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Prof. Otmar Issing

Member of the Executive Board of the European Central Bank
Speech to the European-Atlantic Group
House of Commons, London - 28 Jan 1999

Part 3

6. Looking ahead

The Maastricht Treaty provides the necessary foundations for a successful monetary policy. It has enshrined the principle of central bank independence, endowed with a high degree of political legitimacy, and it has assigned the ESCB the clear mandate of maintaining price stability. The Governing Council of the ECB has presented its stability-oriented monetary policy strategy, which provides a coherent framework for its policy decisions and - together with the quantified definition of its overriding objective of price stability - furnishes a clear and "honest" basis for its accountability vis-`-vis the European public. At the same time, it takes account of the unique challenges and uncertainties facing the euro area. One should add that, of course, the ECB also has at its disposal the necessary policy instruments to implement its strategy and to attain its primary objective of price stability over the medium term. The Governing Council of the ECB has already demonstrated that it can act decisively wit h the co-ordinated interest rate move in early December even before the euro was born. This has reduced the uncertainty in the markets and cleared the way for a smooth start of the new currency. The past four weeks have made for a promising beginning.

Thus, looking ahead, what will be the principal concerns regarding the longer-term health of the euro? There can be no doubt in anybody's mind that the ECB is determined and well-equipped to maintain price stability successfully in the euro area over the medium term. It will thereby do its part in contributing to the wider objectives of the Community.

In particular, safeguarding the value of the currency is a crucial precondition for long-term investment, sustainable growth and employment creation. The maintenance of price stability is a task that should never be underestimated. The appropriately forward-looking assessment of future risks of inflationary or deflationary pressures in the economy will tend to be finely balanced at any point in time. Those commentators who call for monetary policy to be simultaneously directed at objectives other than price stability often forget this. We always need to be clear about what monetary policy can do and equally what it cannot do.

This brings me to the possible risks inside Monetary Union. The ECB will do its job, but can we be equally confident that everybody else will do theirs? Europe suffers intolerably high rates of unemployment. For the most part, this unemployment is structural in nature and needs to be addressed urgently through labour market reforms and increased flexibility in the wage-setting process. It is a dangerous and counterproductive illusion that any of this could be helped by printing money, quite on the contrary. Monetary Union should take away that illusion once and for all. National governments and social partners must shoulder their responsibilities and one can only hope that the introduction of the euro serves as a "catalyst for change" and triggers the badly needed structural reforms at the national level.

There have recently been calls for greater policy co-ordination among the euro area countries. Much has been made of the clear asymmetry in the Maastricht construction, ie the combination of a centralised single monetary policy alongside continued national responsibilities for most other areas of economic policy-making. While this may be a reflection of political realities and the requirements of subsidiarity, it would be premature to conclude that the Maastricht construction was devoid of economic logic. On the contrary, Monetary Union, above all, calls for a greater need for flexibility as well as discipline in wage-setting and budgetary policies and a better functioning of market adjustment mechanisms.

Precisely because monetary policy can no longer respond to national conditions, the exact opposite of greater centralisation and harmonisation may be required in other areas. Talk of uniform European wage-setting or an ambitious social union is going in the wrong direction; different productivity and real economic conditions across the euro area must be taken into account more than ever. Following similar reasoning, there is a strong case for retaining and even strengthening national (and in some cases "sub-national") responsibilities for fiscal policies. Indeed one reason for the Stability and Growth Pact being aimed at budgets that are close to balance or in surplus in normal times is to recover the room for manoeuvre for fiscal policy required to let automatic stabilisers operate effectively to smooth out national and regional business cycles.

As long as the letter and the spirit of the Stability and Growth Pact are respected, national fiscal policies are free to use the remaining room for manoeuvre as best fits national circumstances and preferences. This should also be sufficient to prevent gross imbalances in the aggregate monetary-fiscal policy mix. Beyond that, it is not quite clear to me what any further "co-ordination", over and above the regular exchange of views and data, could possibly achieve. In particular, it would seem highly unrealistic, impractical and counterproductive if attempts were to be made at European-wide "Keynesian-style" fine-tuning and demand management among 11 Finance Ministers. Such attempts have proven a failure in the past, even at the national level, where the institutional preconditions would appear to be much more congenial.

The Maastricht Treaty provides for a clear assignment of responsibilities. Monetary policy is centralised at the European level and has been given the single overriding objective of price stability. Fiscal policy and most other areas of economic policy-making remain largely rooted at the national level. Nevertheless, it is obvious - and the Treaty recognises this - that monetary policy does not operate in a vacuum. Unfavourable developments in other policy areas, in particular wages and fiscal polices, can place additional burdens on monetary policy and make the maintenance of price stability more difficult for the ECB.

Therefore, it is natural that the ECB will participate in a continuous dialogue with European and national officials in a number of institutional settings, and we shall not hesitate to engage actively in the wider economic debate in Europe. However, this dialogue or any form of co-operation must not at any time blur the respective fundamental responsibilities. Without a clear assignment of responsibilities, policies are unlikely to be conducted in an effective and credible manner. Moreover, without it, there can be no meaningful accountability towards the ultimate sovereign - the people of Europe.

7. Monetary Union and political union

In European Economic and Monetary Union sovereignty, which in any democracy ultimately belongs to the people, is delegated to a new supranational European institution as far as monetary policy is concerned. At the same time, the Euro-system has been assigned a clear and limited mandate, ie to maintain price stability in the euro area, which it is to pursue free of political interference. This "twin transfer of sovereignty" in the monetary field - pooled at the European level and exercised through an independent central bank - is at the heart of the Maastricht Treaty. To be successful over the longer term, the ECB as the guardian of the euro, like any institution in a democracy, will have to win and maintain the trust and support of the European public.

Historically, currency jurisdictions and national borders have tended to coincide. This reflects the simple fact that the right to issue money has always been a key attribute of national sovereignty and therefore monetary union would not appear to be just a small and innocuous step of a primarily technical nature. One is indeed hard pressed to find any precedent in history, where sovereign nation states voluntarily ceded sovereignty in the monetary field to a genuinely supranational body. It is therefore clear that European Economic and Monetary Union has been and will continue to be not just an economic, but also a political project. Indeed, as I mentioned at the beginning of my speech, the European integration process as a whole has been characterised by an interplay of political and economic forces and motivations.

Perhaps in no other Member State of the European Union is the political dimension of EMU debated as fiercely as in the United Kingdom. The perceived "loss of sovereignty" has raised fears that the single currency might open the floodgates to a centralised European "super state" run by unelected and "faceless bureaucrats". Baroness Thatcher has famously called the Maastricht Treaty a "treaty too far". Others make no secret of their view that, on the contrary, it is a treaty "not far enough". They believe that the single currency can be used as a vehicle towards the ultimate objective of greater political union and that further integration in other policy areas would be required to make European Economic and Monetary Union work.

I have always found the idea that a single currency could be used as a "pace-setter", which would itself trigger further political integration, to be highly doubtful and extremely risky. The stability of the currency is too important a goal in itself and must not be overburdened with not strictly related political ambitions, however worthy these may be. Indeed, some commentators, such as the Berkeley economist Maurice Obstfeld, have warned that Europe "has taken a gamble in placing monetary unification so far ahead of political unification". However, in this whole debate the precise meaning of political union and the link to monetary union often remain unclear. It is certainly hard to draw a direct line from monetary union to, say, a common foreign policy.

What is required, to my mind, for a successful monetary union is a sufficient degree of political commitment by all participating countries, the leading economic actors and the wider public to accept fundamentally and genuinely the political and economic constraints that a single and stable currency represents. The deeper underlying commitment to make European integration a success even in the most difficult of times in history gives some general grounds for hope on this count. Some degree of political unity (not necessarily union), or rather a sense of common responsibility would appear to be important for the long-run health of EMU. However, it is not a substitute for the right economic conditions for lasting success.

The Maastricht Treaty, together with the Stability and Growth Pact adopted subsequently, provides the necessary foundations for stable money, sound economic policies and a flourishing free market economy in Europe. In particular, a single European monetary policy is compatible with responsibilities for many other policy areas, remaining firmly rooted at the national level, as long as the minimum set of common objectives, principles and rules established in the Treaty are followed in letter and in spirit.

Most importantly, the delegation of monetary policy to an independent and European institution does not at all contradict the basic principles of democratic legitimacy. On the contrary, because the ECB is given a precise and limited mandate, ratified by all 15 national parliaments, it can and will be held accountable effectively for its performance by the European public and its elected representatives.

My conviction that the Maastricht Treaty offers a sound and convincing framework for economic policy-making in Europe, even with the presently very limited degree of political integration in other areas, does not mean that current institutions and structures in the European Union will and should be cast in stone. All durably successful institutions need to adapt as circumstances change, as has been the case for the institutions of British democracy.

This has been and will continue to be true for the further evolution of European integration. The birth of the euro four weeks ago, on 1 January 1999, is certainly not the end of history, nor is it the sudden dawn of an entirely new age. It is, however, an important milestone on the road of European integration. It is a vision that has become reality. But it is now a reality that requires a constant vigil against manifold risks and, more prosaically, continued plain hard work to turn it into a lasting success. The ECB is prepared to do its part.

* * * * * * *

For the synopsis and the first two parts of this speech, please see Synopsis and Part 1 of speech and Part 2 of speech

Last update: 25 March 1999

© Copyright Anthony Cowgill and Andrew Cowgill, 1999

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