Given its need to instil confidence in the markets and to ensure the stability of the euro exchange rate, the European central bank is likely to want to be perceived as ready and able to operate effectively in the dollar market, for which substantial dollar reserves may be required. In the short term, the response of non-European central banks to the introduction of the euro is also likely to be cautious. Ultimately, the desired euro holdings of these central banks will largely depend on the decisions they make about their exchange rate regime. A number of countries -- including the central European countries that have applied for membership in the European Union and other countries in Africa -- may decide to peg their currency to the euro. Yet these countries may well wait for the newly-formed European central bank to establish its policy record and clarify its operating procedures before they commit their currencies to a euro peg. Indeed, history suggests that a currency’s role as an international reserve, means of exchange, and store of value is slowly gained and slowly lost -- as the examples of the dollar and pound sterling illustrate. The dollar, in particular, may have seemed on the way to losing much of its international prominence after the demise of the Bretton Woods system in 1973. After declining as a share of international reserves and a means for international transactions from 1974 to the mid-1980s, however, the dollar’s relative use has not changed significantly during the past decade.
The Governing Council does not react mechanistically to a single variable - whether this be a forecast, the exchange rate, unit labour costs or fiscal indicators - but rather takes into account the complete picture offered by all available and meaningful leading indicators of future inflation. In this context, the Governing Council analyses the economic reasons behind the projected risks to price stability. The appropriate monetary policy response to a threat to price stability will depend on the nature of the threat. The Governing Council can only understand the nature of the risk if it is presented with a full set of data. From these, it can attempt to identify the nature of the disturbance to price stability. Having identified the threat, an appropriate policy response can be selected and implemented. Internal forecasts of economic activity and inflation in the euro area can also contribute to the success of an appropriately forward-looking monetary policy. However, the Eurosystem should not be judged on, or held accountable for, the accuracy of its internal forecasts. Thus, publication of the forecasts cannot contribute to accountability. Rather, its performance in maintaining price stability in the medium term should be used by the public to judge the success of the Eurosystem. Allow me to say a few words on certain proposals made in the recent public debate, which may be deemed to suggest that the focus of monetary policy should be shifted towards objectives other than price stability.