CEPR has played a pioneering role in research on European economic and monetary union (EMU). CEPR researchers have recently been examining the issues likely to arise in the period immediately after the euro has been launched. Some of the results of this research are presented in this special issue of European Economic Perspectives, kindly sponsored by the Banca Nazionale del Lavoro.

Of central concern are the challenges facing the newly constituted European Central Bank (ECB). In the latest issue of Economic Policy, Rudi Dornbusch, Carlo Favero and Francesco Giavazzi argue that the Bank will have three key tasks – all connected to the fact that it must conduct a monetary policy that is ‘European’.

First, the ECB must tread the narrow path between an institutional revolution and continuity with the Bundesbank. The capital markets are likely to prove unforgiving if they see anything less than Bundesbank policy. But the political community will be unforgiving if they do not see a genuine concern with being European, creating a language and constituency that goes beyond German savers and monetary hawks. The legitimacy that the ECB must build depends on understanding that its constitution in no way guarantees political effectiveness. Successful communication will be crucial.

Second, the ECB must conduct a European policy and should not attempt to solve every local problem by excessive regionalization of its policy. It must work on the broad picture of stabilizing European prices, not putting a lid on German inflation or a floor under French deflation.

Third, the ECB must develop an understanding of how interest rate movements are transmitted through the European economy. That task will be complicated since financial structures and wage-price processes differ significantly across countries and are sure to evolve in response to the changing focus of European monetary policy. Shooting at a moving target in the fog is no easy task, Dornbusch and his colleagues conclude.

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