mr duisenberg focuses on the possible future impact of the unique monetary unification in the european union and shares some observations on the challenges facing the ecb and the eu speech given by mr willem duisenberg, president of the european central bank, at the villa d ’ este workshop in cernobbio on 4 september 1999. * * * ladies and gentlemen, a great number of you are clearly familiar with the political and economic developments which led to the introduction of our new currency, the euro. i should therefore like to look ahead and focus my remarks on the possible future impact of this unique monetary unification and share with you some observations on the challenges facing the european central bank and the european union as a whole. since 1 january 1999, the euro has been the common currency for eleven member states of the european union. this was rightly described as a historic event, since the completion of economic and monetary union indeed marks an unprecedented degree of economic and political integration among the european countries participating in this endeavour. i am sure that the introduction of the single currency will help to further realise the efficiency and welfare gains of the single market, although this will probably be a gradual process, and will become apparent only over time. however, with the establishment of economic and monetary union, the integration process has certainly gained a new quality. the significance of the complete and voluntary transfer of a core competency of the modern state, namely monetary policy, from the member states to a truly european and independent institution such as the european central bank, can hardly be overestimated. while the years of technical preparation certainly required great efforts on the part of all involved, it is the longer - term impact of emu which holds the prospect of the most momentous change. the first few months of the existence of the euro have set the scene for a positive outlook. even though external developments such as the depreciation of the euro against the dollar have attracted rather pessimistic headlines, there are, in fact, several reasons for some satisfaction. the changeover to the single currency ran smoothly, largely thanks to the diligent preparation of all involved. the european central bank and the eurosystem have assumed their new responsibilities, and the monetary policy instruments and decision - making procedures are functioning well. a unified euro area financial market is developing as operators re - orient their activities beyond the borders of their previous domestic markets. however, it is altogether natural that not all facets of the complex emu project are as yet

i would question whether this could really be called risk management at all. worse still, it would project us into the political domain on very shaky analytical foundations. this brings me to the second reason why economic and political risks have to be treated separately, and it relates to the endogeneity between monetary policy and risks. in the economic 3 / 7 bis central bankers'speeches realm, such endogeneity has been recognised as desirable and is a key reason why central banks have become much more transparent over the past two decades or so. a clear understanding by the public of how the central bank will react to economic risks automatically reduces the likelihood of such risks materialising. for instance, if markets expect central banks to react to adverse shocks by providing monetary accommodation, easier financial conditions will immediately follow. such anticipation effects can increase the effectiveness of monetary policy. for political risks, however, establishing such expectations would not be desirable. if we were to communicate that we will take decision “ x ” in response to political outcome “ y ”, financial conditions would move as the probability of that outcome rose, and this would potentially prejudice the result. that would be controversial in the case of global political risks. for domestic ones, it would be unacceptable. even if the central bank had perfect foresight of the economic consequences, such a reaction function would be seen as undue interference in the political process and it could undermine the effectiveness of monetary policy, instead of increasing it. and since our assessment would be largely based on judgement not analysis – for the reasons i mentioned – we would find ourselves being accused of political meddling. this is a position that no independent central bank would want to be in. so when it comes to political risks, we have to be data - driven. we do not prejudge political outcomes. and we do not try to risk - manage their effects on the economy, since we can rarely predict those effects accurately – and worse, we may end up influencing political developments and thereby compromising our independence. the only way in which we can include political risks in our policy framework is by responding to their visible impact on economic and financial conditions. this does not mean being complacent : we can and must plan for all eventualities. but we react to data, not to political events themselves. in some ways, this is analogous to the debate about “ leaning versus cleaning ” of financial bubbles : faced with so much uncertainty about what constitutes a bubble, most of the time it is more efficient