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The establishment of a single currency is a strongly political event in its genesis and a profound social and cultural change in its nature. As economists and central bankers we pay limited attention to notes and coins because they are a minor and endogenous component of the money stock. For many politicians, however, Monetary Union meant little else than a common banknote. They saw, better than us, that for the people money has to do with the perception of the society to which they belong and, ultimately, with their culture. As such, money goes well beyond the economic sphere of human action. Indeed, the act whereby we accept to provide goods or services to an unknown person in exchange for pieces of paper that have no intrinsic value is perhaps the most significant and widespread testimony of the social contract that binds people. This is why coinage and money printing have always been a prerogative of the State.

Yet, for two main reasons it remains true that Europe has a lack of political union. First, the European Union is still not the ultimate provider of internal and external security, the two key functions that constitute the raison d'кtre of the modern State. Second, EU institutions still fail to comply with the key constitutional principles that constitute the heritage of western democracies: foundation of the legislative and executive functions on the popular vote, majority principle, equilibrium of powers.

Why does the lack of political union constitute a challenge for the
Eurosystem? I would answer as follows.

In a period of less than thirty years money has abandoned both the anchors it has had since the earliest times: metal and the sovereign. It is true that central banks have struggled for years to free the printing press from the influence of the modern sovereign, as they struggled in the past to free it from the influence of private interests. It is equally true that the present status of the Eurosystem in the constellation of public powers is exceptionally favourable. However, only a superficial thinker could confuse independence with solitude and take the view that the lack of political union strengthens the position of the central bank and makes it freer to fulfil its mission.

The security on which a sound currency assesses its role cannot be provided exclusively by the central bank. It derives from a number of elements that only the State or, more broadly, a political union as previously defined, can provide. When we say that a currency is a "safe haven" we refer not only to the quality and credibility of its central bank, but to the solidity of the whole social, political and economic structure to which it belongs. And historical experience shows that when that structure appears to weaken, the currency weakens, irrespective of the actions of the central bank. A strong currency requires a strong economy and a strong polity, not only a competent central bank. The central bank is, and should remain, an institution with too limited a mission to replace the lack of a political union.

The problems posed by the coexistence of a single currency with a still unachieved political union will influence both practical and intellectual activity in the coming years. They will have implications for the central banker, the politician and, more generally, the citizen. For the politician the implication is that his political decision to move ahead with Monetary Union in advance of political union contains an implicit commitment to work for the completion of political union. The central banker should be aware of the special difficulties and responsibilities deriving from this anomalous condition. On the one hand he will have to cope with this situation and adapt his attitudes to a composite - EU and national - institutional architecture, one that lacks the simplicity he was used to and in which the Eurosystem now represents the most advanced supranational component. On the other he should be prepared for the further evolution of that same architecture. Finally, from the citizens that we all are, it will require a deeper reflection about the multiple "social contracts" he is part of, and the loyalties they entail.

8. CONCLUSION

I have been fortunate to operate in an environment in which no conflict has arisen between the central banking profession I have exercised for more than thirty years and the European conviction that, like many persons of my generation, I matured in my youth. Since the early '80s I have also been convinced that monetary union, i.e. a confluence of the two motives, was desirable and possible. At the same time, the challenges for the Eurosystem originate precisely from that confluence.

The challenges are not solely economic in their nature, nor can their features be captured by the functional relationships economists are most familiar with. Although partly related to economic factors, their features are in fact tied to the special institutional environment to which the
Eurosystem now belongs. They derive from the tension between the completion of the union in the monetary field and the incompleteness of the overall construction. It is a tension because in that environment the notion of the public interest is no longer as simply and statically defined as it was when the Nation-State was an all-pervasive reality and the jurisdiction of the central bank coincided with its jurisdiction. Inevitably, this tension runs through the institutions of the European Union, the Eurosystem itself, and even our minds.

A challenge is a call to a difficult task; it entails the two notions of necessity and difficulty. The problems I have tried to describe are a challenge not only for practitioners, but also for the academic profession, because their solutions can hardly be found in a textbook and will only be invented if the creativity of practitioners will be supplemented with that of scholars.

***

Monetary policy in EMU

Prof. Otmar Issing

Member of the executive board of the European Central Bank

Washington, D.C.

6 October 1998

1. Introduction

On 1 January 1999, the curtain will ri"+ !-+ 1999MAYOR99.DOC†[?]р?p-
-#"+ !-+ 1999INDUSTRIAL MARKETING.DOC?[?]р?x- -#"+ !-se on a world premiиre. For the first time in history, sovereign states will abandon their own currencies in favour of a common currency, and transfer their monetary policy sovereignty to a newly created supranational institution.
This process is all the more unusual from a historical perspective because the national currencies involved are not being abolished because of their weakness. On the contrary, proof of a large measure of monetary stability is demanded as a precondition for participation.

The decision has been taken. The Euro will start on time. It must not
- and it will not - fail. The European System of Central Banks (ESCB) will devote its best endeavours to making European Monetary Union (EMU) a success.

The French president recently called this unique project a "great collective adventure". As a central banker I am generally not in favour of
"adventures" - but who would deny that there are risks and uncertainties in this enterprise? You should be reassured that at the European Central Bank
(ECB), we have the necessary independence, instruments and tools to deal with these risks and uncertainties in a successful way. I will discuss some of these in a moment.

Moreover, when considering the uncertainties implied by the transition to Stage Three of EMU, we should not forget that Monetary Union will also reduce, or even eliminate, a number of risks. This has already been demonstrated, even before the actual introduction of the euro. Recent turmoil in international financial markets did not cause any significant disruption to exchange rates among currencies of the designated participants in Stage Three. This is a clear demonstration of the success of the EMU process.

Today, I will address the role of monetary policy in EMU.

First, I will make reference to the final goal of monetary policy - the maintenance of price stability.

Second, I will discuss some important issues relating to the design and implementation of the monetary policy strategy at the outset of Stage
Three of Monetary Union; and

Finally, I will describe some features of the operational framework of the ESCB that have recently been finalised.

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