john hurley : the eurosystem approach to monetary policy speech by mr john hurley, governor of the central bank and financial services authority of ireland, at the conference “ the global interdependence center abroad in ireland ”, co - organised by the central bank and financial services authority of ireland and the irish american business chamber and network, dublin, 11 - 12 june 2007. * 1. * * introduction ladies and gentlemen, let me begin by saying how pleased i am to have the opportunity to participate in this conference. we in the bank have co - organised this event and we feel that the high quality of the speakers and participants will ensure its success. it is both a networking exercise and an opportunity for participants to exchange views and hopefully gain further insights into financial and economic issues. i have been asked to speak on the topic of monetary policy in the euro area. the single european currency project commenced towards the end of the 1980s and resulted in the adoption of the single currency eight years ago. although the euro area is comparable to the united states in terms of population and gdp, it differs significantly in a number of respects. in particular, it is not accompanied by political union, nor is there a common language. these factors have not presented major difficulties and, by any standards, it can be said that emu has been a success. i will start by briefly recalling the background to the creation of the european single currency. i will then talk on the monetary policy strategy of the european central bank as well as its communication strategy. after briefly describing actual monetary policy since the launch of the euro, i will examine the benefits of monetary union for the euro area economy. finally, i will refer briefly to the effects of the single currency on the irish economy. 2. background the adoption of a single currency by eleven members of the european union at the start of 1999 was an ambitious and unprecedented event. it was a very challenging task for all concerned. despite considerable scepticism about the project in some quarters, it has been an undoubted success. reflecting this, it has attracted two new members, greece in 2001 and slovenia in 2007. it has also resulted in the physical replacement of national currencies by euro notes and coin in 2002. at this stage, the general public in the euro area has effectively altered its mindset to think in terms of the euro rather than their previous national currencies. how was this success achieved? one important impetus was the strong belief that the full benefits

to ensure that risks to price stability over the medium term do not materialise. the euro area economy has gone from strength to strength over the past 18 months. the economy expanded at its fastest pace for six years in 2006, and the medium - term outlook for growth remains favourable. the information we have for the first quarter of 2007 suggests that growth remained healthy. looking ahead, the conditions are still in place for the euro area economy to grow solidly. external demand, while moderating, should still provide some support, while domestic demand seems set to maintain good momentum. our assessment is that the risks to the outlook for growth are broadly balanced in the short term. however, over the longer term, there are some downside risks from oil price movements and global imbalances. while inflation remains below 2 per cent, the rise in oil prices in recent months has meant that the dip in inflation that was expected in the first half of 2007 has not occurred. over the remainder of the year, base effects are expected to push up the headline rate of inflation from september onwards. with regard to the medium - to longer - term outlook, upside risks remain. these risks are well known and relate to oil prices, the potential for increased pass - through and wage growth in a stronger economic environment and, in the case of the longer - run outlook, vigorous money and credit growth. the governing council has signalled that close monitoring of all these developments is essential to ensure that risks to price stability over the medium term do not materialise. 6. benefits of emu the successful implementation of the stability - oriented monetary policy of the ecb has been of undeniable benefit to the euro area economy, both directly by maintaining price stability and indirectly from the lower volatility in real economy variables that price stability facilitates. the introduction of the common currency has also promoted increased financial and economic integration between the member states of the euro area, thus increasing economic efficiency and providing fresh impetus for the deepening of the european single market. the performance of the ecb in regard to its price stability mandate has been successful. in particular, long run inflation expectations have been within the ecb ’ s definition of price stability. this underlines the credibility that the ecb has achieved since taking control of monetary policy. the volatility of inflation has also fallen. it nearly halved during the convergence period before the inception of the euro and has continued to fall since the adoption of the euro, despite the major economic shocks hitting