Such effect is usually known as a sudden-stop in capital inflows and the mechanics of the process is not too different from the disrupting effect of the financial accelerator on the credit channel of monetary policy in developed countries. 8 Finally, even an analysis of trade and financial integration, while improving our understanding of complex open economic systems, may fall short of explaining the synchronisation of real and financial cycles. Since cyclical patterns are largely attributable to different cost structures and profitability profiles that affect investment decisions and output volatilities, another  5  Meller, B., Metiu, N. (2015): The synchronisation of European credit cycles, Discussion Paper No. 20/2015, Deutsche Bundesbank. 6  Drehmann, M., Borio, C., Tsatsaronis, K. (2012): Characterising the financial cycle: don’t lose sight of the medium term!, BIS Working Papers No 380, Monetary and Economic Department. 7  Duval, R., Cheng, K., Hwa Oh, K., Saraf, R., Seneviratne, D. (2014): Trade Integration and Business Cycle Synchronization: A Reappraisal with Focus on Asia, IMF Working Paper 14/52; Davis, S. (2011): Financial Integration and International Business Cycle Co-Movement: The Role of Balance Sheets, Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute, Working Paper No. 89. 8  Bernanke B.S., speech at the Credit Channel of Monetary Policy in the Twenty-first Century Conference, Federal Reserve Bank of Atlanta, Atlanta, Georgia, June 15, 2007. BIS central bankers’ speeches  3  potential explanation should be sought on the production side, which operates in conjunction with trade and finance.

With single monetary policy, commitment not to bail-out heavily indebted member states is necessary to eliminate potential for moral hazard. However, the actual euro-area experience demonstrates strong incentives for sovereign fiscal policies to “trespass” on the prudent fiscal stance, either in the expectations of non-enforcement of the no bail-out clause, with the implicit assumption that sovereign default will be politically unacceptable, or through a direct support of common monetary authority through special monetary operations. This uneasy triangle is usually referred to as the fiscal trilemma of the monetary union. Such a “holy trinity” makes impossible the cohabitation of the independent monetary policy of a supranational central bank, national fiscal sovereignty and the no bailout clause 15. In order to ease the frictions stemming from national fiscal policies, the monetary framework of the euro area was reconstructed by implementing the elements of the banking union (the Single Supervisory Mechanism and the Single Resolution Mechanism), setting up the European Stability Mechanism (ESM, previously the European Financial Stability Fund (EFSF)) as well as by starting the ECB’s quantitative easing program (QE). All these mechanisms should help to decouple bank distress and sovereign debt pressures. 16 The described trilemmas in the European economic and monetary framework, with the still absent synchronisation of real and financial cycles, have given birth to a specific quadrilemma that demonstrates difficulties faced by policy makers in the euro area.