Fiscal and monetary stabilization in Europe : how to make the mix effective

Abstract

The socio-economic fallout of the pandemic and the Russian invasion of Ukraine create formidable challenges for policy stabilization in Europe. The question is how to ensure that the common monetary policy and national fiscal policies remain effective and credible, and align in contributing to economic and financial stability at both euro-area and country levels. Current proposals range from soft coordination to the state-contingent suspension of the rules followed in normal circumstances. The issue has taken on a renewed urgency as governments have accumulated substantial new debt since 2020 and inflation is on the rise driven by energy and commodities prices. In the euro area, a resilient policy regime is needed to avoid the repeat of the euro-area sovereign risk crisis and prevent polarisation of socio-economic conditions across member states, forcing austerity when and where fiscal policy is still needed.