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
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The Independent Online

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.

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