Since the compilation of report, moreover, the political reasons for participating from the start have grown in that more countries than expected will now be members from the beginning. 2. The euro’s stability The euro will exist as an account-based currency as of next January. While banknotes and coins denominated in euro will not yet be in circulation, it will be possible to make transactions in euro. So what will be the euro’s role in currency markets? Will it be stable? And will it compete with the dollar as an international reserve currency? As we all know, predicting exchange rate movements is difficult. In general, one can say that a currency’s nominal exchange rate is determined by the real exchange rate together with differences in inflation with the rest of the world. A currency’s real exchange rate can be described as the price of goods and services in that country relative to the rest of the world. If a difference in inflation grows, a corresponding depreciation of the currency is needed to keep the real exchange rate stable. The current exchange rate is also influenced by expectations of future rates. The credibility of economic policy’s commitment to long-term price stability is thus important for exchange rate tendencies. The value of a currency is also susceptible to influences of a more temporary nature. Cyclical factors may play a part. When the economy is in an upward phase, a country may need a tighter monetary policy, which normally leads to an appreciation of its currency.
The members of the Council are jointly responsible for making the ECB a success and establishing price stability in the euro area. In this sense they are all in the same boat and nothing is more likely to capsize the boat that a national preference. That, I believe, will characterise what happens in practice. In any event, a distinct, transparent policy right from the start is vital in order to avoid unnecessary uncertainty that could result in exaggerated movements in exchange rates and interest rates. Other components of economic policy  BIS Review 68/1998  -4-  In the long term it is the construction of monetary policy that determines the rate of inflation. In the shorter run, however, price movements are also influenced by other economic factors. Other components of economic policy - that is, fiscal, labour-market and structural policies - therefore have to be constructed so that they support the policy drive for sustainable price stability. If these components do not work, the burden on monetary policy becomes additionally heavy. Economic policy apart from monetary policy will continue to be a national matter in the euro area, even though it is the subject of agreements at Community level. Fiscal policy will still be constructed by the national governments, though to some extent its scope is restricted by the Stability and Growth Pact, to which all the EU countries subscribe. This Pact requires each country to conduct a responsible fiscal policy, defined as achieving a general government budgetary balance or surplus over the medium term.