole. 3. 1 heterogeneity as a challenge for monetary policy one of the aggravating factors is heterogeneity in terms of growth, inflation and competitiveness. with regard to the euro - area countries ’ economic performance, we are currently observing a widening divergence. broadly speaking, there is a considerable growth gap between the core and the periphery, or to put it more precisely, some peripheral countries of the euro area. in my view, the economic heterogeneity of the euro area is a non - issue. why should heterogeneity be a problem for the single monetary policy? after all, the dispersion of growth rates, as measured by the weighted standard deviations of quarterly growth rates, is not significantly greater than in the first years of emu. with regard to inflation variance, we see even lower values than then. furthermore, the us economy is characterised by considerable heterogeneity, too, and that does not impede the federal reserve ’ s monetary policy, either. and