otmar issing : testimony before the committee on economic and monetary affairs of the european parliament introductory statement by professor otmar issing, member of the executive board of the european central bank, in brussels, 20 march 2002. * * * today, i would like to review economic developments in the euro area in the context of the monetary policy strategy of the ecb. before doing this, allow me to mention that we are extremely pleased to see that the euro cash changeover went so smoothly. there were no significant technical problems in this complex logistical process and the fact that national banknotes were largely withdrawn well before the final deadline of their ceasing to be legal tender confirms that the european public became familiar with the new banknotes and coins very quickly. the governing council would like to express its gratitude once more to all those who helped to make the euro cash changeover such a success. turning to monetary policy, let me start with some remarks on the first pillar of the ecb's monetary policy strategy. in 2001, the annual rate of m3 growth doubled from a low of almost 4 % in march to 8 % in november, before declining slightly in january 2002. from june 2001 onwards, m3 growth stood clearly above the reference value of 4½ %. however, the governing council has so far assessed that these developments do not imply risks to price stability over the medium term. let me explain in some more detail this assessment. as you are well aware, the governing council of the ecb does not react in a mechanistic way to deviations of m3 growth from its reference value. rather, it conducts a thorough analysis of monetary analysis with a view to derive information about the outlook for price stability in the medium term. this analysis is based on clear evidence of high m3 growth leading to inflation over the medium term in the euro area. however, in addition, we need to take into account that monetary developments are at times affected by a number of temporary factors such as changes in tax regulations or, as has been the case, turmoil in financial markets. hence, an appropriate assessment of monetary developments always needs to take a medium - term perspective and in addition requires a detailed knowledge of their underlying factors. the year 2001 highlighted the importance of taking a broad - based approach to monetary analysis. m3 growth in 2001 was driven to a significant extent by a number of factors which we continue to judge as not indicating upward risks to price stability over the medium - term. let me just point to one important

policy has to ward off the risk of a de - anchoring of inflation expectations, which could lead to second - round effects in the form of excessive wage and price - setting dynamics. that implies adjusting monetary conditions and frontloading rate hikes. but so long as expectations remain anchored, the calibration of our policy adjustment should take into account the unprecedented uncertainty of the post - pandemic world. if we were too hasty and mistaken in concluding that supply shocks have durably depressed potential output, we may subject the economy to excessive tightening. if not corrected quickly, this could result in a permanent loss of output as productive capacity adjusts to significantly and persistently lower demand. [ 4 ] and that scar may prove difficult to heal. being prudent does not rule out the possibility of us having to move from withdrawing accommodation to restricting demand. but in the absence of clear second - round effects, we would need convincing evidence that the current shocks are likely to keep having a more adverse effect on supply than on demand. this balancing act – weighing the various factors at play in a forward - looking way – is the ultimate purpose of projections and policy judgement alike. models and measurements should be challenged and improved – indeed, this is what this conference is about – but selective anecdotal evidence is certainly not a better guide. our policy decisions should continue to be informed by comprehensive analysis of the data ; there is simply no substitute for that. the origin of the shocks the origin of the shocks – that is, whether they originate more on the demand side or on the supply side – matters considerably for monetary policy. a central bank would typically want to adjust policy gradually in the face of supply shocks. [ 5 ] but it should react immediately to demand shocks that risk bringing mediumterm inflation above target. this question is crucial today because the shocks that have hit the euro area economy in recent years have affected both demand and supply, making the main drivers of inflation harder to identify. we have faced both a series of external supply shocks [ 6 ] and a deterioration in the terms of trade which have pushed up costs for firms and weakened demand. this has resulted in an extraordinary rise in energy and food prices, especially after russia ’ s invasion of ukraine. together, energy and food currently directly account for more than two - thirds of headline inflation ( chart 1 ). chart 1 contributions of components of euro area headline hicp inflation ( annual percentage changes and percentage points contributions ) sources : eurostat and ec