"Macro-Financial Stability and the Euro"
Philip R. Lane, Governor of the Central Bank of Ireland
IMF/Central Bank of Ireland/IMF Economic Review Euro At 20 Conference
Dublin, June 26th 2018
Abstract
The goal of this paper is to examine the implications of monetary union for macro-financial
stabilisation policies at national and area-wide levels. The boom-bust-crisis-recovery cycle
that the euro area has experienced revealed the costs of national and international
institutional frameworks that proved inadequate to manage the policy challenges of this
period. After the crisis, much has been done to remedy these policy shortfalls, even if the
reform agenda is not complete. National and area-wide policymakers must make use of the
improved institutional architecture to do a better job in terms of ex-ante risk management
and ex-post crisis management.
1. Introduction
This joint conference with the International Monetary Fund and the IMF Economic
Review is a highlight in the calendar of events marking the 75th anniversary of the
Central Bank of Ireland.1 I am delighted that the conference features so many that
have contributed to the intellectual debate about monetary union in Europe, while
also featuring the latest original research on the different dimensions of this debate.
At a personal level, I welcome the opportunity in this keynote address to offer some
reflections on twenty years of the euro. European monetary union has been a
dominant factor in my professional career. As a student and early-stage academic,
I vividly recall the debates in the 1990s as to the potential benefits and costs of a
single currency for Europe, while the launch of the euro and its impact on the
European and global economies has stimulated much of my own research over the
last two decades.2 In recent years, my roles as governor of the Central Bank of
Ireland and a member of the governing council of the European Central Bank (ECB)
has allowed me to gain additional insights into the workings of the monetary union.
Macro-financial policy makers have drawn two primary lessons from the experience
of the first twenty years of the euro. First, it is imperative to address emerging
macro-financial imbalances in a pre-emptive manner, in order to limit the risk of
triggering a country-specific or area-wide crisis. Second, if a crisis episode does
occur, the euro area needs a better crisis management toolbox, compared to the
minimalist framework that was in place at the onset of the 2008-2012 crisis. In what
follows, I address these two dimensions of macro-financial stabilisation:
preemptive counter-cyclical policies and crisis management policies.
In addressing these issues, I do not cover other important aspects of the monetary
union. Amongst other omissions, I do not review the impact of the single currency
on cross-border financial flows, international trade or the political economy of the
European Union.3 Nor do I review the performance of the ECB in relation to its
primary mandate of maintaining price stability.4 It is also outside the scope of this
contribution to address the related topics of promoting income convergence among
EU member countries and regions or devising efficient mechanisms to fund common
public goods. Finally, I do not seek to provide a guide to the scholarly literature on
the economics of the euro area.5
The plan for the rest of this address is as follows. In Section 2, I discuss the forces
shaping asymmetric macroeconomic performance during the initial years of the
euro, with a particular focus on the evolution of external imbalances. I discuss some
counterfactuals in Section 3 in order to provide comparisons to a scenario in which
better national policymaking might have mitigated cyclical risks during this period
and a "no monetary union" alternative benchmark. I turn to the 2007-2012 period
in Section 4, during which the euro area first had to deal with the global financial
crisis and then the doom loop area-specific crisis during 2010-2012. I turn to the
institutional reform agenda in Section 5, before offering some conclusions in Section
6.
2. Macro-Financial Stability and External Imbalances During
There were several structural changes in the international economy and
international financial system from the mid-1990s onwards, so that the
establishment of the monetary union cannot be viewed as the sole (or even primary)
factor determining macro-financial outcomes in the euro area during the first
decade of the single currency.
At a basic level, the twin forces of technological change and globalisation have
affected the member countries in a differentiated manner. For instance, the
increasing share of emerging Asia (especially China) in output and international
trade was associated with a reconfiguration of comparative advantage, with
asymmetric effects across individual European economies (Chen et al 2013). Some
member countries (including Germany) gained from the rising international demand
for capital goods; other countries (Portugal, Greece, Italy) faced increasing
competition in industries such as textiles and footwear. The integration of Central
and Eastern Europe into European supply chains was a further source of structural
change, again with asymmetric effects across member countries.
It is in this global context that the impact of the euro on the economies of the
member countries should be interpreted. The production structures of the member
countries are differentially exposed to global factors, both through direct trade
linkages and indirect market structure effects. Furthermore, the variation in country
size and global trade linkages across the member countries also mean that there are
intrinsic differences in terms of the impact of global factors and international
currency movements on the individual member countries (Honohan and Lane 2003,
Lane 2006, Lane and Stracca 2018).
An important type of divergence across the member countries was the widening of
external imbalances.6 Figure 1 shows the distribution of current account imbalances
in the euro area across the groups of surplus and deficit member countries in each
year. In relation to the deficit group, Figure 1 shows an entry effect in the late 1990s
that was followed by a stabilisation phase during 2000-2003. There was a sharp
increase in the aggregate imbalances during 2004-2008. Over the last decade, the
aggregate across deficit countries has gradually converged to close to zero, while
the aggregate across surplus countries has climbed.
Figure 1. Current Account Imbalances in the Euro Area.
EA Current Account Balances
500
400
300
200
100
billions
€,
-
-100
-200
-300
EA19 Surplus EA19 Deficit
Source: IMF WEO
Note: In each year, sum of surpluses and sum of deficits calculated for the group of countries that
are now members of the euro area. The graph is very similar if we restrict the group to the
earlystage members of the euro area.
While there was certainly an entry effect during 1997-2001 that boosted the euro
periphery as a result of the convergence of interest rates across the member
countries (further augmented by the sizeable depreciation of the euro against the
dollar during 1999-2001), this process had largely played out by 2001-2002, with the
international slowdown during that period marking the conclusion of that phase.
This initial phase could be interpreted in a benign manner to the extent that the
qualitative pattern in net capital flows was in line with expected convergence
dynamics (Blanchard and Giavazzi 2002).
From 2003 onwards, the expansion in imbalances was driven by an international
credit boom that was inadequately managed by national macro-financial
policymakers. The international credit environment entered a sustained loosening
phase due to a combination of a savings glut in fast-growing emerging economies,
low policy rates set by major central banks, financial innovations (asset-backed
securitisations, the expansion of shadow banking) which was sustained by
excessively-relaxed supervisory attitudes, over-confidence in the "Great
Moderation" hypothesis and a widespread risk-on attitude among lenders and
borrowers.7
Given the scale of the international credit boom and the expansion in external
imbalances, the complacency among many national policymakers during the first
decade of the euro was surprising. After all, memories of the major financial crises
that took place in the 1990s (the Scandinavian banking crisis; the Mexican crisis; the
East Asian crisis; and the Russian crisis) should still have been fresh in the memories
of policy officials. Moreover, the lack of an independent national exchange rate and
the expanded scope for cross-border borrowing in a monetary union reinforced the
importance of adopting a more prudential approach to credit regulation, banking
supervision and fiscal policy (Lane 1997, 1998, 2006).
The nature of European imbalances also shifted during the 2003-2007 period. While
the expansion in current account imbalances that was observed until 2001 could be
reasonably interpreted as a corollary to intra-European convergence and the euro
entry effect, the significant increase in dispersion during 2003-2008 was significantly
procyclical in nature, with those countries projected to grow more quickly running
larger deficits and those countries projected to grow more slowly running larger
surpluses (Lane and Pels 2012). More broadly, the magnitudes of imbalances during
this period significantly exceeded the values associated with historical patterns
(Lane and Milesi-Ferretti 2012, 2015). These imbalances largely took the form of
net debt flows, with a strong correlation with domestic credit growth (Lane and
McQuade 2014).8
The widening of current account imbalances was a general phenomenon across
advanced economies, rather than being specific to the euro area. In particular,
Iceland and many Central and Eastern European economies also saw a sharp rise in
current account deficits during this phase. Moreover, it is not obvious that the single
currency amplified the scale of imbalances: a study of the relation between output
growth and the current account for thirty-four OECD economies over 1984-2013 does
not indicate that euro membership increased the cyclicality of the current account
(Lane 2016). The same study does not find an increase in the cyclicality of the real
exchange rate for members of the euro area, with an increase in the cyclicality of
the domestic inflation rate overwhelmed by the exogenous factors driving the
external value of the euro.
Still, the expansion in imbalances during 2003-2008 was especially troubling, given
that it took place at the same time that there was an adverse shift in the underlying
growth prospects for the euro periphery. Rapid growth over the previous decade
meant that the convergence dynamic was inevitably weaker than before; the sharp
appreciation of the euro against the dollar over 2002-2007 was an external blow to
the competitiveness of many European firms and reinforced the trend shift towards
imports from emerging Asia; the new member countries from Central and Eastern
Europe were tougher competitors for the location of manufacturing activities; rising
commodity prices represented an income transfer from commodity importers to
commodity exporters; and demographic factors constrained aggregate potential
growth at the European level. Furthermore, it is also plausible that the easy
international credit conditions delayed reform efforts in some member countries
(Fernandez-Villaverde et al 2013). In the aggregate, the expanding current account
deficits in the periphery funded an expansion in the nontraded sector rather than
boosting investment in the tradables sector, further aggravating the deterioration
in growth prospects (Giavazzi and Spaventa 2011, Benigno and Fornaro 2014).9
The bust that followed the end of the international credit boom in 2008 hit hard
those economies that had developed excessively-large current account deficits.
Over 2009-2012, the cross-country variation in the declines in output and domestic
spending (with little relief from real exchange rate adjustment) was strongly
correlated with the scale of the gap in 2005-2008 between the realised current
account positions and the current account positions that would fit a
fundamentalsdriven model (estimated over 1969-2008 for a panel of sixty four countries) (Lane
and Milesi-Ferretti 2012, 2015). However, it is noteworthy that membership of the
euro area did not amplify the severity of the adjustment during this period: while
high-deficit member countries experienced less by way of real exchange rate
adjustment compared to other high-deficit advanced economies, other features of
the monetary union (such as access to cross-border eurosystem liquidity and the
responsiveness of the common monetary policy to area-wide conditions) cushioned
the impact. Indeed, those Central and Eastern European economies that were
outside the euro area but pegged to the euro underwent sharper adjustment (Gros
and Alcidi 2013, Lane 2016).
The limited role for real exchange rates in the external adjustment process for
advanced economies during this period suggests that the importance of the exchange
rate regime as a determinant of macroeconomic outcomes might sometimes be
overstated. This is consistent with the received wisdom that it is difficult to find
significant differences in average macroeconomic outcomes across different
exchange rate regimes (Mussa 1990). One reason is that floating exchange rates are
subject to non-fundamental shocks that may push an economy away from its
equilibrium (Engel 2011, Berka et al 2018). A second is that currency movements
can have a nuanced impact, with wealth effects from terms of trade movements
possibly operating in the opposite direction to the competitiveness channel. For
instance, Lane and Stracca (2018) find that an appreciation in the external value of
the euro raises disposable income and consumption through a positive terms of trade
impact, even if the export sector shrinks.
3. Counterfactual Scenarios
A primary lesson from this boom-bust cycle that the costs of tolerating the rise of
persistently large imbalances are extremely high, especially for high-deficit
countries (Lane 2013c).
During a global credit boom period, what instruments are available to policymakers
in an individual country to mitigate macro-financial risks? For members of the euro
area, the absence of a national currency and national interest rate policy increases
the importance of using other policy instruments.
Most directly, a credit boom can be addressed through vigorous macro-prudential
regulation of the banking system. A wide range of policies can be implemented:
loan-to-value limits; debt service to income limits; sectoral concentration limits in
lending; high capital asset ratios; counter-cyclical capital buffers; and limits on the
use of short-term funding. The very limited use of these tools in the mid-2000s
meant that regulatory policies did too little to offset the scale of credit expansion.
A common objection to the use of macro-prudential policies is that the effectiveness
of these tools is weakened through regulatory arbitrage with curbs on domestic
lending leading to growth in cross-border lending. However, even if some
substitution towards cross-border lending might have resulted, the balance of risks
would have been shifted, since the credit risks would be on the books of
foreignbased banks rather than domestic banks.
In addition, fiscal policy can be deployed at both microeconomic and
10
macroeconomic levels. At a microeconomic level, a property boom can be
mitigated through reforms that reduce the tax incentives offered to developers and
households. More generally, time-varying tax rates on consumption and investment
can replicate some properties of national-level exchange rate and interest rate
policies by altering the intertemporal terms of trade (Farhi et al 2013). At a
macroeconomic level, at a minimum, a government under such conditions should
seek to maintain acyclically-neutral budget, with a countercylical budget balance
even more desirable.
While Ireland achieved small headline budget surpluses during the boom period, the
underlying budget balance was much less healthy, given the reliance on
construction-intensive tax revenues. The scale of the boom was such that
significantly more positive budget surpluses were warranted, with the deterioration
in fiscal discipline towards the end of the boom period especially unfortunate. In
2007, the fiscal surplus in Ireland was just 0.2 percent of GDP, whereas it was 5.1
percent in Finland, 5 percent in Denmark, 3.3 percent in Sweden and 2 percent in
Spain.
Running large budget surpluses is politically difficult, given the pressures to meet
spending demands and cut taxes. In terms of safeguarding the public balance sheet,
it may be more politically feasible to establish a fiscal reserve fund in recognition
of the contingent nature of the windfall revenues during a credit boom and the fiscal
risks associated with banking crises. While Ireland did set up a reserve fund (the
National Pensions Reserve Fund), its mandate was long-term in nature rather than
cyclical and its equity-dominated investment strategy was not appropriate in
managing crisis conditions.11 Rather, an additional cyclically-focused fiscal reserve
fund that held a liquid-assets portfolio should have been established (Lane 1998).
To illustrate a counterfactual scenario in which national macroprudential and fiscal
policies were deployed to lean against the wind, Figures 2 and 3 show the evolution
of household credit and output (relative to the euro area aggregate) in Ireland in a
simulation of the model proposed by Martin and Philippon (2017). Figures 2 and 3
show that the avoidance of the extraordinary build up in household debt (plus a
more conservative fiscal feedback rule) would have led to a shallower boom-bust
cycle and a faster recovery. In particular, through the preventive use of ex-ante
macroprudential policies during the boom, the containment of sovereign spreads
during the crisis and the avoidance of fiscal recapitalisation of the banking sector
would have made it more possible to run an expansionary, counter-cyclical fiscal
policy during the downturn.
Figure 2. Counterfactual Evolution of Household Debt in Ireland
Note: Simulation of model proposed by Martin and Philippon (2017).
Figure 3. Counterfactual Evolution of Output in Ireland
Note: Simulation of model proposed by Martin and Philippon (2017).
Figure 4. National Interest Rates under Taylor Rules
Counterfactual Taylor Rule Interest Rates
7
6
5
4
3
2
1
0
-1
-2
Euro Area - Calibrated Greece - Calibrated Ireland - Calibrated
Italy - Calibrated Portugal - Calibrated Spain - Calibrated
Note: Calibrated Taylor rules: = (1 - π)(i∗) + where i∗ = + -
it πit-1,
φrrt φπ(E(πt+1)
π∗) + - yn). We set π = 0.8, = 1, = 1.5, and = 0.5. We also assume
φy(yt φr φπ φy
perfect foresight, so that = , while the target rate of inflation is
E(πt+1) πt+1
considered to be constant at π∗ = 2.
An important alternative benchmark is to assess likely macroeconomic outcomes
12
during this period had the monetary union not been established. To this end, some
researchers have run Taylor-type rules to capture plausible paths for national
interest rates in this alternative world (Ahrend et al 2008, Taylor 2008). Figure 4
shows the hypothetical national interest rates for selected member countries over
1999-2009. By and large, the differentials vis-à-vis the euro area interest rate are
relatively minor, which reflects the fact that there was relatively little dispersion in
national inflation rates during the mid-2000s and estimated real time output gaps
were adjudicated to be quite small.13
Even if higher interest rates had been imposed during the boom period, the
effectiveness of interest rate policy in sharply limiting a credit boom is open to
question (Lane 2016). First, given that central banks choose to vary interest rates
within a fairly narrow band (since small interest rate movements have powerful
effects on the real economy), even a moderately-higher path for interest rates may
not sufficiently deter investors that expect sizeable capital gains in the property
market. Second, a positive interest rate differential vis-à-vis other economies can
induce domestic investors to borrow in foreign currencies, just as happened in
Iceland and several countries in Central and Eastern Europe. Third, the currency
appreciation associated with a higher path for interest rates could have encouraged
extra borrowing by risk-taking entrepreneurs since the capacity to increase leverage
in foreign currencies through loans collaterised against domestic assets would have
been enhanced (Bruno and Shin 2015).
The risks embedded in the 2005-2006 European macro-financial configuration were
clear, even if the nature and timing of a future disruptive shock was unknown (Lane
2006, Lane and Milesi-Ferretti 2007). As it turned out, the trigger for the end of the
international credit boom originated in the United States, with a sustained
tightening in funding markets from August 2007 onwards and an intensification in
the financial crisis between the near-collapse of Bear Stearns in March 2008 and the
collapse of Lehman Brothers in September 2008.
4. The Euro and the Crises of 2007-2012
During 2007-2009, the availability of eurosystem liquidity provided an important
buffer during the global financial crisis: banks in the euro area could replace private
funding with central bank funding. For banks with insufficient eurosystem-eligible
collateral, national central banks could also provide emergency liquidity assistance
(ELA), within the framework set out by the eurosystem. Even dollar funding was
available through the eurosystem, thanks to the currency swap arrangements
between the ECB and the Federal Reserve Board. Since individual countries had
different funding shortages, these liquidity policies had asymmetric outcomes across
the individual member countries, as captured by the intra-system Target2
imbalances. At this level, membership of a common currency area provided an
important bulwark against the global financial shock by allowing cross-border
liquidity flows to replace cross-border private flows (Fagan and McNelis 2014,
Whelan 2014b). By way of contrast, such automatic cross-border liquidity flows were
not available to other European countries that retained their own currencies but had
significant foreign currency liabilities.
At the same time, the application of eurosystem liquidity policies involves some
discretionary judgement calls. In particular, there are strong feedback loops
between liquidity and solvency if there is a system-wide crisis and loans to the
nontradable sector (construction, housing, SMEs) dominate the asset side of the
balance sheet. In particular, forced deleveraging over a short-time timescale can be
self-defeating by driving down asset values in a firesale process. At the same time,
open-ended liquidity provides incentives to delay excessively the resolution of
problem loans, such that the monetary authority must strike a delicate balance in
setting liquidity policies. On an ex-ante basis, the prospective availability of
eurosystem liquidity may have also weakened the incentives to constrain credit
growth during the boom phase (Fagan and McNelis 2014). Furthermore, in scenarios
in which banks are substantially exposed to sovereign default risk, it may be
necessary to condition access to eurosystem liquidity to compliance with specified
fiscal plans, which inevitably puts central bankers in the political spotlight.
In the absence of monetary union, the unfolding of the crisis would have been quite
different. Since the scale of the pre-crisis credit expansion in the euro periphery
would only have been possible by taking on large-scale foreign-currency liabilities,
a national central bank would have been limited in its capacity to provide substantial
foreign-currency liquidity. In the event of a large-scale flight of bank depositors and
bank creditors, the imposition of capital controls and/or liability restructuring would
have been necessary. At the same time, a loss in confidence in the domestic currency
could have resulted in a large devaluation, a sharp increase in interest rates and a
corresponding decline in asset prices.
While devaluation may be helpful in stimulating economic recovery by improving
domestic cost competitiveness over time, its immediate impact is to further
exacerbate balance sheet problems in relation to foreign-currency debts. Taken
together, these forces could have led to a more acute type of crisis, with a deeper
initial recession, larger movements in interest rates and asset prices, a jump in the
domestic price level and more debt restructuring. Of course, a full evaluation of
the pros and cons of alternative monetary regimes requires a broader set of criteria,
with the role played by exchange rate adjustment during a crisis episode set
alongside the implications for monetary conditions during normal times. In the
European context, a further political economy consideration is the potential impact
of fluctuations in national currency values on the political support for the level
playing field philosophy that is the foundation for the single market (Eichengreen
1996).
Assessing the relative contributions of surges in sovereign risk premia, fiscal
austerity, poor investment dynamics and the monetary policy stance to the second
phase of the crisis during 2010-2012 remains open to dispute.14 One basic policy
lesson from this episode was that compromised fiscal capacity severely inhibits the
potential role of counter-cyclical fiscal policy during recessions, especially if
monetary policy is near its lower bound. In particular, if a counter-cyclical fiscal
initiative triggers solvency concerns, the adverse impact of an increase in the
sovereign risk premium can dominate the traditional Keynesian transmission
mechanism (Corsetti et al 2014). More speculatively, this episode also raised the
question whether a more coordinated approach to determining the fiscal stance
could have alleviated the impact by internalising the cross-border spillovers of
national-level austerity policies.
A second lesson was that the untested foundations of the single currency could
amplify crisis dynamics by inviting speculation in relation to redenomination risk.
While cross-country variation in sovereign risk premia (and the funding costs facing
banks) that aligned with differences in solvency assessments would be consistent
with the operation of the monetary union, it became clear during this period that
investors also placed some weight on redenomination risk in determining asset
prices, which was not compatible with a secure monetary union.
A third lesson was the force of the doom loop by which national fiscal crises and
national banking crises fed each other. While the balance sheets of the sovereign
and the national banking system have common exposures to domestic recessionary
forces, national governments were also exposed to the direct fiscal costs of
intervening in banking systems, which was more likely in the absence of recovery
and resolution regimes that could ensure that private investors bore the costs of
fixing a distressed banking system. In the other direction, banks were exposed to
sovereign risk through multiple channels. If an intensification of sovereign risk
triggered recessionary austerity measures, the quality of the domestic loan book
would decline, while banks might also be faced with a higher tax burden. In
addition, banks were directly exposed to sovereign risk through holdings of domestic
sovereign bonds.
14
See, amongst others, Lane (2012), Veld (2013), Kollmann et al (2015), Rannenberg et al
(2015) and Constancio (2018b).
In the next section, we turn to the policy measures that were taken in response to
the crisis and also address the future evolution of the institutional architecture for
the euro area.
5. The Institutional Design of European Monetary Union
The original work on the design of the monetary union focused on the mandate of
the European Central Bank, while the fiscal policies of the member countries were
also restricted by the EU-wide Stability and Growth Pact.15 The crisis induced a
significant expansion in the institutional framework of the monetary union, while it
is widely agreed that further progress is required in order to enhance
macroeconomic stabilisation and ensure that the euro area proves sufficiently robust
in the event of future crisis events.16
The cohesion of the euro area is underpinned by the pursuit of sound public finances
by each member state. If member countries maintain prudent fiscal stances during
good times, fiscal easing (both through automatic stabilisers and discretionary
measures) during downturns can play an important stabilising role in the event of
country-specific or common shocks. At the level of the EU and the euro area, a
recurrent challenge has been to design an institutional framework that can
effectively support and validate the running of prudential national fiscal policies,
given the deficit and debt biases identified in the literature on the conduct of fiscal
policy. In response to the crisis, extra fiscal safeguards were put in place, with a
greater emphasis on national institutional constraints (fiscal responsibility laws,
independent fiscal councils), a shift in focus towards the underlying structural fiscal
balance, the introduction of feedback mechanisms to promote reversion in the
debtoutput ratio during recovery phases and a more structured approach to the
monitoring and oversight of fiscal plans.
The optimal design of the European fiscal framework remains a live debate, with
open issues including the simplification of the set of fiscal rules and the effective
measurement of structural fiscal positions. Still, the framework has provided an
important anchor for the conduct of national fiscal policies during the post-crisis
period: while the counterfactual evolution of fiscal positions under purely national
frameworks is difficult to pin down, it is plausible that the collective restraints
imposed by the European-level framework has contributed to fiscal discipline.
Moreover, the development of a robust fiscal framework and the accumulation of a
track record of national compliance may facilitate effective counter-cyclical
national fiscal policies during future downturns, since cyclical loosening should not
give rise to concerns about long-term sustainability under such conditions.
Furthermore, a credible area-wide institutional framework that anchors national
fiscal policies is a precondition for other initiatives such as an official funding
mechanism (the ESM), the outright monetary transactions (OMT) programme of the
ECB and the deepening of banking union.
The combination of the Greek fiscal situation and the ongoing weaknesses in the
European and global financial systems induced the introduction of European official
funding programmes in 2010 that went on to be deployed in Ireland, Portugal, Cyprus
and Spain (banking sector only), in addition to Greece. In 2012, the European
Stability Mechanism (ESM) was formalised as a permanent official funding agency.
A permanent official funding agency reduces the probability of a panic-induced
sudden stop in sovereign debt markets, which may be especially prevalent in a
monetary union to the extent that traders believe that national sovereigns in a
currency union have fewer stabilisation options in the event of a rollover crisis
(Bianchi and Mondragon 2018). Compared to the potential disruptive impact of
sovereign debt restructuring, an official funding programme can also ease the
possible spillover impact of fiscal distress in a member country that has suffered a
loss of market access but which can plausibly return to market funding after a
temporary phase of official support.
An official funding agency is more sustainable, the less often it is called upon, such
that there is a tight connection between the ESM and the European fiscal framework
discussed above: if the latter is effective, the former will only be needed in the
event of severe cases of bad luck, with the fiscal position of a national government
only undone by an unanticipated and large shock. Equally, the funding costs of the
ESM are minimised, the more the long-term fiscal plans of a member country can be
anchored by a credible fiscal framework, such that a programme country can return
to normal market funding sooner rather than later.
As is reflected in the current po