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In my view, some of these crisis measures have excessively blurred the boundaries between monetary and fiscal policy. Some of the Eurosystem's measures, at least, are at the outer edge of its mandate. This action attracted public scrutiny and also prompted a debate over the mandate itself. Criticism is being raised from two corners. From those who believe that central banks have already become too embroiled in the crisis, and from those who are calling on central banks to play an even greater role in other policy areas.
In other words, the Maastricht Treaty is based on the principle of national responsibility. Key national policy areas remain national matters, so liability for the consequences of these policies should also stay at the national level. This principle of liability is crucially important for monetary union. The failure of this regulatory framework to avert the crisis was only partly due to gaps which the founders of monetary union had overlooked – gaps which are severely impairing the stability of the euro area – like, for instance, the creeping erosion of competitiveness in some countries, excessive debt levels not just in the public sector but in the private sector as well, insufficient financial market regulation and lax banking supervision.
That makes it all the more important now to bolster the existing operational framework and to attach renewed importance to the principle of national responsibility. Another option would be to make greater mutual liability conditional on greater mutual control.
There is one area of responsibility, though, which is to be shifted to the European level as part of the Banking Union – that of supervising roughly 130 significant banks across the euro area. But this, too, is an area in which a balance needs to be struck between liability and control. While it is true that the Banking Union will mean sharing responsibility for future misalignments, liability should only be mutualised for developments caused by factors that lie outside the sphere of national policymakers. So there are good reasons for retaining a substantial share of national liability. After all, the single recovery and resolution mechanism is essentially designed to primarily bail in the owners and creditors of ailing banks.
Monetary policy constantly has to navigate the tensions between the regulatory framework and other policy areas, notably fiscal, financial market and structural policy. This means that a central bank whose monetary policy strategy is based on price stability cannot create the setting in which it operates. No one would dispute the fact that monetary policy can stimulate economic activity in the short run. In the long run, however, this stimulus inevitably comes at the cost of rising inflation. Ensuring price stability is therefore the best way for central banks to contribute to long-term economic growth. In the end, the structure of an economy – and, in particular, the productivity of its enterprises and employees – is the main factor which determines its growth potential.
The danger of financial dominance
We must always keep in mind that the intention is to supply banks with liquidity and not to replace capital market finance. It is therefore crucial that central bank refinancing operations do not allow structural problems in the banking industry to go unsolved by ruling out the possibility – so vital to a market economy – of banks without any chance of survival exiting the market.
We should design refinancing operations in such a way that they do not encroach on capital market funding; their conditions should not be too generous compared with market conditions. One of the aims of liquidity provision should be to facilitate lending to the private sector. The liquidity should not be used to amass even more government bonds.
To ensure that the Eurosystem is not pressured into rescuing ailing banks in the future, two works in progress need to be completed.
In addition, I believe that the preferential treatment of government bonds on bank balance sheets should be abolished. If banks needed the same kind of risk-based capital backing for lending to euro area governments as they do for other loans, this would curb their appetite for government bonds. And it would also help to discipline the fiscal policy of the countries issuing these bonds.
To minimise the risks posed by the crisis measures to the euro area operational framework, the monetary policy mandate must be interpreted as narrowly as possible. This is the best way for the Eurosystem to safeguard its independence and would reduce the danger of suspicions of fiscal or financial dominance. We therefore need to re-establish clear boundaries between monetary and fiscal policy tasks in particular. While monetary policy has some scope to contribute to financial stability, where aims come into conflict with one another the objective of maintaining price stability should take clear priority.