Today, the euro celebrates its sixth birthday. Today, we look back on a period in which the European Central Bank has successfully pursued a stability-oriented single monetary policy serving more than 300 million citizens.
This is a remarkable achievement. When the Maastricht Treaty was ratified in 1993, many people doubted whether Economic and Monetary Union would work. The Treaty's objective was widely thought to be laudable -- but realizable only in the indefinite future. To the surprise of many, Europe demonstrated great determination to ensure that the single currency became a reality.
A single monetary policy for a currency area comprising 11 -- and later 12 -- countries, each with a sovereign national government, was something entirely new. Would it be compatible with autonomous national fiscal policies? Given the decentralized nature of the system, would national interests distort the conduct of monetary policy?
I see several reasons underlying the ECB's success in implementing a supranational monetary policy -- and thus in firmly establishing the euro's stability. First, the ECB's mandate -- enshrined in the Maastricht Treaty -- is to deliver and maintain price stability. Focusing on the goal of maintaining a low and stable rate of inflation is the best contribution that monetary policy can make to economic welfare, sustainable growth, and job creation.
Second, the Treaty made the ECB perhaps the most independent central bank in the world. The political temptation is always there to resort to inappropriate monetary expansions that bring temporary relief at the expense of harming longer-term growth. Institutional independence has allowed the central bank to conduct its monetary policy in a consistent manner, insulated from short-term political influences.
Admittedly, the ECB's first years were a "baptism of fire." Blessed at the start with a very low inflation rate in the euro area, the common currency soon faced a series of one-off shocks. The biggest impact initially came from sharply rising oil prices and later from a rapidly weakening exchange rate, which led to a sharp rise in import prices. By the end of 2000, oil prices had risen to levels not seen since the beginning of the 1990's.
These shocks were naturally beyond the ECB's control. The policy response, however, required preventing these shocks from becoming entrenched in medium to long-term inflation expectations. In this context -- and in view of the robust economic growth recorded in 1999 and 2000, the still-booming stock markets, and the continued accumulation of excess liquidity -- the ECB's Governing Council progressively tightened policy, thereby keeping upward risks to price stability from materializing.
A bigger challenge came with the protracted stock market slowdown, the terrorist attacks on the US in 2001, and the wars in Afghanistan and Iraq. These events hindered the global economy by thwarting confidence and momentum.
Another period of excessive pessimism arose a year ago. In the summer of 2003, public debate and market sentiment in the euro area were influenced by Japan's protracted deflation and the expectation of a possibly severe disinflationary process in America. Some observers saw a risk of sustained deflation in the euro area as well.
Our assessment was different. Inflation in the euro area was then slightly above 2 percent. Given the movements in the euro's exchange rate in previous months and sluggish growth in the euro area, we expected that inflation rates would decline, but only to levels close to 2 percent.