The real significance of those arrangements – in both cases – is that in introducing them the respective governments confirmed their common commitment to achieving and maintaining effective price stability in their respective currency areas. That role for monetary policy is not simply an end in itself, in some abstract, doctrinaire way. On the contrary it recognises that consistently and reliably low inflation, into the medium and longer term, is a necessary means to the end of sustainable growth of output and employment, which are, of course, the truly good things of economic life that we are all seeking to achieve. Our own new legislation defines the MPC’s objective as to maintain price stability and, subject to that, to support the Government’s economic policy, including its objectives for growth and employment. The Maastricht Treaty defines the primary objective of the European Central Bank as to maintain price stability, and without prejudice to that objective to support the general economic policies of the European Union. There are significant differences between the two statutory frameworks. In our case, for example, the precise definition of the stability objective is determined by the Government; and there are much more rigorous requirements for transparency of the MPC process and public accountability for MPC decisions. I am convinced that our arrangements are wholly appropriate to our particular circumstances. But the essence of what we and the ECB Governing Council are mandated to do is very much the same.
The position is complicated in the euro-zone by a reviving political debate about just how much of the unemployment reflects supply-side weaknesses requiring structural reforms, and how much it reflects inadequate overall demand. The outcome of that debate will be crucial to the future evolution of the euro-zone. But in the immediate situation there was no reason to suppose that continued growth of demand and output was inconsistent with effective price stability in the zone as a whole. So much for our different starting points. But over the past year, the world – and I mean the world – has changed quite dramatically for both of us in that we have both been affected by the international economic slowdown. This started, in fact, with the financial disturbances in Asia in the latter half of 1997, but even as late as the beginning of last summer it seemed as if it might have only limited impact on the overall world economy. The IMF, for example, was still then projecting 3–3¾% world growth in 1998 and 1999 respectively – which was certainly a setback compared with their forecast of over 4% just six months before – but it was hardly catastrophic. Since last summer it has become increasingly clear that things are likely to be significantly worse than that.