jurgen stark : does the euro area need an economic government? statement by mr jurgen stark, member of the executive board of the european central bank, at the hec european executive campus, brussels, 22 january 2008. * * * i am delighted to be here today to participate in this session on economic policies and governance. the topic of our panel discussion is very well chosen : “ does the euro area need an economic government? ” this is indeed an important and highly topical issue. the advocates of an economic government for the euro area argue that such an institution is needed in order to 1. improve the coordination of national economic policies in the euro area ; and 2. establish a dialogue with the ecb in order to discuss the monetary strategy for the euro area. i will give you my conclusions straight away : i do not agree with these claims. we do not need an economic government for the euro area to improve the coordination of national economic policies. effective and efficient coordination can be achieved within the current institutional framework if all policy makers respect its provisions and use the existing procedures and instruments more responsibly. indeed, the idea of establishing a political entity in order to institutionalise a dialogue with the ecb with a view to influencing monetary policy in the euro area represents a fundamental attack on the euro area ’ s monetary policy framework, which has proved very successful over the last nine years. the institutional framework of emu is based on clearly specified objectives, a clear allocation of responsibilities to different policy areas and a sound framework for the coordination of national economic policies. the economic objectives of the community, which are listed as “ tasks ” in article 2 of the treaty establishing the european community include “ harmonious, balanced and sustainable development of economic activities, a high level of employment [ … ], sustainable and noninflationary growth, a high degree of competitiveness and convergence of economic performance ”. the treaty of lisbon transformed these tasks into “ objectives ” and reworded them but made no substantive changes. one noteworthy, welcome, amendment is the addition of price stability to the list of objectives, which further strengthens the focus on stability of the eu ’ s policy framework. in order to achieve these objectives, the maastricht treaty established a clear allocation of responsibilities, reflecting the fact that assigning policy instruments primarily to one single policy objective and making individual policy - makers responsible for one single policy instrument ensures a high level of effectiveness and accountability. the single monetary policy was given the task of maintaining

that price stability is effectively achieved and maintained. a necessary condition for the achievement and maintenance of price stability is a credible commitment to ultimately pursuing a price stability - oriented monetary policy. it is universally accepted, on the basis of a vast amount of theoretical and empirical literature, as well as historical experience, that the best means of having monetary policy credibly committed to the pursuit of price stability is to have an independent central bank. it is therefore crucial that the different dimensions of the ecb ’ s independence are fully respected, namely institutional, personal, financial, functional and goal independence. in this context, it is important to stress the benefits of price stability for economic prosperity and to emphasise the fallacious nature of the view, heard occasionally, that an overriding focus on price stability means that the needs of the real economy are neglected. the relationship between inflation and economic performance in the long run has been studied extensively. as i have recently argued, one could say that the long - run phillips curve, describing the long - run relationship between inflation and economic activity, has virtually been rotating in the minds of macroeconomists and policy - makers over the last few decades. around 35 years ago it was positively sloped, suggesting that a little more inflation would have the permanent effect of giving rise to a little more real income. the experience of the stagflation of the 1970s and the rational expectations revolution in macroeconomic theory led to attention being focused once again on a long forgotten principle, namely the concept of the long - run neutrality of money, the insight that monetary policy measures will, in the long run, influence only the level of prices, leaving growth and employment levels unchanged. any attempt by central banks to systematically stimulate output and employment is ultimately doomed to failure, the only certain outcome being inflation. the perceived trade - off between inflation and growth will, sooner or later, reveal its true nature. although it is tempting to believe that such a trade - off exists, it is in fact a mirage. new empirical evidence and new insights in monetary theory have shown that even moderate levels of inflation have considerable negative repercussions for long - term economic performance, and maintaining price stability is therefore the best contribution that monetary policy can make to economic welfare, growth and employment. by maintaining price stability, monetary policy fosters economic prosperity by eliminating distortions arising from high and volatile inflation. in particular, contrary to the view, heard occasionally, that a monetary policy that seeks to safeguard price stability will