monetary - financing prohibition. yet, for well - known political reasons, the maastricht treaty stopped short of assigning responsibility for fiscal and economic policies to the central level. member states retained responsibility for these policy fields. at the same time, the treaty called on governments to treat such policies as a matter of common concern. it also entrusted the task of ensuring appropriate coordination of national policies to the european commission. i would like to thank maximilian freier for his assistance in preparing this remark. all views expressed herein remain mine. delors, jacques ( 1989 ), report on economic and monetary union in the european community, committee for the study of economic and monetary union, april. bis central bankers ’ speeches in the monetary field, a new, fully independent body was created, namely the european central bank. the responsibility for the conduct of euro area monetary policy was delegated to the ecb ’ s governing council. at the same time the independence of national central banks was strengthened considerably in many countries. the institutional set - up for monetary policy was thus starkly different from that for fiscal and economic policies. the crisis exposed the flaws in the set - up governing fiscal and economic policies. over the past six years there have been numerous initiatives to rethink the fiscal and economic governance framework. the political reality is that there is no appetite for moving towards a “ united states of europe ”, as foreseen by victor hugo and winston churchill, and envisaged by jean monnet at the beginning of the 1950s, when the precursor of the european commission was created ( the high authority of the european coal and steel community ). 3 however, there is a common understanding that euro area member states need to further integrate their fiscal and economic policies if the euro area and its member countries are to prosper in the future. this point is made forcefully in the five presidents ’ report which was published in june last year. 4 the five presidents ’ report proposed a multi - stage process towards genuine economic and monetary union ( emu ). the first step is to revive economic convergence among member states. this requires member states to put their public finances on a sound footing. it also requires member states to undertake the necessary structural reforms to strengthen their growth potential and resilience to shocks. making determined progress in these fields is an economic and political precondition for moving on to the second stage, for which a joint shockabsorption mechanism could be envisaged. 5 in this respect,

the time didn ’ t have the benefit of a policy framework anchored on an explicit inflation target. they also underestimated the effect that the run - up in commodity prices would have on demand conditions, and compounded the errors by overestimating the supply potential of the economy. more specifically, they failed to appreciate the serious negative effects that higher commodity prices – principally, energy prices – would have on the economy ’ s production capacity. the generalized price increases that were subsequently observed across the economy were at first dismissed as one - off effects that would soon pass out of the inflation numbers. the exchange rate appreciation that was triggered by the improvement in canada ’ s terms of trade over this period, and that would have helped contain inflationary pressures, was actively resisted for fear of what it might do to other sectors of the economy and employment. the result, when commodity prices subsequently collapsed, was a continuing spiral of rising government deficits and double - digit inflation, both of which took many years to resolve. the ultimate cost in terms of lost output and employment was enormous. what can policy - makers do to improve the situation? now, let me turn from canada ’ s experiences in the 1970s to some of the broader policy lessons that can be drawn. policy - makers can learn from past mistakes and help to ensure better outcomes in three important ways. first, fiscal authorities should avoid behaving in a procyclical manner, exaggerating the boom with aggressive increases in spending and stimulative tax reductions. additional infrastructure may be needed to support private investment in certain areas, but by strengthening their fiscal positions in good times, governments can help to relieve inflationary pressures and smooth consumption. this is the motivation for alberta ’ s sustainability fund and the heritage savings trust fund. fiscal strengthening can also help to relieve upward pressure on the exchange rate. the second way in which authorities can help is by maintaining a disciplined monetary policy. monetary authorities must stay focused on their primary mission of preserving price stability, helping businesses and households to see through the cycle and promoting better decision making by keeping inflation low, stable, and predictable. this is what canada ’ s monetary policy framework now provides : greater focus, greater accountability, and greater discipline. the two key elements of our current framework are ( i ) an explicit monetary policy goal – the 2 per cent target for inflation – and ( ii ) a flexible exchange rate. canada ’ s flexible exchange rate gives the bank of canada the monetary policy independence that is required to successfully