the early years of the introduction of the euro. our strategy rests on two g. alogoskoufis, r. portes and h. rey, “ the emergence of the euro as an international currency ”, 1997, as discussed in a. benassy - quere, b. mojon and a. d. schor, the role of the euro, cepii, document de travail no. 98 - 03, january 1998. “ pillars ” : a prominent role for money as expressed by the announcement of a reference value for the annual growth of m3 and a broadly based assessment of the outlook for price developments, and the risks to price stability in the euro area as a whole. in the context of the first pillar of the monetary policy strategy, the governing council of the ecb has announced a quantitative reference value for the growth of a broad monetary aggregate ( m3 ), which has been set at an annual rate of 4½ %. under normal circumstances, substantial deviations from the reference value would tend to indicate future risks to price stability. however, monetary policy does not react to deviations of monetary growth from the reference value in a “ mechanistic ” way. in the first instance, such deviations will be thoroughly analysed to infer any signals which they may send about the prospects for price developments. if this analysis points to a threat to price stability, monetary policy will react in a manner appropriate to counter this threat, rather than attempt to eliminate the deviation of monetary growth from the reference value in the short term. although monetary data contain information which is vital for monetary policy decision - making, monetary developments alone will clearly not constitute a complete summary of all the economic information necessary to enable appropriate policy decisions to be taken. that is why it is important to monitor simultaneously a wide range of financial and other economic indicators, including economic forecasts. this broadly based assessment constitutes the second pillar of our monetary policy strategy. all in all, the combination of the two pillars of the eurosystem ’ s strategy ensures that monetary, financial and economic developments are closely monitored and analysed. on the basis of this thorough analysis, the interest rate will be set in a way that best serves the maintenance of price stability. ensuring the benefits ( ii ) : stability - oriented non - monetary policies let me now turn to the importance of prudent and stability - oriented non - monetary policies in order to reap the fruits of the single currency. i should

##metric shocks, there was no compensation by other countries. it is a problem that is quite difficult to solve, but it is a fact that emu hasn ’ t functioned very well in this respect. one worry is that the fundamental reflection about how to make emu work better is not advancing sufficiently. not all is negative, of course. we have managed to set up better mechanisms to deal with sovereign debt crises, but you are still in an unclear position when dealing with issues of sovereign debt. and we have banking union, we are especially advanced in terms of supervision, but we have not finished it. the fact that banking union is not finished, doesn ’ t that lead to small banks in small countries being bought by big banks from big countries? i know this is a big discussion here in portugal. i always have problems in understanding why that would be a problem. i experienced the crisis in belgium with fortis, and that bank represented a huge risk for that country. now, it is part of bnp and this has been absolutely instrumental in avoiding a catastrophe. for europe, this is an important question. you see the banking systems are in general more national than they were. not in portugal, but in many countries. the banks, even when they have subsidiaries, are tending to manage by way of separate entities more and more. banks today are exposed to country risk because most of the assets are related to the country. this means that, if you have a shock in the country, the banking system is not diversified enough. of course, the fact that we are in a monetary union limits the room for manoeuvre : you don ’ t have the exchange rate instrument, you have a single monetary policy. so it is absolutely vital to evolve towards pan - european banks, banks that are geographically diversified and also that would be backstopped by emu as a whole. so what you are saying is that, in a monetary union, if small countries want to have safe banks, they have to forget the ownership question? i think what matters in banks is good governance, not national ownership. you can always have local banks, that ’ s not the problem, but having the whole banking system exposed to the local economy in a monetary union like ours is a dangerous combination. we have two problems in the euro area : a fragmented banking market and the lack of common backstop. it cannot be done in one day, but you have to spell out how you make the transition to it