The future European Central Bank (ECB) must be run by appropriate officials and adopt a suitable strategy if it is to attain the required level of credibility, Bundesbank chief economist Mr Otmar Issing said yesterday.
Mr Issing said in the text of a speech to be delivered to an American Economic Association meeting in Chicago: "The launching of a new central bank and a new currency is accompanied by uncertainty."
"The associated risk premium in the interest rate can be kept down by choosing an appropriate strategy and suitable top executives. The financial markets will keep a critical eye on the ECB right from the start. The initial monetary policy course thus takes on crucial importance."
The ECB, due to be established in the course of next year, will run monetary policy for the new European single currency, the euro, once it is created in 1999.
Mr Issing warned however that the formula floated by some, that credibility could be easily gained if the ECB began its life with an extremely tough policy, was potentially flawed.
"Such an uncompromising approach would inevitably give rise to tensions within the (policymaking) council," Mr Issing said, adding, "It is also hard to imagine that the ECB would meet with general approval for such a course among the people of Europe, given the high level of unemployment."
Mr Issing declined to comment directly on the unresolved question of who will head the ECB. Bank of France head Mr JeanClaude Trichet has been pitted against the established candidate, Mr Wim Duisenberg of the Netherlands.
But he made clear that the debate was not helpful. "Public controversies about the filling of top posts damage credibility," he said.
Consensus, not only among the council but also among countries which enter economic and monetary union on the view that price stability was the best policy, would be critical, and meant only the right participant countries should be chosen.
"The consensus...is all the more important as monetary union will have to survive for the foreseeable future without the additional support of a political union," Mr Issing said.
Member states must then also take continued action to reform their labour markets to offer increased flexibility and "cut back the dense jungle of overregulation", he added.
Turning to the question of the strategy tools to be employed by the ECB, Mr Issing noted that preliminary studies had shown that monetary targeting or inflation targeting or a combination of the two would be possible.
Empirical studies indicated that money demand in the euro area should be sufficiently stable for a strategy of monetary targeting and there was "a good chance that, from a technical point of view, monetary targeting would fulfil the prerequisites".
But a series of uncertainties in the early phase of monetary union meant that there could be distortions in the money supply, he warned. It could therefore be wise to use a form of inflation targeting alongside.
