A passive fiscal policy means that the fiscal authority must be ready and willing to adjust its policy stance (revenues and primary spending) in such a way as to stabilise its debt at any level of the interest rate that the central bank may choose. Or, to put it another way, borrowing from Woodford’s terminology, 8 fiscal policy needs to be “Ricardian”. 9 Although the Treaty shows an awareness of the need for consistency between monetary and fiscal policy, in the sense described above, to ensure lasting stability, it did not foresee that fiscal policy could go off track to an extent that requires dedicated institutions and policies able to provide financial assistance, against conditionality, in order to restore sustainability and preserve financial stability in the euro area. The creation of the EFSF/ESM in charge of providing support to euro area Member States in difficulties and enforcing appropriate conditionality has filled this gap. It provides the euro area with a means to restore “Ricardianess”, thereby minimising the risk of “fiscal dominance”. Against this background, it is easy to understand the ECB’s decision on 6 September to undertake Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area, and to understand the specific framework within which they will be implemented. The aim of OMTs is to preserve the singleness of monetary policy and to ensure the proper transmission of the monetary policy stance to the real economy throughout the euro area.
Benoît Cœuré: Challenges to the single monetary policy and the European Central Bank’s response Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the Institut d’études politiques, Paris, 20 September 2012. *  *  *  Ladies and gentlemen, 1 It is a great pleasure for me to speak here today at Sciences Po Paris. 9 August this year was the fifth anniversary of the start of the financial crisis. The past few years have been times of hardship, financial turbulence and risks. At the same time, the crisis has exposed weaknesses in the framework of the economic and monetary union and provided an impetus to strengthen its foundations and to begin the process of bringing all euro area countries back to a more sustainable fiscal and macroeconomic path. The crisis has also brought challenges and opportunities for monetary policy, which is going to be the focus of my remarks today. Let me elaborate on two of them. The first challenge I will describe is that after Lehman’s collapse central banks had to combat exceptional threats to price stability arising from financial instability and recessionary forces. At that time their standard tool of monetary policy – changes to the short-term interest rate – was losing traction due to the dislocation in the financial system.