A series of factors – first and foremost, in the case of the euro area, the Russian invasion of Ukraine - are responsible for these adverse economic dynamics and for the surge in inflation to levels that we had not seen for decades. Accordingly, central banks, including the ECB, have responded swiftly to the inflationary pressures, tightening financing conditions for both private economic agents and the government. Moreover, these shocks have thrown into stark relief European vulnerabilities in key areas, such as the energy sector, as well as the considerable disparities among countries in their relative exposure to them. And this is happening against the background of an increase in euro area public debt by almost 10 percentage points (pp) of GDP since the pandemic, leading to high debt-to-GDP ratios and high structural deficits in some countries that have shrunk the available fiscal space and represent an important vulnerability. All these elements underline the importance of achieving the correct monetary and fiscal policy mix in order to face this complex context. The current circumstances differ substantially from those prevailing at the outbreak of the COVID-19 pandemic. The pandemic confronted us with a severe, albeit temporary, exogenous shock, which was probably the biggest supply and demand shock we had faced in decades. In that context, a coordinated fiscal and monetary policy response was absolutely necessary to support the incomes of both households and firms, and to minimise the potential structural damage to employment, productive capacity and economic growth caused by the crisis.
The fiscal response had to rely on both national and supra-national policy actions of significant magnitude. In the current high inflation setting, however, the appropriate policy mix requires a tightening of the monetary policy stance and a fiscal stance that, at the aggregate, euro area level, is not at odds with this anti-inflationary stance. This means that government support measures should be temporary, targeted and tailored to preserving incentives to consume less energy. 1  In particular, measures should be gradually rolled back as energy prices fall. Otherwise, we are at risk of driving up medium-term inflationary pressures, which would call for a stronger monetary policy response. In this regard, let me stress that achieving a fiscal stance that is consistent with the smooth operation of the Economic and Monetary Union (EMU) while delivering sustainable public finances is precisely the role of the EU’s fiscal rules framework, or at least its key aspiration. Why do we need fiscal rules? Let me be straightforward in stating upfront that a disciplined fiscal framework that fosters the sustainability of public finances is essential to guaranteeing macroeconomic stability and the proper functioning of the EMU. Under the Maastricht Treaty, the design of the EMU rested on two pillars: a single monetary policy authority and a set of coordinated national fiscal policies, which constituted the EMU’s policy mix. The independent central bank (ECB) targeting price stability was entrusted with monetary policy.