inconsistency between member states ’ policies. for this, it is key to continue strengthening the institutional framework and the governance model in the euro area. strengthening integration means strengthening rules and institutions europe needs solid and effective rules and institutions that preserve the fundamental values of the european project and that are able to manage the strong interdependence of its members, in a context of collective decisions. quoting jean monnet again, “ nothing is possible without individuals, but nothing is lasting without institutions ”. the emu is a complex construct, a union of sovereign states making up a single market and sharing a single currency. states that are at the same time independent and interdependent, united and diversified, whose actions are linked and bound by common rules and institutions, while retaining sovereignty. for this complex construct to be sustainable and balanced, a governance model is needed that ensures that the member states and the european institutions perform their roles adequately. this means responsible economic policy - making by the member states and rigorous monitoring and surveillance by the union. consequently, deepening european integration also means greater integration through the rules and institutions. the euro area needs effective rules and institutions that frame and control the interdependence between the stability of the whole and the stability of each member, preventing excessive imbalances from arising and limiting contagion effects. institutions able to ensure the collective ’ s control of each of its parts ( minimising moral hazard ), but also the scrutiny of each of the parts as regards setting and implementing shared goals. it is important to note that having rules is a necessary but insufficient condition. the rules and institutions form the foundations of any society, but they must be applied effectively and respected. however, in society, the legal system and police authorities may compel the general public to follow those rules. this does not happen in the governance of the euro area, the mechanisms for monitoring the application of the rules are essentially political and have proved insufficient for ensuring that the national governments develop appropriate and consistent policies. europe needs a strong institutional framework as well as the means and will to ensure that it is complied with. this means creating a coherent and credible framework of rules and incentives, using a stick and carrot approach, which underpins and guides national and institutional behaviour, aligning it with common interest. stronger institutions, clearer and fairer rules ( equal treatment for all member states ) and an appropriate stick / carrot system will help improve vital coordination of economic policies. great progress has already been

of inflation dynamics and the general economic outlook, including through the impact of the very significant terms of trade deterioration. in particular, the inflation dynamics associated with the energy shock component, to which the euro area is particularly exposed, are of a different nature compared to demand - driven overheating dynamics. the transmission of interest rate changes in the money market the money market is key for the implementation and transmission of monetary policy : it acts as a seismograph for liquidity conditions and market expectations of future policy, while money market rates are central to the transmission of monetary policy through their impact on economy - wide financing conditions. it follows that it is important that money market rates adjust in line with changes in key ecb interest rates. this applies in particular to changes in the deposit facility rate ( dfr ), which represents the relevant policy rate in conditions of excess liquidity. the available evidence suggests that our july rate hike of 50 basis points, which increased the dfr from - 0. 5 per cent to zero, has been well transmitted to money market rates overall. in particular, the euro short - term rate ( €str ) moved up by the full size of the change in policy rates ( chart 1 ). this is especially important, since the €str is the basis for the overnight interest rate swap curve, along which the market prices expectations of future policy. the reaction was similar across deposits by banks and by the different types of non - bank financial institutions that are active in the money market. the near - complete adjustment of repo rates for transactions based on a broad collateral pool – which are predominantly driven by a motivation to borrow or lend cash – was immediate. chart 1 the july 2022 rate hike by 50 basis points and rate changes across money market rates segments ( basis points ) sources : bloomberg, mmsr, brokertec / mts and ecb calculations. notes : general collateral ( gc ) and refers to cash - driven repo transactions and non - general ( non - gc ) refers to collateral - driven repo transactions. the bars show the difference between the average rate of the period 1 - 26 july ( before the hike ) and the period 27 july - 19 august ( after the hike ). for 1 - month government bills, the bars show the difference in the respective rate between the average rate of the period 10 – 27 june ( before the hike ) and the period 27 july – 11 august ( after the hike ). at the same time,