Introduction

Abstract

On 1 January 1999 a new currency, the euro, was launched and a new institution, the Eurosystem,¹ took over responsibility for the single monetary policy in the euro area, which is one of the largest developed economic areas in the world.² However, the euro area is not only large but it is also a heterogeneous economic area since it comprises individual countries with different economic and financial structures. With regards to the size and the heterogeneity of the euro area, the creation of a single currency and a single monetary policy has faced extraordinary challenges, among them the design of suitable instruments and procedures, i.e. of a suitable operational framework, for the conduct of monetary policy.

The term “Eurosystem” has been chosen to describe the institution being responsible for monetary policy in the euro area, namely the ECB and the national central banks in the euro area (European Central Bank, 2001g, p. 9). The European System of Central Banks (ESCB) comprises the European Central Bank (ECB) and the national central banks of all Member States of the European Union. For the sake of simplicity, the terms “ECB” and “Eurosystem” are used interchangeably throughout this work.

Measured in terms of population, the euro area has been the largest developed economy in the world: In 2002, the euro area had a total population of 308 million. As a comparison, the population of the U.S. and Japan were 289 million and 127 million respectively. Measured in terms of its share of world GDP, the euro area has been the second largest economy with a weight of 15.7% followed by Japan (7.1%). The largest economy was the U.S. with a share of 21.1%. (Data: ECB and OECD. Share of world GDP is expressed in terms of purchasing power parity).