to maintain price stability, as stipulated in the treaty on european union. as has long been argued by central bankers and academic economists, inflation is costly, both economically and socially. 1 nobel prize - winner milton friedman expressed this well in 1980, when he said : “ inflation is a disease, a dangerous and sometimes fatal disease, a disease that if not checked in time can destroy a society ” 2. the same could be said about deflation. in my view, emu is a tool to consolidate the progress made towards price stability in recent years and to firmly anchor expectations in line with price stability, and thereby establish the necessary framework to seize the opportunities of monetary union. the eurosystem enjoys full independence to determine the appropriate level of interest rates in order to satisfy its primary objective of price stability. moreover, the members of the ecb governing council have long terms of office and are only dismissible for serious misconduct or inability to perform their duties. these provisions imply that the concept of monetary stability benefits from explicit legal statutes and that the credibility of the eurosystem will be safeguarded by protecting the monetary policymaking process from political interference. s. fisher, “ why are central banks pursuing long - run price stability?, ” revised version of a paper prepared for the federal reserve bank of kansas city symposium ( achieving price stability ), august 1996. m. friedman and r. friedman, free to choose : a personal statement, harcourt brace jovanovich, 1980, p. 253. a further important benefit of emu is that it has greatly reduced the risk of real exchange rate misalignments within the euro area. this fosters economic growth and avoids a misallocation of resources. in fact, it enables the european single market to function smoothly to the advantage of producers and consumers. emu has eliminated nominal exchange rate volatility and exchange rate risks within the euro area. this benefits not only trade between, and economic growth in, the euro area countries but also the economic development of other european and non - european countries. in addition, foreign direct investments into the euro area economies should be promoted, as these investments are negatively affected by exchange rate volatility. the advantages of economic integration afforded by the single market process are enhanced by the elimination of the transaction costs of exchanging different currencies, the direct result of the introduction of the euro. furthermore, the single currency will make prices across the euro area directly comparable, which should increase competition and hence efficiency and economic growth in

10, pp. 23 - 139. cecchetti, s., h. genberg, j. lipsky y s. wadhawani ( 2000 ), asset prices and central bank policy, geneva reports on the world economy no, 2, icmb and cepr. cowan, k. and j. de gregorio ( 2007 ), “ international borrowing, capital controls and the exchange rate : lessons from chile, ” in s. edwards ( ed. ), capital controls and capital flows in emerging economies : policies, practices and consequences, nber and the university of chicago press. cowan, k., j. de gregorio, a. micco and c. neilson ( 2008 ), “ financial diversification, sudden stops and sudden starts, ” in cowan, k., s. edwards y r. valdes ( eds. ), current account and external finance, central bank of chile. de gregorio, j. ( 2009a ), “ implementation of inflation targets in emerging markets, ” in g. hammond, r. kanbur and e. prasad ( eds. ), monetary policy frameworks for emerging markets, london, bank of england. de gregorio, j. ( 2009b ), “ exchange rates, real adjustment and monetary policy, ” presented at the 2009 money and banking conference, banco central de la republica argentina. desormeaux, j., p. garcia and c. soto ( 2009 ), “ terms of trade, commodity prices and inflation dynamics in chile, ” forthcoming, bis papers. edwards, s. and r. rigobon ( 2009 ), “ capital controls, exchange rate volatility and external vulnerability, ” journal of international economics, vol. 78, no. 2, pp. 257 - 267. ellis, l. ( 2008 ), “ the housing meltdown : why did it happen in the united states?, ” bis working paper no. 259. plosser, c. ( 2007 ), “ two pillars of central banking : monetary policy in financial stability, ” opening remarks at the pacb convention, federal reserve bank of philadelphia. prasad, e., k. rogoff, s. wei and a. kose ( 2003 ), “ effects of financial globalization on developing countries : some empirical evidence ”, imf occasional paper no. 220. figure 1 monetary policy and housing prices monetary policy housing prices ( percentage ) ( nominal index, first quarter