As we approach the points at which the Libor panels will cease, it is worth pausing to reflect on what the underlying challenges with Libor benchmarks are and making sure that in finding suitable replacements we move to solutions that don’t replicate those weaknesses. Any failure to address these weakness will pose risks in the domestic  Descending safely: Life after Libor ‐ speech by Andrew Bailey | Bank of England  Page 4  markets that use them but will potentially export those risks into other jurisdictions through international markets, for example through offshore markets, multi-currency lending and cross currency derivatives trades. We need to learn the lessons of Libor, and ensure we complete this transition in a way that minimises the risk of us having to undertake a similar exercise in the future. And across markets we have seen progress in building liquidity in those selected risk-free rates and demonstrating a wide use case. The tools are there to support use of these rates through the production of indexes and calculators that we are seeing emerge. The transition from Libor should be done once and it must be done right. As I have already mentioned, there has continued to be low levels of actual transactions in the markets Libor seeks to measure and the rate has had to remain heavily reliant on ‘expert judgement’.
A possible solution to this coordination problem could be to establish a central mechanism entrusted with setting the euro area’s overall fiscal policy stance and responding to tail events, with national authorities focusing on medium-term goals and placing debt sustainability as their primary objective (see slide 7). This fiscal policy tool could be automatic, such as a common unemployment insurance scheme or a more general stabilising instrument dependent on the cyclical position. In any case, risk sharing must be accompanied by an incentive system that prevents negative cross-country externalities and moral hazard, something of utmost importance in a monetary union. Furthermore, I believe that such a central instrument would also be suited to tackling global challenges, such as climate change or the process of digitalisation, and might be a better option than national “golden rules”. These rules exclude specific types of public expenses from deficit calculations, on the grounds that these could be growth-enhancing and thus need to be protected. This option is attracting much attention in current EU debates. In particular, it is argued that in the current context, with countries having to expend a great deal of effort in the fight against climate change, such investments should be excluded from the expenditure target or budget balance in order to safeguard them from EU fiscal rules. However, a golden rule would add an additional layer of complexity to an already intricate system (see 6  slide 7) and would require the definition of the types of spending to which it ought to apply.