Duisenberg, Willem, Harvard International Review
Conceived in the Maastrict Treaty almost a decade ago, the gestation of the euro through the convergence process of the 1990s was a successful one. Convergence culminated in the achievement of price stability throughout the euro area. The euro has proved to be an important stabilizing force, both within the euro area and at the global level. How interactions with other currencies affect the conduct of the single monetary policy within the euro area is discussed. The international role of the euro and the channels through which the introduction of the euro has affected and will affect the global financial system is discussed.
The Single Monetary Policy in an International Context
Conceived in the Maastricht Treaty almost a decade ago, the gestation of the euro through the convergence process of the 1990s was a successful one. Convergence culminated in the achievement of price stability throughout the euro area. The benefits of this process are already evident. With the attainment of price stability, both nominal and real interest rates in the euro area are now lower than they otherwise would have been, as expectations of inflation have subsided and inflation risk premia have been eliminated with the credible establishment of an environment of price stability.
The birth of the euro in January of this year proceeded successfully. This reflected the intensive preparations undertaken by the European Monetary Institute, other policy authorities, the private sector and, since June of last year, the Eurosystem-comprised of the European Central Bank (ECB) and the 11 national central banks of the countries which have introduced the euro. In the face of financial crises in emerging markets (most recently in Brazil) and the resultant slowdown in world and euro-area economic growth, the euro has proved to be an important stabilizing force, both within the euro area and at the global level.
What is the euro's relationship with other major international currencies, especially the US dollar and the Japanese yen? I shall address this question in two parts. First, I shall discuss how interactions with other currencies affect the conduct of the single monetary policy within the euro area-that is, the role of the exchange rate in the Eurosystem's stability-oriented monetary-policy strategy. Second, I shall deal with the international role of the euro and the channels through which the introduction of the euro has affected and will affect the global financial system.
The Role of the Exchange Rate
The primary objective of the Eurosystem and of the single monetary policy is the maintenance of price stability. This mandate was established by the Treaty on European Union, signed at Maastricht in 1992. It reflects the overwhelming view that the best contribution the single monetary policy can make to raising the standard of living in the euro area is to maintain price stability in a credible and lasting manner. In an environment of stable prices, the signals provided by the relative price mechanism will not be obscured by general price-level changes, therefore allowing the market to allocate resources to their most productive uses. The distortions created by tax and benefit systems will not be exacerbated by inflation. As mentioned above, inflation-risk premia will be eliminated and lower nominal and real interest rates are possible. Through all of these channels, price stability will contribute to faster economic growth and better employment prospects.
In order to guide longer-term inflation expectations, the Governing Council of the European Central Bank has published a quantitative definition of price stability. Price stability is defined as a year-on-year increase of below two percent in the harmonized index of consumer prices (HICP) for the euro area. Price stability according to this definition is to be maintained over the medium term. …