As the European Fiscal Board has highlighted, for the next few years, countries should maintain a neutral or even slightly restrictive aggregate stance. This is particularly important for highdebt countries, as they can combine a restrictive tone in the nationally -funded part of the budget with an expansionary tone in the expenditure financed with European funds, for instance under the NGEU programme. This would be in line with the current fiscal orientation of the European Commission for 2023. Second, fiscal policy should stand ready to react flexibly to the materialisation of adverse scenarios. In the case of a downturn in activity, the best way to achieve a targeted and timely response is by letting automatic stabilisers operate freely. If more intense inflationary pressures materialise, a more contractionary budgetary policy stance might be required. Third, fiscal policy measures should be targeted, focused on the households and firms that are most vulnerable to rising energy prices. According to OECD estimates, so far most of the measures adopted in advanced economies to limit the impact of high energy prices have been non-targeted. Moreover, the best fiscal policy response would be to help adjust the supply side of the economy, by supporting investment projects that will increase potential growth and the resilience of the European economy to shocks, including higher integration and interconnection of energy markets. Lastly, the measures adopted should be temporary. This would help ensure that the fiscal cost is manageable and that it does not increase additionally structural public deficits. Conclusions Let me now conclude.
Second, it seems reasonable to wait and observe potential ripple effects of TLTRO III repayments in bond markets before starting the bond portfolio run-off, as it will allow us to assess the effective impact of balance sheet reduction on financial conditions. After first allowing markets to absorb significant TLTRO III repayments, the normalisation of the ECB’s balance sheet could be followed by ending full reinvestment of the APP portfolio. As announced by President Lagarde last month, we will decide on the key principles of the reduction of our APP portfolio at our December monetary policy meeting. And why we should end APP reinvestments before PEPP reinvestments? In my opinion, a “first-in-first-out” staggered approach is preferable for at least two reasons. First, PEPP reinvestments remain an important line of defence against (pandemic-related) fragmentation episodes, so they are potentially pledged for reallocation across jurisdictions while the lasting vulnerabilities caused by the pandemic continue to pose a risk to the smooth transmission of our monetary policy. Second, we previously declared that PEPP reinvestments will not end up until at least the end of 2024, while our forward guidance on APP reinvestments was open-ended. We have clearly stated our intention to continue APP reinvestments for an extended period of time past the date when we started raising the key ECB interest rates. Moreover, our balance sheet policy will depend too on the operational framework that we adopt for the foreseeable future.