Monetary easing was met by a premature and uncoordinated fiscal tightening. Between 2013 and 2018, fiscal policy tightened by around 2.5 percentage points of GDP, while in the United States it loosened by around 0.8 percentage points. This contributed to the slower recovery and weaker price pressures we experienced. Many observers, myself included, were already highlighting this inconsistency before the pandemic.2 But the crisis, by its very nature, forced us to take a much-needed change of direction. Fiscal policies had to step in to offset lost private sector income, because monetary policy could not target the sectors most in need of help. And we have now seen how powerful this can be: in the fourth quarter of last year, compensation of employees in the euro area fell by more than 2%, but real household income actually rose by 0.6% thanks to powerful government transfers. In parallel, monetary policy has continued to deliver the financing conditions necessary for all sectors of the economy to respond to the crisis, making a superior policy mix possible. Strong policy support will continue to provide a bridge over the pandemic and well into the economic recovery. The ECB is committed to preserving favourable financing conditions throughout this period. On the fiscal front, the European Commission expects the euro area fiscal stance to loosen by 2.5 percentage points of GDP this year.3 Better policy alignment has also extended to supply-side policies.
It undertook a swathe of regulatory reforms targeted at banks and nonbanks alike. Since 2011, European banks have nearly doubled their core capital ratios to over 14%.1 We also saw the creation of European banking supervision to give us a broad European view of risks to financial stability. This meant that, when the pandemic hit, the financial sector could play a fundamentally different role. Instead of being a source of instability, banks could be mobilised to enhance our response to the pandemic, rapidly funnelling liquidity to the economy. From March to May last year, bank lending to companies in the euro area rose by almost € billion, the largest jump on record in a 1/4  BIS central bankers' speeches  three-month period. The increase in bank capital before the crisis meant that supervisors could free up € billion of additional capital for new lending. And thanks to European banking supervision this decision was taken quickly and collectively, rather than in a drawn-out negotiation between multiple national supervisors. This joint European action also averted the risk of stigma that we had previously feared. What the financial crisis taught us, essentially, is that there is no trade-off between effective regulation and supporting growth. A robust financial sector is an asset during a crisis. And our experience during the pandemic has proven the wisdom of this lesson beyond doubt. The importance of credible commitment But the financial crisis also had a more profound impact on Europe, morphing into the euro area sovereign debt crisis.