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First, to protect their independence central banks in the eurozone face clear constraints to the risks they are allowed to take... Second, unconditional further easing would ignore the lessons learned from the financial crisis.
As a result of the measures taken, central banks now play a fundamentally different role. Before the crisis they provided scarce liquidity; now they serve as a regular source of funding that replaces or displaces private investors.
This breeds the risk of some banks becoming overly dependent on central bank funding, thus reducing incentives to reform business models. So far, progress in this regard has been very limited in several eurozone countries, even though experience of past financial crises, say in Sweden or Japan, teaches us the benefits of swift action and the perils of foot-dragging. Regulators need to keep up pressure on banks to proceed with the restructuring of the financial sector, particularly by unwinding unviable banks and retaining earnings to build up capital.
By the same token, relieving stress in the sovereign bond markets eases imminent funding pain but blurs the signal to sovereigns about the precarious state of public finances and the urgent need to act. Macro-economic imbalances and unsustainable public and private debt in some Member States lie at the heart of the sovereign debt crisis. It may appeal to politicians to abstain from unpopular decisions and try to solve problems through monetary accommodation. However, it is up to monetary policymakers to fend off these pressures.
It is therefore vital that there be no ambiguity about the temporary nature of unconventional measures.
To overcome the crisis, short-term measures have to be consistent with the long-term stability we all strive to achieve. Overburdening monetary policy with crisis management upsets this balancing act. Monetary policy in the eurozone is geared towards monetary union as a whole; a very expansionary stance for Germany therefore has to be dealt with by other, national instruments.
However, this also implies that concerns about the impact of a less expansionary monetary policy on the periphery must not prevent monetary policy-makers taking the necessary action once upside risks for eurozone inflation increase. Delivering on its primary goal to maintain price stability is the prerequisite for safeguarding the most precious resource a central bank can command: credibility.