The ECB's Monetary Policy: Experience After the First Year

Abstract

On 1 January 1999, 11 of the 15 Member States of the European Union adopted the euro as their single currency. The euro replaced the former national currencies on the basis of conversion rates that were irrevocably fixed on 31 December 1998. The task of defining and implementing the single monetary policy for the “euro area” has been assumed by the European Central Bank (ECB). The Governing Council and the Executive Board govern the Eurosystem, which is composed of the ECB and the 11 national central banks (NCBs) of the participating EU Member States. The ECB and the 15 NCBs of the EU Member States form the European System of Central Banks (ESCB). The transition to the single currency has required substantial preparatory work. The European Monetary Institute and the NCBs of the EU Member States started at a very early stage to do contingency planning on a number of crucial issues related to the monetary union: from the details of the announcement of central parities to preliminary evaluations of alternative monetary policy strategies. This considerable effort was criticized by sceptics, pointing out the alleged economic inadequacy of the Maastricht criteria, the risks of an early announcement of the conversion rates, and so on and so forth. It is fair to recognize, however, that no hint of turbulence or increase of volatility was recorded in foreign exchange markets between the announcement of the conversion rates, in April 1998, and the beginning of the monetary union.