the reason is that it is precisely during a crisis that the fiscal authorities try to push the central bank towards solving the fiscal problem through the inflation tax. however, the central bank is protected from this pressure by its statutes and the rules it adopts for the conduct of monetary policy. in the case of the ecb, the rules specify that it can lend only to sound institutions and against appropriate collateral. the appropriateness of the collateral depends in particular on whether the country under stress follows rigorously the imf / eu adjustment programme and is on track to regain market access. the soundness of institutions, which is assessed primarily by supervisors, is also a key principle. it has ensured that all adjustment programmes envisaged sufficient funds for the recapitalization of the banking system. these rules and principles apply to the central bank but are ultimately there to protect taxpayers and to prevent monetary policy from being misused to bail out insolvent governments. they constrain the actions of the central bank, but also give it sufficient flexibility to react in the event of a crisis. there is no doubt that these rules cause some frustration to those who would instead like to shift the responsibility for solving the crisis entirely to the central bank, even if the crisis is of fiscal origin. it is quite paradoxical that the very same people who criticise the ecb for having taken too many risks during the financial crisis are also those who criticise it for opposing any form of debt restructuring. this same group even suggests that the ecb should stand ready to accept, after a debt restructuring, the signature of a default - rated government as collateral. how are such contradictions possible? in my view they are only possible when the analysis is partial or the rationale is unclear. let me give a couple of examples. one reason for debt restructuring – which is often made by some theoretical economists – is that it helps financial markets to function better and it eliminates moral hazard. the problem with this view is that it totally omits the broader impact on the markets. trying to eliminate moral hazard in the middle of a systemic crisis is like shooting yourself in the foot. think about it : did the failure of lehman brothers make markets work better, or worse? did it reduce moral hazard? another reason for private sector involvement ( psi ) is to minimise the taxpayer ’ s contribution and to penalise bad investments. this reason is even less economically sound. lehman brothers ’ failure proved that if psi is applied in the wrong way

at least compared with other risks, such as inflation and exchange rate risks. the reason is twofold. first, inflation risk may take time to materialise and to be factored in, even when the central bank monetises the debt. second, financial markets may find it easier to manage and hedge against inflation and currency risk than against sovereign risk. the separation between monetary and fiscal policies may create non - linearities and even multiple equilibria in the pricing of credit risk, which in turn may fuel self - fulfilling expectations and precipitate crises. given the role that government bonds play in advanced economies ’ financial markets, such instability may impair the transmission of monetary policy. this may justify targeted action by a central bank to push markets towards a more stable equilibrium. in general, the lack of fiscal dominance and the exposure to sovereign risk should promote overall better fiscal policies. this is certainly the case for most of the euro area countries. fiscal consolidation started already in 2010, when the euro area general government deficitto - gdp ratio and the debt - to - gdp ratio reached around 6 % and 85 % respectively. this compares with a deficit of 11. 2 % and a debt of 92 % in the us, a deficit of 9. 5 % and a debt of 220. 3 % in japan, a deficit of 10. 4 % in the uk and a debt of 80 %. further improvements in the fiscal situation of all the euro area members is expected for the current year, with the bis central bankers ’ speeches euro area average coming down to slightly above 4 %. the euro area debt - to - gdp ratio is expected to stabilise in 2013 and come down thereafter. in the euro area three countries are facing severe problems regarding market access. overall these three countries account for about 6 % of the euro area gdp. i will not elaborate on these three cases, and the fact that they have emerged in the midst of the worst economic and financial crisis since world war ii. the solution to these three cases entails a specific role to be played by the fiscal authority of the respective countries, the fiscal authorities of the other countries supporting the adjustment programme in those countries and the ecb. some commentators have said that in a crisis stronger coordination between monetary and fiscal policy is desirable, even if it comes at the expense of reducing the independence of monetary policy. the opposite is actually true. especially in a crisis the responsibilities for monetary policy and for fiscal policy have to remain quite separate.