Sustained buying of government paper by the central bank would only postpone problems and delay the necessary fiscal adjustments, ultimately resulting in a build-up of inflationary pressures. The ECB has never hesitated to reaffirm and remind all Member States, in very concrete terms, that compliance with the principles of budgetary discipline is absolutely fundamental. Naturally, since member states do not control their currency alone, they are vulnerable to liquidity episodes and multiple equilibria. Creditors’ assessments can change, e.g. via contagion effects, even when the fundamentals would not justify it. The high degree of financial integration within EMU means that, if left unchecked, contagion in the banking sector can spread rapidly via cross-border holdings of sovereign debt. For the sovereigns themselves, sudden shifts in market re-pricing of risk can lead to unexpected liquidity challenges. These dynamics underscore the importance of strengthening the mechanisms that prevent such risks – the SGP, surveillance of broader macroeconomic imbalances and stronger financial supervision. However, the liquidity dry-ups and the contagion risks also call for stronger backstop mechanisms, to provide significant, albeit temporary, liquidity assistance. The SMP aims to create a better functioning transmission mechanism of monetary policy to all parts of the monetary union and is therefore in full compliance with the prohibition of monetary financing. Also, we sterilise the impact of the SMP on our total liquidity provision.

However, aside from monetary policy, it lacks powerful decision-making institutions. This means that rules-based frameworks must act a substitute for centralised authority. For fiscal and economic issues, a unitary state would have a finance ministry which both defines and vetoes fiscal and broader economic policies. EMU must achieve the same effect through its economic governance framework. We know from  BIS central bankers’ speeches  3  research, including some by Professor Rogoff, also corroborated by experience, that softrules will not achieve the desired outcome. Strengthening the rules governing fiscal and broader macroeconomic policies is thus essential. The Stability and Growth Pact (SGP), which was created to discipline fiscal policy, has not worked well and is now being strengthened and complemented by a macroeconomic imbalances procedure. Greater automaticity in the implementation of the SGP is needed when unsustainable policies put the stability of the euro area as a whole at risk. Credible economic governance needs to be consistent and predictable. It also needs to be backed by timely, tough sanctions to encourage compliance. Fiscal surveillance should set ambitious benchmarks for excessive deficit and for setting the adjustment path towards a country’s medium-term budgetary objective. The liquidity dry-ups and contagion risks also call for stronger backstop mechanisms, to provide significant, albeit temporary, liquidity assistance. Stronger financial supervision at euro area level is also essential. Finally, national authorities need to take ownership of their European commitments. This means anchoring EU rules in their national legislation and making them mandatory and being held to account by domestic parliaments.