Otmar Issing: How to make one currency work for 12 countries

From a speech at Cass Business School, in London, by an executive board member of the European Central Bank

The European Central Bank (ECB) has now been conducting monetary policy for over five years. Historically, the situation is unique: one currency - and one central bank - but at the same time, 12 countries and governments. It is not surprising that there was considerable scepticism as to whether a single monetary policy for so many countries could be successful.

The European Central Bank (ECB) has now been conducting monetary policy for over five years. Historically, the situation is unique: one currency - and one central bank - but at the same time, 12 countries and governments. It is not surprising that there was considerable scepticism as to whether a single monetary policy for so many countries could be successful.

As a new institution, the ECB was not able to rely on a record of past successes. It was therefore important to commit to a publicly announced policy strategy which would provide a framework for internal analysis and decision-making. The strategy had to establish a solid anchor for inflation expectations and set a benchmark which the public could use to hold the ECB accountable.

When developing its strategy in 1998, the ECB decided on a new approach. It chose neither a monetary targeting nor inflation targeting strategy, and with good reason. A focus on a simple indicator or a single analytical approach would not have done justice to the uncertainties faced by the ECB. The two pillars provide a framework for bringing together and cross-checking different analytical approaches and making systematic use of all information relevant to decision-making.

The ECB has gained a high level of credibility. However, despite the achievements in the area of price stability, macroeconomic conditions in the euro area remain unsatisfactory: High unemployment, weak economic growth and growing public deficits indicate the need for urgent structural reforms.