This paper looks at what economic theory and empirical evidence have to off
er about the institutional conditions that are most likely to lead to a sta
ble currency. Both theory and evidence suggest that an independent central
bank with the explicit mandate to pursue price stability provides an effect
ive solution to the time-inconsistency problem. The EMU institutional set-u
p is well-equipped to support a stability-oriented monetary policy. The ECB
appears to be the most independent central bank in the world. An added pro
tection of monetary policy from the influence of unsound budgetary policies
enhances the prospects of price stability. The Maastricht Treaty and the P
act for Stability and Growth provide effective constraints against excessiv
e deficits and encourage an environment of balanced budgets. The argument t
hat both strong institutional arrangements and sound economic policy-making
stem from a "conservative" attitude of the public is not dismissed altoget
her in this paper. We note, however, that this hypothesis is not formulated
in a testable form and has ambiguous practical consequences. The hypothesi
s, nonetheless, serves as a useful reminder that the ECB should endeavor to
draw its legitimacy not only from the text of the Treaty, but also from so
ciety as a whole.