Just as overfishing creates negative externalities for other countries, excessive public debt harms the euro area as a whole. Excessive debt in one member state drives up longer-term interest rates for all euro-area countries. And second, each member state issues debt in a currency it cannot create.
Hence, a high level of fiscal discipline is needed to ensure that solvency concerns do not spiral out of control. For monetary policymakers focussing on maintaining price stability, the question of how to safeguard public finance is thus of particular concern. As so often, Mervyn King put it most aptly when he said that “Central banks are often accused of being obsessed with inflation.