The European Central Bank (ECB) used its first monthly statement to issue a series of warnings about possible threats to the euro. Without naming specific trouble-spots it signalled how recent economic turbulence (in Brazil) could undermine the EU's exporting drive in the region; "the possibility cannot be ruled out that the negative repercussions of recent global developments for economic growth could turn out to be more serious than is currently anticipated". The report also highlights the continuing inflation risk and it reminds national governments how this could be triggered by loose fiscal policies and rising wage demands. It also expresses grave concern about the continuing high level of unemployment within the euro zone.
Despite the highly successful launch of the euro, there is no triumphalism in the report. Rather, a sober assessment is given of current economic realities and potential problems: the similarities with the conservative approach favoured by Germany's Bundesbank were striking. It can be expected that the monthly reports on monetary policy from the ECB, like those from the Bundesbank, will now be closely analysed by the markets as they tease out the bank's main policy priorities. To date, the markets have clearly been impressed by the launch of the euro; yesterday's report will help to confirm this strong early impression. The ECB report is likely to provoke further debate about the role of monetary policy in helping to boost growth and employment. The German finance minister, Mr Oskar Lafontaine, has led demands for an interest rate cut by the ECB in order to generate stronger economic growth. In response, the ECB used yesterday's report to launch a robust defence of its policies. It is widely recognised, it said, that a central bank lacking independence is susceptible to short-term pressures that may be prejudicial to the maintenance of price stability. The ECB also says that it would be counter-productive to bow to political pressure by implementing an inflationary monetary policy. This, it said, would undermine price stability which is the key to lasting economic growth.
But the monthly ECB reports will also serve a wider purpose than self-defence; as the ECB president, Mr Wim Duisenberg, writes in his foreword the report is also designed to explain the main policy decisions taken by the bank's governing council to the 300 million people in the euro-zone. Mr Duisenberg expressed the hope that the detailed economic analysis which forms part of the report will "aim at enhancing the transparency of monetary policy". There is much work to be done in this regard. These are still early days for the euro zone but, as the new currency beds down, the ECB will need to strike the right balance between two policy imperatives; the need to boost its democratic credentials and the need to safeguard its independence.