Introductory Statement by Mr. Lucas Papademos, candidate for Vice-President of the ECB to the Committee on Economic and Monetary Affairs of the European Parliament
22/04/2002 - Speeches
Committee on Economic and Monetary Affairs
of the European Parliament
by Mr. Lucas Papademos
candidate for Vice-President of the ECB
Brussels, 22 April 2002
It is a great pleasure for me to appear before your Committee for this
hearing which is part of the process of my nomination to the Vice-Presidency of the
European Central Bank. I am extremely honored to have been proposed by the EU Council for
In my introductory statement, I will first focus on the objectives and
the role of the ECB. Then, I will address a number of issues and principles relating to
the conduct of monetary policy, including its communication and accountability.
The Treaty clearly states that the primary objective of the ECB is to
maintain price stability in the euro area. The unambiguous priority given by the Treaty to
this objective partly reflects the inflation experience during the previous decades and
the economic and social benefits that price stability entails. These benefits are
appreciated by the European public, which at times has suffered the consequences of
inflation, including the costs of restoring stability lost as a result of misguided
policies. The assignment of price stability as the primary objective of the ECB also
relates to the fundamental role of monetary factors in determining the price level in the
long run. Monetary policy conducted by an independent central bank can effectively provide
a nominal anchor to pin down the price level.
Price stability is not, of course, the only important economic policy
objective. Attaining sustainable and non-inflationary growth and a high level of
employment are other important goals. The ECB is required to support the general economic
policies in the Community with a view to contributing to the achievement of these goals,
provided that price stability is not jeopardized. In my view, the maintenance of price
stability and the attainment of sustainable growth and high employment are not conflicting
but complementary objectives in the long run and, in general, over the medium term as
well. The monetary policy strategy of the ECB takes into account both parts of the ECB’s
mandate and contributes to the achievement of the real economic goals of the Community.
Let me briefly elaborate on the previous two statements. There is broad
consensus that maintaining price stability contributes, through a variety of channels, to
establishing conditions conducive to output and employment growth in the long run. In
addition, it protects society from the arbitrary redistribution of income and wealth
resulting from unanticipated inflation, thus fostering social cohesion. But, maintaining
price stability over the medium term can also help, in general, to limit undesirable
output and employment volatility. The contribution of monetary policy in stabilising
output and employment fluctuations over the medium term depends on features of the central
bank’s strategy as well as on the credibility of its commitment to price stability.
The ECB’s monetary policy strategy with its forward-looking,
medium-term orientation and its quantitative definition of price stability contributes to
the stabilisation of output and employment in various ways. Monetary policy decisions do
take into account the evolution of output and other real variables in assessing inflation
prospects. The medium-term orientation implies a gradual response to certain shocks,
particularly on the supply side, to avoid inducing undesirable large output fluctuations.
And the definition of price stability helps anchor expectations, influencing favourably
short-term inflation – output dynamics.
Thus, monetary policy can contribute to the attainment of the
Treaty’s wider objectives in parallel with the pursuit of its primary goal, in the long
run and over the medium term. Monetary policy, however, can not influence directly
potential growth and long-term employment creation. The bulk of empirical evidence
supports the theoretical proposition that money is “neutral” in the long run.
Sustainable output and employment growth can be effectively pursued by policy measures and
reforms which increase productivity and improve the functioning of labour and product
markets. Improved productivity and labour market efficiency in the euro area will also
enhance the effectiveness of monetary policy in achieving its primary objective and will
reduce output volatility.
The effective pursuit and maintenance of price stability requires that
the ECB should be fully independent in its decision-making. Independence is essential for
safeguarding monetary policy from political pressures to focus excessively on the
short-run economic situation. It is also required in order to fend off requests to focus
on objectives that monetary policy cannot effectively achieve or to accommodate the
undesirable side-effects of other policies on financial and product markets. Moreover, in
a monetary union, independence also shields the central bank from national pressures in
its conduct of the single monetary policy which aims at ensuring price stability in the
euro area as a whole. In all these cases, interference would undermine the central
bank’s medium-term orientation and its ability to maintain long-term price stability.
For all these reasons and because the empirical evidence clearly shows that there is a
positive correlation between the degree of central bank independence and the effectiveness
of monetary policy in securing low inflation, the ECB’s independence was enshrined in
the Treaty. The European Parliament, in particular, has advocated and supported the
independence of the ECB. Like all other members of the decision-making bodies of the ECB,
I am committed to act in accordance with this important principle.
Independence does not imply that the ECB is not accountable for its
policy decisions. On the contrary, transparency about policy actions and accountability
for its performance to the European citizens and their representatives in the European
Parliament are necessary both for enhancing the effectiveness of monetary policy and for
legitimising the ECB’s independence. Moreover, a fruitful dialogue between the ECB and
all relevant economic policy-making bodies and institutions of the Union (e.g. the
Commission and the Eurogroup) is also essential. An exchange of views and information
between the ECB and other policy-making bodies about the economic situation and prospects
and a better understanding of the fiscal and structural policies to be pursued in the
Union provide useful input for monetary policy decisions.
Transparency about policy decisions is a vital ingredient of monetary
policy-making. By explaining and justifying policy decisions so that they are clearly
understood by the public and the financial markets, we can influence the expectations of
economic agents in a way which facilitates the transmission of policy effects and the
attainment of policy goals. On the whole the ECB communicates actively and extensively,
through a variety of channels, with the aim to ensure a high degree of transparency about
its policies. It provides ample information for the assessment of its performance by the
European public. Its accountability to the European Parliament involves not only
presentation of various reports but also a continuous and active dialogue between this
Committee, the President of the ECB and other members of the Board. I believe it is
important to enhance this constructive dialogue.
Since its establishment the ECB has achieved a high degree of price
stability in the euro area. This was accomplished in an environment marked by large supply
shocks and high volatility in foreign exchange and financial markets. More recently, the
ECB has succeeded in managing and coordinating the smooth changeover to the euro, a
historically unique and complex undertaking. These achievements make us confident that the
ECB will continue to meet its objectives and perform its tasks efficiently in the future.
In my new capacity I intend to use my professional experience and devote all my energy to
the success of this effort.
In my introductory statement I have chosen not to speak in my native
language so as to underline the supranational character of the ECB and to facilitate
communication. I would like, however, to finish with a quote from Aristotle regarding the
value of money. In his Politics (Book I, 1257 B10), he states: “Oτέ δε πάλιν
λήρος είναι δοκεί το νόμισμα και νόμος
παντάπασιν φύσει δ’ουθέν, ότι μεταθεμένων τε των
χρωμένων ουθενός άξιον, ούτε χρήσιμον προς ουθέν
των αναγκαίων εστί και νομίσματος πλουτών
πολλάκις απορήσει της αναγκαίας τροφής”. This text can
be freely translated as follows: “If those who employ a currency system choose to change
the agreements upon which it is created, the currency ceases to have its value and
although one could have plenty of money one could no longer use it to procure the
necessities of life”. This quote shows that the value of money has been a major concern
since ancient times. The overriding responsibility of the European Central Bank is to
achieve its primary objective and secure the purchasing power of our single currency in
the euro area. By doing so, it contributes in a fundamental way to the long-term growth of
real incomes and employment and, more generally, to the social and economic welfare of the
citizens of Europe.
Thank you very much for your attention.