But at times of significant uncertainty, private investment may not fill the gap left by the pandemic in spite of very favourable financing conditions. In these situations, monetary policy cannot unfold its full potential. Fiscal expansion is then indispensable in order to sustain demand and mitigate the long-term costs of the crisis.5 Strong complementarities reinforce the policy impact, working in both directions.
On the one hand, fiscal policy will be more effective when interest rates can be expected to remain low for a considerable period of time, like today. On the other hand, decisive fiscal action increases the effectiveness of monetary policy, especially in the presence of divergent developments across the euro area.