At the same time, these vulnerabilities are a reminder of the urgent need to make further progress on reforming the euro area’s institutional architecture, in particular by completing the Banking Union, advancing the Capital Markets Union and reviewing the European fiscal framework. These reforms will foster risk sharing, enhance resilience and reduce procyclicality.
From the viewpoint of monetary policy, the potential emergence of an adverse macro-financial feedback loop between sovereigns, banks and corporates would matter for at least two reasons. First, it could measurably slow down the return of inflation to our medium-term aim. Increasing corporate defaults through a premature withdrawal of fiscal support would deepen the contraction in output and, ultimately, exert additional disinflationary pressures.