Secondly, monetary union still has a long way to go to achieve sounder governance that will reduce the union’s vulnerability to shocks, provide for better coordination of its economic policies and promote the reforms needed to encourage and to be able to sustain long-term growth. 3/7  The role of monetary policy I shall first address the role that monetary policy has played and is continuing to play in the recovery. The confluence of the financial and sovereign crises in a European monetary union whose institutional architecture was incomplete meant that the ECB had to assume a pivotal role in the economic policy response. Initial measures took the form of a gradual reduction in interest rates and the granting of practically unlimited amounts of liquidity to banking systems, at increasingly longer maturities, with greater flexibility in the attendant collateral policies. In 2012, amid a second recession in the euro area and financial turmoil, the possibility of purchasing the public debt of countries subject to financial pressures was introduced. While this possibility was not actually activated, it contributed to staving off the threat of the single currency breaking up. Yet by mid-2014, and despite the fact that the most acute episodes of the crisis had been overcome, the euro area was immersed in a scenario of low growth and deflation risks in which various external and internal factors were at play. On the external front, the weakness of global growth and the collapse of commodities prices accentuated the downside pressures of producer prices.
When designing policy conduct, there are no mechanisms conducive to countries internalising the benefits of achieving a suitable economic policy mix for the area as a whole; and this especially at a time, such as the present, when the existence of a very accommodative monetary policy means that both the national effects and the impact on other countries associated with a specific fiscal impulse are greater. Against this backdrop, and as highlighted in the recent discussion paper on the deepening of EMU published by the European Commission, it would be necessary in the medium term to develop a fiscal capacity for the euro area as a whole that contributed to supporting monetary policy. 6/7  The estimates detailed in this year’s Annual Report of the Banco de España suggest that a study could be conducted of a common fiscal instrument, managed at the supranational level, but which does not entail permanent transfers between countries and which, without committing a high volume of funds (around 1% of GDP), provides the euro area with a fiscal stabilisation capacity similar to that other federal states have. It also appears necessary to seize the opportunity afforded by the favourable economic juncture and the overcoming of some of the political risks to complete the reform of European governance, along the lines considered by the Five Presidents’ Report published in 2015 and the recent discussion paper by the European Commission.