In this context, it should be borne in mind that in the long term, central banks can affect inflation and can have a corresponding impact on the nominal exchange rate, but they cannot affect the real exchange rate in the long run. If the real exchange rate rises because of an increase in the equilibrium real exchange rate and the Central Bank halts the rise in the nominal exchange rate, the real exchange rate will ultimately rise in any case, through larger wage increases and inflation. If the Bank had halted the rise in the exchange rate at all costs, inflation would probably be well above the target already, and it is very unlikely that inflation expectations would be at target. This would also have been inconsistent with the Bank’s legally mandated price stability objective. It would also have been quite costly, as the credibility of monetary policy would have been gone and interest rates in the future would need to be higher in order to restore that credibility. If there is the will to impede the rise in the real exchange rate and mitigate the crowding-out effect that tourism has on other sectors, which is certainly needed, but without sacrificing price stability, it must be done with policy instruments that can have a lasting impact on the real exchange rate, such as tighter fiscal policy.
Jean-Claude Trichet: Preventing spillovers on the global economy Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the Bretton Woods Committee, International Council Meeting 2011, Washington DC, 23 September 2011. *  *  *  Ladies and Gentlemen, It is now four years after the outbreak of the global financial crisis, and three years after the collapse of Lehman Brothers, which were stark reminders of how much financial integration and globalisation made all economies interdependent. This interdependence creates benefits but also adverse spillovers which may arise in all domains, from inadequate macro policy choices to private market imperfections. I will focus today on two key areas of policy interest to address spillovers in the global economy: (1) reforming global finance, and (2) strengthening policy discipline at the domestic and global level, before turning to how the euro area can contribute to global stability. 1. Reforming global finance  At the Pittsburgh Summit in 2009, G20 leaders agreed “to do everything needed to repair our financial system and to maintain the global flow of capital”. The November 2011 G20 Cannes summit will take stock of where we stand in terms of implementation of this important reform agenda. In a number of areas, important decision have already been taken, notably as regards the improvement of bank capital with the agreement on Basel III, and the development of macroprudential frameworks. In other areas, we are close to concluding our work, in particular as regards a new global framework on systemically important financial institutions (SIFIs).