was taking insurance against more negative developments which, although not the most likely to occur, were nevertheless possible. the other example refers to the cut in rates decided in may 2001 when headline inflation was above 3 per cent but the world economy seemed to be on the brink of recession and there were no risks for medium term inflation. this flexible approach was appropriate in both cases and was validated by subsequent events. monetary policy cannot be transformed into a dogmatic and mechanical science and it will always be necessary to use good judgement to properly assess the balance of the risks regarding inflation prospects. the same assessment of risks that is also essential to good communication with markets which has become such a crucial part of the activity of central banks. the recent clarification of our monetary strategy, in particular concerning the goal of price stability now defined as implying an inflation rate « below but close to two per cent », was thus important to improve communication and to ensure the continuation of good monetary policy for the euro area. turning now to our own national perspective, it is clear that portugal has been a net beneficiary as a participant in the european economic and monetary union. among other things, we have taken advantage of our trade interdependence with europe through currency stability ; we imported a low inflation regime that is good for long - term growth and we have benefited from financial integration that granted us lower bond rates and a lower cost of capital. there are obviously risks involved and the need to adopt new and rigorous discipline concerning public finance and flexibility of markets in order to achieve timely adjustment of wages and prices. in view of a past history of high inflation, portugal could be considered a good candidate to illustrate what some critics underline as the great difficulty of a single monetary policy in dealing with a group of heterogeneous economies. in our case, however, the performance of the economy throughout this period does not confirm these possible causes of concern. since 1999 portugal has had an average positive inflation differential with the euro area of only 1. 2 per cent and an average annual output growth of 0. 5 per cent higher than the one of our partners. considering the overall picture, the dispersion of inflation in the euro area, after only four years, is remarkably similar to the one verified in much older monetary unions like the usa or canada. what some critics seem to forget is that monetary union itself contributes to the deepening of economic and financial integration, by promoting the medium term convergence of inflation and the synchroni

vitor constancio : the performance of monetary policy during the past five years speech by mr vitor constancio, governor of the bank of portugal, at the dinner in honour of the governing council of the european central bank, queluz, 2 october 2003. * * * prime minister, minister of state and finance, president of the european central bank, colleagues, ladies and gentlemen, it gives me great pleasure to welcome you all in this place full of history on the occasion of a meeting of the governing council of the european central bank. we meet twice a year outside frankfurt and this constitutes an important expression of the decentralized nature of the eurosystem. it also underlines the accountability of the ecb to all national constituencies and the importance we attach to the need that our activity should be understood and supported by public opinion in all member states. the decentralized system that we operate has worked well and it is therefore fortunate that the draft constitutional treaty about to be discussed in the coming inter - governmental conference, has left untouched the basic principles and organization of the eurosystem. i think this is wise in view of the delicate balance that a major sharing of sovereignty among nations always requires and the need for stability that monetary institutions always deserve. european monetary union has been a great historical achievement and the past five years were marked by several accomplishments : the smooth efficiency of its beginning, the building - up of a new international institution, the successful introduction of euro notes and coins and, in particular, the delivery of sound monetary policy. many have contributed to make this possible but it is justifiable to stress the importance of good leadership for the whole endeavour. so, i think it is appropriate to take this opportunity to pay tribute and express our gratitude to wim duisenberg for his role as the first president of the ecb. i am sure that time can only enhance the assessment of his contributions to european monetary history. we were fortunate to have him as our leader but, at the same time, we feel secure regarding the future as the presidency passes into the experienced and competent hands of jean - claude trichet. this is then a good moment to briefly take stock of the performance of monetary policy during the past five years, both from a general perspective and from the point of view of a country such as portugal. with time and after the correction of an early depreciation of the euro with no basis in the fundamentals, the public assessment of our monetary policy has become