jean - claude trichet : reflections on the european economic and monetary union speech by mr jean - claude trichet, president of the european central bank, at the evangelische akademie tutzing, tutzing, bavaria, 13 november 2010. * * * ladies and gentlemen, i would like to thank the organisers for inviting me to speak here today. this is a crucial time for the european economy and for the global economy. vital debates about the state of and interactions between the world ’ s major economies have been taking place at the g20 meetings of ministers and governors a few weeks ago and at the g20 summit in seoul yesterday. within europe, there is a particularly vital debate about the framework of governance for economic and monetary union. both debates touch on the importance in these challenging times for the design of appropriate policies. throughout the global crisis, we have all striven to avoid a repeat of the economic policy disasters of the 1930s – and to foster a close cooperation between policymakers around the world. working together towards a common goal must continue to guide our actions. today, i would like to put some of the key issues into a broader context. first, i will focus on the experience of economic and monetary union in europe. second, i will briefly describe the origins and impact of the financial crisis and outline how the european central bank ( ecb ) has responded to the crisis. and finally, i will touch on the current economic situation and conclude with the key challenges that lie ahead of us in achieving an effective economic governance policy in europe. price stability in the euro area let me begin with price developments. the quality of a currency is reflected in its value. as you know, this is what in german is called geldwertstabilitat. there is one single benchmark to measure such stability within an economy and that is the degree of price stability or, expressed the other way around, the rate of inflation. as the guardian of price stability for the euro area, the ecb has set itself a very clear numerical benchmark to measure the degree of price stability. it has defined price stability to be an annual rate of inflation of consumer prices in the euro area of below, but close to 2 %, over the medium term – that is, over an average of several years. we now have almost 12 years of experience with the euro – enough time to judge whether the ecb has been successful in delivering its mandate. over these 12 years, the

challenges for economic and monetary union but as its name indicates, our economic and monetary union rests on two pillars : an economic pillar and a monetary pillar. the fundamental concepts of the monetary pillar are the full independence of the ecb and its crystal clear mandate to pursue price stability in the euro area. the fundamental concepts of the economic pillar can be summarised as follows : first, the need to determine macroeconomic policies in line with the rules governing the participation in a monetary union that is based on price stability ; and second, the need to set fiscal policies in line with the requirements as laid out in the stability and growth pact. i have already described the contribution of the monetary pillar. unfortunately, the contribution of the economic pillar is at times much less flattering. much of the problems we face today see their origins in insufficient discipline of fiscal policy makers and an inappropriate setting of macroeconomic policies. for several years, fiscal policies in many countries have not been in line with the letter and the spirit of the stability and growth pact. the pact calls for balanced budgets over the cycle, maximum deficits of 3 % and a debt level of below 60 %. when a few years ago it became clear that fiscal policies would not be able to meet the rules of the stability and growth pact, it was not policies that were changed but the pact. in 2004 and 2005, several heads of states and governments were actively trying to dismantle the stability and growth pact. one of the countries in the lead of these endeavours was germany. it was supported by france as well as other countries. it was a very fierce battle at the time, and the ecb voiced publicly its grave concerns. the second area of policy slippage concerns macroeconomic policies. in a monetary union, national developments in prices and costs have to take account of the fact that the union is a union of monetary stability. therefore, national price and costs developments significantly higher than the union average entail significant losses over time in competitiveness that are painful to reverse. by the same token, fiscal and structural policies – including appropriate supervisory policies ( today we would say macroprudential policies ) – need to keep domestic demand and credit growth in line with rates of sustainable growth and price stability. otherwise, booms and busts are the inevitable consequence. both areas, fiscal and macroeconomic policies, are monitored by the peers, supported mainly by the commission. the eurogroup and ecofin meetings of finance ministers are the fora for such peer