term, as money and credit growth continues to slow down. against this background, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. as the transmission of monetary policy works with lags, we expect that our policy action will progressively feed through to the economy. hence, with all the measures we have taken, monetary policy has been supporting the availability of liquidity and the recovery of the euro area economy. looking ahead, and taking into account the improved conditions in financial markets, not all our liquidity measures will be needed to the same extent as in the past. accordingly, the governing council will make sure that the extraordinary liquidity measures taken are phased out in a timely and gradual fashion and that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term. by so doing, the governing council will continue to ensure a firm anchoring of mediumterm inflation expectations. such anchoring is indispensable to supporting sustainable growth and employment and contributing to financial stability. accordingly, we will continue to monitor very closely all developments over the period ahead. as regards fiscal policies, many euro area governments are faced with high and sharply rising fiscal imbalances. if not addressed by a clear and credible exit strategy, this could seriously risk undermining public confidence in the sustainability of public finances and the economic recovery. the very large government borrowing requirements carry the risk of triggering rapid changes in market sentiment, leading to less favourable medium and longterm interest rates. this in turn would dampen private investment and thereby weaken the foundations for a return to sustained growth. moreover, high public deficits and debts may complicate the task of the single monetary policy to maintain price stability. the governing council therefore calls upon governments to communicate and implement in a timely fashion ambitious fiscal exit and consolidation strategies based on realistic growth assumptions, with a strong focus on expenditure reforms. tax cuts should only be considered over the medium term, when countries have regained sufficient room for budgetary manoeuvre. in this regard, the recent ecofin council conclusions, which call for consolidation to start in 2011 at the latest and to go well beyond the structural benchmark of 0. 5 % of gdp per annum, represent the minimum requirement for all euro area countries. the success of fiscal adjustment strategies will also depend crucially on the transparency of the budgetary procedures and the reliability and completeness of government finance statistics. this is an

benoit cœure : central banking, insurance and incentives speech by mr benoit cœure, member of the executive board of the european central bank, at the ecb conference : “ debt, growth and macroeconomic policies ”, frankfurt, 6 december 2012. * * * i wish to thank florian heider and oreste tristani for their contribution to this speech. i remain solely responsible for the opinions contained herein. ladies and gentlemen, it is a pleasure to be here with you tonight. the underlying theme of this conference is the aftermath of the financial crisis. papers on the implications of debt overhang, on the interaction between private and public indebtedness and on the sovereign debt crisis feature prominently in the conference programme. the aftermath of the financial crisis, which i will focus on tonight, however, has to do with the changes in the nature of monetary policy operations. central bank liquidity has increased dramatically over the past few years. “ unconventional ” or “ non - standard ” measures have been deployed in all the main industrial countries. at the ecb, such measures have always aimed at improving the transmission of standard policy decisions, but they have assumed different forms over time. in the first phase of the crisis, they were mainly aimed at banks with the objective of preventing a collapse of the interbank market. as the financial crisis has evolved into a sovereign debt crisis, we have stepped up the size of our operations with banks, and we have also aimed at removing redenomination risk from government bond markets through the decision on outright monetary transactions ( omts ). as a monetary policy - maker, i am convinced that these measures were necessary to prevent the financial crisis from having further adverse consequences on both the financial system and on the macro economy and therefore, ultimately, on medium term price stability. a freezing - up of the interbank market could have caused a credit crunch and a downward spiral in asset prices. the money supply would have shrunk. the ensuing collapse in aggregate demand would have put downward pressure on prices. a great depression scenario could have occurred. the same scenario could materialise at local level in case of fear that countries could leave the euro, and severely hamper our ability to deliver price - stability. thanks to our non - standard measures, central bank liquidity has proved to be an effective insurance mechanism against the risk of an economic disaster. providing insurance can, however, generate perverse incentives. knowledge of the existence of a safety net can encourage imprud