klaas knot : monetary - fiscal policy mix in the euro area - lessons learnt and the way forward introductory remarks by mr klaas knot, president of the netherlands bank, at the european central bank policy panel at the annual congress of the european economic association, rotterdam, 27 august 2024. * * * thank you very much for inviting me. this panel touches upon a topic that i believe will always lie at the forefront of policy discussions, especially in the light of our experiences from the recent past. i will start my remarks by recalling the policy responses to the global financial crisis and the covid pandemic. because i think these events have taught us important lessons not only about the appropriate monetary / fiscal policy mix, but also about the fiscal policy design both at the national and at the union level. when the euro was introduced, the common belief was that national fiscal policy should focus on stabilising national business cycles and that monetary policy was the appropriate instrument for stabilisation at the euro area level. this thinking changed when interest rates fell for an extended period and were approaching their effective lower bound, thereby limiting the effectiveness of monetary policy. this increased the importance of fiscal coordination among member states. this came to the fore for the first time during the global financial crisis. during the global financial crisis and the subsequent debt crisis in the euro area. the monetary / fiscal policy mix was suboptimal, both at the national and the european level. monetary policy was quite accommodative throughout that period, there is little doubt about that. its intended stimulus could have been reinforced by a countercyclical fiscal stance. that would potentially have allowed a faster economic recovery without having to rely so excessively on loose monetary policy. however, this is not what happened. throughout most of the debt crisis, most governments pursued tight fiscal policies. this reflected choices that are understandable at the national level, as some countries had little choice but to undergo fiscal consolidation, but it was not conducive to economic recovery at the european level. had monetary and fiscal policy moved in tandem, the recovery could have been quicker. but this would only have been possible if public finances had been on a sound footing throughout the euro area. unsustainable debt levels and fiscal deficits spinning out of control make it difficult to implement the right monetary / fiscal policy mix. the monetary / fiscal policy mix was more effective during the pandemic. again, the ecb conducted a very acc

here at home. only fiscal authorities have the power to affect this outcome. monetary authorities, like me and my colleagues on the federal open market committee of the federal reserve ( fomc ), have limited influence. we can fill the gas tank with attractively priced fuel – abundant and cheap money – needed to propel the economy forward. but we cannot trigger the impulse to step on the pedal and engage the transmission mechanism of job - creating investment by the see collected short stories, by william somerset maugham, new york : penguin books, 1972. bis central bankers ’ speeches private sector. this is the province of those who write our laws and regulations – the congress of the united states. i firmly believe that the federal reserve has already pressed the limits of monetary policy. so - called qe2, to my way of thinking, was of doubtful efficacy, which is why i did not support it to begin with. but even if you believe the costs of qe2 were worth its purported benefits, you would be hard pressed to now say that still more liquidity, or more fuel, is called for given the more than $ 1. 5 trillion in excess bank reserves and the substantial liquid holdings above the normal working capital needs of corporate businesses. even surveys of small businesses – most recently, the u. s. chamber of commerce ’ s survey of companies with less than $ 25 million in sales and fewer than 500 employees – indicate that fewer than 10 percent of small enterprises ( which employ half of the private sector ’ s workers ) are having problems accessing credit. 3 the national federation of independent business specifically noted just yesterday that “ 91 percent [ of those surveyed in june ] reported that all their credit needs were met or that they were not interested in borrowing. ” 4 u. s. banks and businesses are awash in liquidity. adding more is not the answer to our problems. with monetary policy having reached the limits of accommodation, and the federal government at sixes and sevens, what then is the foreseeable economic outlook? are we going to grow through the rest of the year and on into the next, or are we going to dip back into recession? forecasting economic growth is not a precise business. economics is an art form, not a science ; it is very judgmental and subjective. the fomc is composed of 17 thoughtful, introspective and deliberate men and women. five of the members serve full time in washington as governors of the federal reserve