In designing the Eurosystem's strategy, Governing Council of the ECB recognized the new circumstances faced by monetary policy in the euro area. Where there were previously eleven open, generally small economies, there is now one large, relatively closed single currency area. The challenges implied by this transformation in the landscape of monetary policy are profound.
With the adoption of the euro last January, public, financial markets and policy-makers in the euro area have all had to get used to a new monetary policy environment and have, thus, had to learn a new "monetary policy language". The Eurosystem's monetary policy strategy has been designed, in part, to make this learning process as straightforward as possible. Continuity with the successful strategies of the national central banks prior to Monetary Union was one of the guiding principles governing the selection of the monetary policy strategy. Nevertheless, given the changed environment for monetary policy, new strategy with a new vocabulary had to be developed, reflecting the unique and novel circumstances facing the Eurosystem.
In this regard, Eurosystem faces an especially formidable task. As mentioned earlier, euro area currently consists of eleven different sovereign nations, each with its own distinct monetary history and heritage. With each policy announcement or Monthly Bulletin, Eurosystem must thus communicate with the public of eleven different countries and must speak in all eleven different official languages of the European Union. Such a situation is unprecedented. This diversity of language, history and culture across the euro area raises further challenges for the ECB.
Over the years, each national central bank had developed its own strategy and, linked to this, its own "monetary policy language" for communicating with the public in the nation it served. This language reflected the unique circumstances of the country in question. The process by which the public learned this monetary language from the statements and behavior of the national central bank was largely subconscious. Over time, strategies and the related language and conventions of monetary policy came to be so well understood as to be almost second nature. In these circumstances, private economic behavior was shaped by the monetary policy environment.
In the run-up to the euro this feature of the system was explored, and some expressed doubts about its effectiveness. I will tonight examine the problems of banking supervision in the euro area. The plan of my remarks is the following. I will first review the existing institutional framework for the prudential control of banks in EMU. I will then examine the likely scenario for the European banking industry in the coming years. Against this institutional and industry background, I shall then discuss the functioning of, and the challenges for, banking supervision and central banking in the euro area, both in normal circumstances and when a crisis occurs.
These press conferences are a tangible expression of the Eurosystem's commitment to be open, transparent and accountable in its conduct of monetary policy. In my view, our commitment to openness should not be in doubt. However, ensuring that this openness translates into effective communications continues to be a challenge. Journalists, financial markets and the public are still learning the new strategy and language of monetary policy in the euro area.
Some commentators have suggested that the Eurosystem simply adopt the strategy used by another central bank or by a national central bank in the past. Tellingly, such observers often suggest the strategy they know best: Americans suggest using the Federal Reserve as a model; Britons, Bank of England; Germans, Bundesbank. However, Eurosystem cannot simply adopt a strategy designed by another central bank for a different currency area under different economic circumstances. A strategy that might have been suitable in one situation may be quite inappropriate for the unique and novel circumstances facing the Eurosystem, given the very different economic structure and environment confronting it.