2. POLICY MISSIONS

Policy missions have not been altered by the start of the euro. They correspond to aspects of the public interest that were not redefined, and did not need a redefinition, because of the euro.

In the field of central banking the public interest is to provide economic activity with a medium of exchange that preserves its value over time. In the broader field of economic policy - of which monetary policy is part - the public interest is, to use words from the Maastricht Treaty that can be similarly found in most national constitutions and legislation, "to promote economic and social progress which is balanced and sustainable"
(Article B). In the field of European integration, the mission is that of
"creating an ever closer union among the people of Europe, in which decisions are taken as closely as possible to the citizen" (Article A).
Finally, in the field of international relations the public interest is to
"maintain international peace and security" (UN Charter Article 1.1) as well as to "contribute to the promotion and maintenance of high level of employment and real income" (Articles of Agreement of the IMF, Article
1.ii).

The formulation of these policy missions has taken shape over the course of this century, or even earlier, on the basis of experience, scholarly investigation, political debate and action. There would be no consensus about the primary mission of the central bank if countries had not experienced first hyperinflation and then successful monetary management by a stability-oriented and independent central bank. Social progress and economic growth would not be on the agenda of governments without the labour movement and the Great Depression. We would not have the
EU Treaties and the Charter of the UN without the tragedy of two World
Wars.

Economists have explored the scope for economic policy action, and the limits thereof, in the monetary, fiscal and regulatory fields. Without thirty years of academic debate about the role of monetary policy, the EMU
Treaty and the Statute of the ESCB/ECB would not have been written the way they were. The subordination of economic policies to the principle of "an open market economy with free competition" would not have been explicitly inserted in the Maastricht Treaty (Article 3A) had those principles not gained recognition in the community of scholars.

Central bankers (most notably in the Delors Committee) have prepared the blueprint for the single currency. International and constitutional lawyers have elaborated the legal concepts and studied the procedures to carry out the policy missions. They have built that legal monument that is the Rome/Maastricht Treaty. Citizens and politicians have discussed, promoted and implemented the whole process.

Different policies carry different degrees of compulsion and effectiveness. In general, instruments are more strongly framed when they are entrusted to institutions whose area of jurisdiction coincides with that of the nation state. Strongly framed instruments, however, do not necessarily produce strong results. Tough regulation against air pollution adopted only by a small country is less effective, for that same country, than softer regulation adopted by a larger group of countries. The economic literature about externalities, or that about optimal currency areas, are seminal examples of the contribution economic research can make in this respect.

In the following I shall focus on the mission of the central banker, because this is the function assigned to me. I am convinced, however, that the missions I mentioned are fundamentally complementary. Different assignments are part of an orderly division of labour. In a democratic and market-oriented environment not only citizens, but also officials, can consider the aims of the various policy bodies and charters - national and international - to which they refer as forming a consistent configuration.
I regard this as a special privilege of the time and space in which I have lived so far.

3. NEW CHALLENGES

In the last thirty years central bankers have fought for two objectives: the recognition of the primacy of price stability for monetary policy, and the independence of the central bank. This has been the period in which the combination of political democracy and fiduciary currency made the governance of money particularly difficult in many countries.

The intellectual recognition, then the political acceptance and finally the actual implementation of a monetary constitution based on price stability and central bank independence have required a long process. The academic profession has contributed to it in a powerful way, from Irving
Fisher to Don Patinkin to Robert Lucas. Even those who have denied the need of having a central bank, like Milton Friedman and Friedrich A. von Hayek, have in the end contributed to clarify its role and function. No less persuasive have been the arguments of experience. In a positive sense, the economic success of the country - Germany - where the two elements had been introduced at an early stage. In a negative sense, the social evil of high and prolonged inflation suffered by many other countries, including my own.

In legal and institutional terms, the result of this long fight has been engraved in the Treaty of Maastricht. The Treaty represents the strongest monetary constitution ever written, not only because of its substance, but also because the procedure to amend it is more difficult than that required for the charter of any existing central bank. Largely induced by Maastricht and EMU is also the independent status of national central banks in the European Union. We should indeed not forget that, until recently, key decisions in the field of monetary policy were still in the hands of the Treasury in such countries as the United Kingdom, France,
Italy and Spain. The Maastricht process has been the catalyst for monetary reforms central bankers had advocated for years.

Partly, but not exclusively, because of this process, the conditions under which the single currency has come to life differ from those prevailing in the past years.

Prices have for some time now shown the highest degree of stability seen for more than thirty years. Most countries have made significant progress towards fiscal consolidation. The consensus on sound principles of budgetary and monetary management is broader and stronger, among both politicians and ordinary people, than in any other period the present generation can remember. Few dispute in an open way the now widely used expression "culture of stability".

However, when in 1981 it was decided to save the last specimen of the smallpox virus in a laboratory for the sake of documentation, health had not ceased to be in danger. Similarly, none of these achievements can be considered as permanent and central bankers should primarily strive to preserve them. To this end, detecting new challenges at an early stage is essential. The question is: where do the problems come from? What are the circumstances under which the "old mission" will have to be accomplished in the coming years? What threatens our health besides smallpox?

4. MAKING THE EUROSYSTEM A CENTRAL BANK

The first challenge consists in making the Eurosystem a central bank.
It may seem simple, but is not. Let me start my explanation from the two key words of this proposition.

Eurosystem is the word chosen by the ECB to indicate the "ECB+11 participating national central banks", i.e. the central bank of the euro.
The Treaty has no name for this key entity, while it refers extensively to the ESCB (European System of Central Banks) formed by the ECB and the 15
European national central banks). However, as long as there are "out" countries, the ESCB in its full composition will remain a scarcely relevant entity because it neither refers to a single currency area nor has any policy competence. Instead, the word Eurosystem indicates clearly the articulated entity which is for the euro what the Federal Reserve System is for the dollar.

Central bank is the institution in charge of the public interests associated with the currency. It originates from fundamental changes in the technology of payments: the adoption of banknotes, cheques and giros, and their final disconnection from gold. These changes have shaped the two other functions that most central banks have derived from the original payment system function: monetary policy and banking supervision. Man-made money made monetary policy possible. Commercial bank money made banking supervision necessary.

These three functions have most often been entrusted to the same institution because they are inextricably linked. Just as money has the interrelated roles of means of payment, unit of account and store of value, so central banking has a triadic function that refers to the three roles of money. Operating and supervising the payment system refers to money as a means of payment; ensuring price stability refers to money as a unit of account and a store of value; pursuing the stability of banks refers to money as a means of payment and a store of value. The function remains triadic (albeit, in my view, in a less satisfactory way) even where prudential control is entrusted to a separate agency. I am referring to the special "supervision" any central bank has over its banking community, necessitated by the fact that banks are the primary creators of money, providers of payment services, managers of the stock of savings and counterparties of central bank operations.

In performing its triadic function the central bank exerts operational and regulatory powers, interacts with other public authorities and the financial community, entertains relations with other central banks, participates in international debates and negotiations about monetary and financial matters. In all these activities it pursues and represents the public interest of a sound currency; all are instrumental to that interest.
From the point of view of the perceptions of people and markets all such activities refer to that same public good that we call confidence.

For the Eurosystem the challenge is to rise to a full central banking role as just defined. It is necessary because of the links that bind the various functions of money. The Eurosystem would find it hard to play effectively its most delicate role - the pursuit of a stable currency or, as the German Constitution puts it, "die Wдhrung zu sichern" - if it appeared as an inexplicable exception to the classic paradigm of a central bank. The public, the markets, the international institutions and fora would not understand.

But it is also difficult, because the steps to take are multiple and complex from both a conceptual and a practical point of view. Moreover, they cannot all be taken at once. Let me briefly explain.

In the articulation of any federal constitution (Bund, Land and local, to use the German terminology) the central bank undoubtedly belongs to the level of the "federation", or Bund. The fact that important activities are conducted by "local" components of the system
(Landeszentralbanken, or Federal Reserve District Banks) is an organisational feature that does not impinge upon the constitutional position of the central bank. The same happens within Monetary Union. The
Eurosystem is the central bank of the euro area, even though operations are carried out - to the extent possible and appropriate - through its component parts, the NCBs. Indeed, the constitutional and the organisational profile of the institution are not in contradiction.

Although a federal and decentralised central bank is not a novelty, the Eurosystem is a special case. It is the central bank of an economy that has a much deeper national segmentation than any other currency area. Its components have for many generations (and until few weeks ago) performed the full range of central banking functions under their own responsibility and in a national context. They have been accountable to, and sometimes dependent on, national institutions. Public opinion has perceived, and still perceives, them as national entities. The notion of the public interest they were referring to was the notion of a national interest.
Significant differences existed, and partly remain, in their tasks, organisations, statutes and cultures.

In this situation, making the Eurosystem a central bank requires drawing the appropriate distinction between being national in the organisational sense and being euro area-wide in the definition of the public interest pursued. This is a difficult distinction to draw in conceptual terms, not only in practical terms or from the point of view of personal attitudes.

In the preparatory discussions and negotiations that led to the
Maastricht Treaty, central banks took the view that monetary functions are indivisible and that, contrary to the fiscal field, subsidiarity cannot apply to the monetary field. Their traditional and strongly held position has been that the public interest assigned to central bank is a whole which cannot easily be decomposed. Indeed, while there is a fairly well developed theory of fiscal federalism, there is no equivalent for the monetary field.

As I said, I do think that the functions of a central bank constitute a whole that cannot be split. This does not exclude that the Eurosystem should avoid seeking more uniformity than necessary and that some diversity is a positive factor and has always been valued as an aspect of the richness of Europe. Perhaps even a limited degree of internal competition may be used as an incentive to good performance. But can the Eurosystem depart from the two historical models of the Federal Reserve System and the
Bundesbank? What are, in conceptual terms, the criteria of what I just called the "appropriate distinction"? What should be the touchstone?

It would be an illusion, I think, to expect or pretend to have a full and satisfactory answer solely from legal interpretation. And it would be unfortunate if the Eurosystem were to fall into the trap of the narrowly legalistic approach that paralyses international organisations. The
Eurosystem is not an international organisation, its model is not the
Articles of Agreement of the IMF. Of course, the answer will have to comply with the Treaty, which provides useful guidance. However, the system is entrusted to decision-making bodies that are composed not of lawyers, but of central bankers. They carry the primary responsibility to manage the euro and are accountable for that responsibility. They have known for years what a central bank is and how vague the wordings of central bank statutes have historically been. Their touchstone can only be, in the end, the effectiveness in the accomplishment of the basic mission embodied in the triadic paradigm of central banking functions.

5. DEALING WITH EUROPEAN UNEMPLOYMENT

The second challenge comes from the high level of unemployment in
Europe.

Every economist, observer or policy-maker would probably agree that the most serious problem for the European economy, today and in the years to come, is high unemployment. In large parts of continental Europe the economic system just seems to have lost the ability to create new jobs.

Also on the nature and causes of European unemployment there is a large degree of agreement, as there was agreement on the nature and causes of European inflation well before price stability was finally restored in the 1990s. The key words describing such agreement are structural factors and flexibility. There is agreement that perverse incentives, direct and indirect taxation of labour, unsustainable pension schemes, overly tight employment rules and rigidities throughout the economy are the main obstacles to the creation of new jobs. There is agreement that the typically European welfare state system should be profoundly corrected, but not suppressed. Many also think that rather than following a "Thatcherian" policy of cracking down on the trade unions, it would be preferable to work with, rather than against, the labour organisations, although reform entails occasional confrontations.

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