Time and again “experts” from all areas try to exert pressure on the European Central Bank to relax its anti-inflationary monetary policy in order to increase economic growth in the euro area. But monetary policy is not the answer to Europe’s ills. Indeed, a babel of criticism may prevent people from seeing that the euro area has witnessed ample economic progress since the euro’s launch. The broad macroeconomic fundamentals of sustained growth are, in fact, more favorable today than they have been for years. Europe’s challenge is to exploit this economic potential. It is thus important to be clear about what monetary policy can and cannot do to contribute to Europe’s growth so that other necessary – though often politically difficult – reforms are not neglected. Although there are some theoretical ambiguities, the best available evidence suggests that, in the longer term, inflation is harmful to both output and welfare. The corollary of this is that the best contribution a central bank can make to assure that growth is achieved over the long run is to pursue a policy aimed at maintaining price stability over the medium term. This consensus view is enshrined, explicitly, in the statute of the ECB, which unambiguously states that its “primary objective...shall be to maintain price stability.” But what about the short term? Many commentators suggest that a monetary policy directed at price stability may lead to protracted, and in extreme cases, permanent negative movements in output. The mechanism invoked is “hysteresis” – a phenomenon in which factors such as depreciating human capital or wage bargaining by insiders keeps outsiders locked out of jobs – which can allow temporary shocks to have a permanent impact on output. So, these commentators argue, central banks should be cautious in tightening policy to deal with inflationary pressures because any adverse impact could prove both protracted and costly. A corollary to this suggestion is the notion that central banks should “give growth a chance,” even if this means “taking risks with inflation.” Whatever the theoretical merits or demerits of the hysteresis argument, the resulting policy recommendation cannot withstand scrutiny. Monetary policies focused on short-term cyclical stabilization are doomed to failure because of the extreme uncertainties involved in such fine-tuning efforts. The only certain effect would be a decisive deterioration in the bank’s efforts to constrain inflation, without any tangible gains in either the level or volatility of output in the medium term. Indeed, weaker growth and higher unemployment would be the likely result. A misbegotten policy of this kind would involve the central bank in taking unwarranted risks with inflation and lessen the credibility of its commitment to price stability in the medium term. Although quick fixes from monetary policy for economic problems are always tempting, the only certain way to achieve strong and sustainable growth in the euro area is to raise the economy’s potential to grow. That potential, however, depends on factors such as labor, capital, the stock of knowledge and, perhaps most important of all, the efficiency with which they are employed. Deploying these factors to maximum effect depends on structural features within the economy, in particular on the existence of competitive markets and a public policy framework that promotes, rather than hinders, business. It is now widely recognized that a number of structural features in the euro area actively inhibit growth. In product markets, these include the relatively high share of government in economic activity, and the associated high level of taxes, restrictions on competition in product markets and insufficiently developed financial markets. Severe structural impediments in euro area labor markets lead to unacceptably high rates of unemployment in many countries. Minimum wage laws and employment protection legislation have powerful negative effects. Other disincentives to job creation are found in the income tax and benefit systems and, especially, in their interaction. Add to this a myriad of inflexibilities in wage bargaining and inadequacies in training and education and you find a series of hurdles to employment growth that can be remedied only by structural reform, not monetary policy. In some areas – e.g. deregulation and the development of financial markets – reforms are already underway, and this is truly encouraging. But further progress is essential. The gains from a stable pro-competitive, pro-market strategy were revealed by the US economic performance in the 1990s. This has led to talk of a “New Economy” in which the exploitation of advances in information and communications technology, facilitated by efficient market structures, globalization and a stable macroeconomic framework, has led to significant improvements in longer-term growth prospects. The potential for such developments clearly exists in Europe as well. The euro area can benefit from more widespread applications of emerging information and communications technologies, as most indicators suggest that Europe lags well behind the US in this field (except for mobile telephones). Improvements are also possible in increasing integration of the euro area into the global economy, enhancing competition (reflecting both the single market and the single currency) and deregulation in the market for goods. With progress on these measures, Europe could experience much stronger growth in the near future. In other words, the key to achieving sustainable growth in the euro area – and exploiting the full potential from technological innovations and the opportunities provided by competitive global markets – lies in a comprehensive program of structural reforms. Monetary policy as pursued by the ECB cannot substitute for such reforms. By focusing on achieving price stability in the medium term, the ECB will provide a stable monetary framework within which Europe’s economic potential can be realized.