The first lustrum of the ECB
European Central Bank President Dr Willem F. Duisenberg
addresses the recent International Frankfurt Banking Evening. In his
speech, Duisenberg puts the ECBs monetary policy-making in perspective
and speaks of the future of the ECB, its future institutional status
and the relevance of the Bank in the Convention on the Future of Europe
It gives me great pleasure to address such a distinguished
audience today; even more so as it is not the first time I am speaking
at the International Frankfurt Banking Evening.
On 1 June of this year, the ECB celebrated its fifth anniversary. Hence,
In my speech today, I will focus on two topics. First, I will discuss
some lessons from our experience of monetary policy in the euro area
during the first five years of the ECB. Second, I will look ahead and
elaborate on ongoing developments in the context to the Convention on
the Future of Europe, which aims to lay the foundations for a Constitutional
Treaty for the European Union.
ECB monetary policy-making in perspective
Starting with our experience of monetary policy, and, of course, speaking
as an impartial observer, I can say that I am very satisfied with how
the Governing Council of the ECB has functioned over the last five years
in fairly difficult circumstances. Indeed, a lot has happened and it
must be said that the first lustrum of the ECB was a fair "baptism
of fire". I am not going to bore you with a recap of the monetary
policy decisions we have taken, or the reasons behind each of them,
but will instead concentrate on seven or so features which, to my mind,
can be considered as the main issues when reviewing our monetary policy
Let me begin by making a few remarks on our focus on price stability.
This focus is enshrined in the Treaty on European Union and is our mandate.
It is so with very good reason. Long gone are the days when monetary
policy was thought to face a long-term trade-off between inflation and
economic growth. It is now globally acknowledged that maintaining a
low and stable rate of inflation is the best contribution that monetary
policy can make to economic welfare.
The ECB has pursued its mandate of maintaining price stability with
vigour and determination. The public has understood this. Inflation
expectations, as measured by survey data or by financial market indicators,
have always remained consistent with our definition of price stability.
This is all the more remarkable as the ECB had no track record at the
beginning while it was faced with the euro area economy being hit by
repeated upward price shocks. As a result of all these shocks, HICP
inflation has been above and sometimes significantly above
2% for quite some time. But inflation always bounced back following
these shocks and today the outlook for price stability is once again
A second related point I would like to mention is the medium-term orientation
of our policy. As a central bank, we only affect prices with long lags
and we cannot steer trends in prices with high precision. Our focus
on the medium term helps to avoid overly ambitious attempts to fine-tune
inflation developments. You might ask what "medium term" means
exactly. It is certainly not a fixed time horizon, as some have argued.
Experience in recent years has taught us that flexibility in this respect
is very important. From this point of view, the ECB's monetary policy
strategy is different from pure forms of inflation targeting.
This leads me to my third issue, which is that one cannot simply rely
on a single inflation forecast to conduct monetary policy successfully.
Experience suggests that it can be very misleading to summarise the
assessment of medium-term inflationary pressures in one single figure,
even when a measure of statistical error is attached to it. Unfortunately,
monetary policy is not so simple and the repeated significant forecast
errors by all major institutions over the last few years provide evidence
of this. Indeed, I agree with Alan Greenspan who once said that central
bankers should be less reluctant to admit that they sometimes do not
Instead of relying on a single forecast, our monetary policy strategy
emphasises this fundamental uncertainty. Our strategy builds on several
forecasts and indicators and includes a cross-check of the information
from the economic analysis, which is relevant from the short to medium-term
perspective for inflation, with that from the monetary analysis, which
is important for the medium to long-term outlook.
In this respect, the fourth point that I would like to discuss today
is that over the last few years we have seen that monetary analysis
is not only an important, but also a complex business. I have no doubt
that inflation is a monetary phenomenon over the long term and that
we are right in attributing a prominent role to monitoring monetary
developments in our monetary policy strategy.
A fifth point I would like to make is that it was difficult to gauge
the effects of global interdependencies when we began to conduct the
single monetary policy. What we have learnt, in particular, is that
global linkages go well beyond the international trade channel, which
was traditionally considered to be the main, if not the only channel
through which economic shocks were transmitted. Moreover, more shocks
such as those associated with the introduction of new technologies
and those of a political nature have increasingly become global
Related to this and this is my sixth point we have learnt
that sharp asset price fluctuations may be very important for shaping
economic trends. In recent years we have witnessed extraordinary developments
in capital markets. Initially, exceptional optimism about potential
output growth and talks of a "new economy" drove stock prices
to sky-high levels.
The "new economy" euphoria was sowing the seeds of less positive
developments even before it actually burst. It seems to have been accompanied
by a rising short-termism of corporate managers, which in turn was accompanied
by corporate malpractice and also pushed firms to over-invest, especially
in the IT and telecommunications sector. The subsequent large fall in
equity prices and the revelation of corporate malpractice had a series
of negative consequences, including an increase in leverage ratios of
non-financial corporations, a decline in the value of collateral, increases
in risk premia, and certain firms experiencing difficulties in obtaining
external finance. All of this may still be part of the reason for the
weak consumption and investment activity, and thus the slow pace of
economic growth in the euro area that we are now observing.
To cut a long story short: Monetary policy obviously has to take into
account the public and financial market sentiment in assessing the risks
to price stability over the medium term. Central banks must monitor
financial market developments very closely in order to figure out what
the consequences are for the outlook for price stability over the medium
term, but they must not target asset prices.
Finally, and this is my last point on monetary policy, I would like
to stress that effective communication is an all-important requirement
for successful monetary policy. However, as we have learnt over the
last five years, it is no easy business. I am sure you will appreciate
that communication is particularly difficult in the context of the euro
area, with so many different traditions and languages.
Over time, we have seen a significant improvement in public understanding
of our communication of our monetary policy strategy and our monetary
policy decisions. Evidence of this is that our monetary policy decisions
have been very predictable, as reflected in money market indicators,
which I rate as a highly positive development. Indeed, we want to be,
and we have to be, well understood in order to be effective in our policy.
And, as you were able to see from our recent clarification of the ECB's
strategy, we continue to strive for even more effective communication.
The future of the ECB
Let me now turn to the Convention on the Future of Europe and the future
institutional status of the ECB. Celebrating the fifth anniversary is,
of course, a good opportunity for us to look ahead. Where will the ECB
be in five years time? What kind of challenges will it face? What kind
of environment will it be confronted with?
Today we are very much aware that the constitutional construction of
the European Union is in a process of evolution. The Convention has
more or less wrapped up its deliberations and its President, Valéry
Giscard d'Estaing, will present the draft of a new "Treaty establishing
the Constitution" to the leaders of the Member States in a few
As the central bank of the European Union, the ECB has followed the
work of the Convention with great interest over the past one and a half
years. The ECB welcomes all efforts to further the construction of a
united Europe. A European Union with effective, functioning and transparent
structures and processes, capable of meeting the expectations of its
citizens, and equipped to assume international responsibility commensurate
with its size and importance, would complement and further bolster the
success of Economic and Monetary Union (EMU). Throughout the five years
of its existence, the ECB has stated that a strong euro is good for
a strong Europe. I would now like to add that a strong Europe is good
for a strong euro.
If the European Union is re-writing its rulebook by giving itself a
Constitution, does this mean profound changes to the provisions relating
to the ECB and to monetary union in general? Throughout the process
of drafting the Constitution, the ECB has consistently advocated that
the economic constitution of the EU the basic set of rules and
provisions for EMU as laid down in the Maastricht Treaty is sound
both in terms of the objectives set and the allocation of responsibilities
between different actors and levels of government. The Convention appears
to have followed a similar reasoning, as it appears that the future
Constitution will take over the provisions relating to EMU in an essentially
unchanged form. The single monetary policy is, by its very nature, indivisible
and is thus centralised; hence it remains an exclusive competence of
the Union. The task of conducting monetary policy, as well as all other
central banking tasks, has been assigned to an independent central bank
with a clear primary objective of maintaining price stability. In addition
to the ECB, the ESCB is also mentioned in the first part of the Constitution,
thus acknowledging the federal nature of the monetary authority of the
European Union and its sui generis character. Finally, the more specific
provisions concerning monetary policy in the current Treaty as well
as the Statute of the ECB and the ESCB will remain unchanged and form
part of the constitutional texts of the Union.
By contrast, budgetary and other economic policies will remain under
national competence in the future Constitution, in recognition of the
fact that the vast majority of "public goods", such as defence,
for which revenues are raised and subsequently dispensed, are still
provided at the national level. That said, the draft Constitution also
prescribes a close co-ordination of economic policies within the Union.
I very much welcome the fact that the fundamental features of the current
set-up of EMU have been preserved. After all, the stability of the institutional
architecture is a crucial element of the credibility of the single monetary
policy and the public's confidence in our currency.
Clearly it is now up to the governments of the Member States to move
forward in the forthcoming Intergovernmental Conference and give the
final form to the text prepared by the Convention. If I, as a central
banker, am allowed to present my assessment, I would argue that the
Convention has done a very good job of incorporating the substance of
the EMU chapter into the new Constitution, while also introducing clarifications,
additions and updates in the current texts where necessary and appropriate.
What I do miss is that the Convention has not taken over our suggestion
to incorporate somewhere in the text the notion of Eurosystem, which
stands for the core concept of our central banking system, i.e. the
ECB and the national central banks of the member states that have adopted
the euro. The Eurosystem is not mentioned in the Treaty as it stands,
nor in the draft-Constitution. Conclusion: we still have some work to