jean - claude trichet : the euro, its central bank and economic governance text of the stamp memorial lecture by mr jean - claude trichet, president of the european central bank, at the london school of economics and political science, london, 13 june 2011. * * * ladies and gentlemen, it is a great honour for me to speak here at the london school of economics and political science today. the euro and its central bank, the ecb, are unique. the european single currency is the only major currency not issued by a single sovereign state, but by a union of sovereign states. indeed, the european treaties specify a clear division of responsibilities between europeanlevel policy - making and national policy - making. for countries that have adopted the euro as their currency, this implies that, on the one hand, monetary policy is inherently indivisible, and in the euro area it is thus conducted at the supranational level by the ecb. on the other hand, fiscal policies remain largely the competence of national governments. in this lecture i would like to explore how the unique institutional framework of economic and monetary union ( emu ) in europe has fared over the past 12 years and particularly during the global financial crisis. as you will be aware, the primary objective of the european system of central banks is to maintain price stability in the euro area. in the first part of my lecture i will show how the ecb achieved this primary objective before, during and after the crisis. i will also try to convince you that the economic performance of the euro area as a whole has been quite remarkable over the past twelve and a half years. at the same time, we have to recognise that several individual countries in the euro area are facing significant challenges and that experiences during the crisis in different parts of the euro area have been quite diverse. in the second part of my lecture, i will address the issue of economic diversity in the euro area and show that the euro area shares this characteristic with the united states – an economy and a currency area that is a natural reference point taking into account its size. finally, the crisis has exposed weaknesses in the economic governance framework of emu that need to be addressed urgently. i will close my lecture with some comments about what these reforms of the economic governance framework should look like from the perspective of the ecb. the ecb ’ s primary objective : price stability in the euro area before and after the crisis i can say today that the ecb

##ties are different, there has been a convergence in objectives and frameworks. central banks have stepped up their supply of funds at longer maturities. some have broadened the range of collateral accepted in their secured lending operations. they expanded the scope of eligible counterparties so as to ensure a wider dissemination of funds. importantly, major central banks conducted coordinated actions to provide longer - term funds to address dollar funding needs of non - us banks, thereby ensuring an adequate distribution of liquidity across borders. yet, after more than a year of crisis, credit markets remain very fragile, normal interbank relationships have not been reestablished, and those frictions could destabilize the financing of the corporate sector, thus further threatening economic growth. with our last decision, we have given financial intermediaries full assurance that their liquidity needs will be met, in an environment of total clarity and absolute predictability. we hope that this will contribute to reduce uncertainty and restore confidence between counterparties, which is a prerequisite to a functional money market. this may depend on more than simple liquidity provision. but central bank ’ s ability – and willingness – to use their capacity are a major source of stability in the financial system, and should be seen as such, both by market participants and the general public. second, on monetary policy. we have participated in a concerted action by major central banks this is a major, and unprecedented, move to restore confidence, but one, i want to emphasize, fully and absolutely consistent with our mandate. it is obvious to all observers that the overall environment has dramatically changed in the last three weeks. declining oil and commodity prices, together with stagnant activity have significantly altered the inflation outlook. based on current conditions, we can expect " instant " inflation rate to come under our definition of price stability somewhere in the middle of 2009. in addition, long term inflation expectations, as measured by the " 5 years in 5 years " break even ( or swap ) inflation rate, has dropped significantly under 2 %, perhaps reflecting the credibility created by our past actions. to be sure, we must remain vigilant as regards wage developments and the still possible second round effects from past price surges. but, overall, i would asses that our new monetary stance is in line with what is necessary, in current conditions, to fulfill our mandate. let me now elaborate on two other set of policies, which, although not directly linked to the currency, contribute to underpin