economic crises that centred on the mutually reinforcing effects between over - indebtedness and deflation. 5 according to this view, over - indebtedness beyond some point triggers distressed asset sales as debt is called in. this leads to abrupt deleveraging and a contraction of the amount of money in circulation. the destruction of money precipitates a fall in the general price level. deflation in turn causes the real debt and interest burden to go up, thereby triggering a new bout of distressed asset sales and deleveraging and trapping the economy in a vicious circle. deflation poses risks to the economy that – in some respects – are even more intractable than inflation. it is for this reason that the governing council ’ s definition of price stability rules out negative inflation values. moreover, the governing council ’ s policy aim ( within the range of positive inflation rates that are consistent with price stability ) is sufficiently close to the upper bound of the range to stave off the risk that negative price shocks may unleash a self - reinforcing downward inflation spiral. but engineering financial repression in order to facilitate balance sheet adjustment would clearly violate the mandate to maintain price stability as a primary objective conferred upon the ecb by the treaty. earlier in my remarks i referred to the central bank ’ s steering of inflation expectations as an illustration of the notion of control. moreover, i mentioned that the steadfast pursuit of the fisher, “ the debt - deflation theory of great depressions ”, econometrica, vol. 1 ( 4 ), 1933, pp. 337 – 357. bis central bankers ’ speeches central bank ’ s mandate exemplifies the notion of courage. i am very sceptical whether increasing the numerical definition of price stability helps in either of these dimensions. engaging in communication regarding the future path of policy rates let me now turn to the second example of an innovative proposal for monetary policy that i would like to discuss today. unlike the previous proposal, this one does not relate to the objective of the central bank. instead, it focuses on how the central bank can actually achieve its assigned objective, when the chances that the objective will be hit diminish. as i already mentioned, central banks typically conduct monetary policy by steering nominal short - term interest rates. these are the rates over which they can exert significant influence through the monopoly supply of central bank reserves. it is, however, widely accepted that it is primarily long - term interest rates

quality of emu governance by going well beyond the scope of the economic governance package. we need a genuine economic union. i trust the ep will use the review clause included in the package to enable further enhancements to the euro area economic governance that will contribute to a smoother functioning of emu, for instance by introducing greater automaticity. in my view, more fundamental deepening of fiscal and economic policy surveillance is necessary in the long run. this will involve a transfer of sovereignty to the european level with much stronger powers and will necessitate stricter constraints on national budget policies. those reforms will require a comprehensive treaty change but above all, an adequate mechanism to ensure their democratic legitimacy through the appropriate involvement of the european parliament and the national parliaments. let me outline the cornerstones of such a governance reform. to ensure fiscal discipline, all planned deficits of more than 3 % of gdp and those in excess of a country ’ s medium term objective would be approved by all euro area governments. past fiscal slippages would be automatically corrected in upcoming budgets without any room for discretion via the introduction of constitutional rules similar to the german “ debt brake ”. all member states would also agree to implement full automaticity regarding fines and sanctions. moreover, countries under macroeconomic adjustment programmes in the context of esm assistance and which fail to remain on track would be placed under financial receivership. and finally, the institutional arrangements at both national and supranational level have to be strengthened. at the national level, independent budget offices would ensure reliable forecasts – a prerequisite for sound planning and implementation of budgets. at the euro area level this needs to be complemented by an independent entity with a clear mandate and a strong institutional framework to assess the implementation of fiscal rules, for instance some form of european budget office. the “ ebo ” could potentially form the nucleus of what could become over time and in a step wised manner a european ministry finance. strong and independent institutions at euro area and national levels enhance transparency and add bis central bankers ’ speeches pressure to conduct sound policies, as well as effectively counteract possible tendencies towards a lenient implementation of fiscal rules at the level of individual member states. 3. issuing common bonds in the euro area further strengthening of economic governance is a must. do not be mistaken that there is an alternative “ silver bullet ” that will resolve the current crisis and prevent future ones, such as the issuing of eurobonds. given that one of the root