, fiscal and economic policies continue to be a national matter, albeit subject to coordination rules. as i have already mentioned, this asymmetry can give rise to instability. if the consequences of an unsustainable national economic policy can be shifted onto others – for example, through bail - outs or via the conduit of a common central bank balance sheet – incentives for prudent policymaking will be stunted. still, hopes were high that, with sufficient safeguards in place, an asymmetrically integrated euro area could prove to be stable as well. as we now know, that hope has not been fulfilled. the safeguards installed to ensure sound public finances, such as the stability and growth pact and the no bail - out clause, have failed to keep public debt in check. beyond that, the framework also had its shortcomings. it did not provide for resolution mechanisms to deal with the financial fallout of private over - borrowing. nor has it prevented economic imbalances from building up, which eventually required painful adjustment policies in some euro - area countries. 2. 1 rebalancing at national level ladies and gentlemen, in his novel anna karenina, leo tolstoy famously observed that happy families are all alike, while every unhappy family is unhappy in its own way. this insight puts me somewhat in mind of economic developments in the euro - area countries over the first decade of emu. the underlying reasons why euro area economies got into trouble differed from country to country. nevertheless, there are some factors which are more or less common to all “ unhappy ” countries. bis central bankers ’ speeches in some cases, lower interest rates brought about by monetary union and inflowing capital fuelled unsustainable developments. the resulting domestic boom and existing labour market rigidities led to large wage increases well in excess of productivity growth, triggering a loss in price competitiveness, thereby impairing export performance. current account deficits were therefore ultimately a symptom of countries living beyond their means. portugal, for example, had a current account deficit before the crisis amounting to 12 % of gdp, which was definitely not sustainable. economic adjustment was therefore unavoidable. and if countries like greece, ireland and portugal had not drawn on european and international solidarity, the adjustment process would have been much more abrupt. the sudden stop of external capital inflows would have forced those economies to balance their current accounts immediately. in response to the crisis, portugal implemented considerable

bundesbank research shows that rate forward guidance linked to the app contributed to the observed decline in longer - term interest rates to a significant extent. in other words, part of the expansionary effect of the purchase programme was due to the management of expectations about interest rates in the more distant future. last year, the governing council announced the end of app net purchases after december 2018 and decided to link the two elements of forward guidance directly to policy rates. this reformulated guidance succeeded in anchoring expectations about future short - term rates despite the end of net purchases and, therefore, contributed to keeping longer - term interest rates low. more generally, by using rate forward guidance, central banks can do what they also do when employing asset purchases, namely to influence long - term rates and stimulate the economy when conventional policy is constrained. besides shaping expectations, asset purchases can work through other channels, such as portfolio rebalancing, as well. but they also entail different risks and possible side effects, all the more so in a monetary union with fiscally autonomous member states. in this particular set - up, government bond purchases involve the fundamental risk of mutualising sovereign liability risks through the central banks ’ balance sheets, blurring the lines between fiscal and monetary policy. given its effectiveness, forward guidance could be a preferred policy tool near the lower bound of interest rates. indeed, the reformulation of forward guidance introduced in september maintained the focus on policy rates. 3 lower for longer at the effective lower bound, theory, at least, suggests that the central bank could do more if it switches to the second type of forward guidance. by committing to hold interest rates lower for longer than implied by the monetary policy rule, the central bank pledges to let inflation overshoot its target in the future. in this way, it could provide an additional stimulus to the economy via inflation expectations. if people expect future inflation to be temporarily higher than anticipated so far, real interest rates will decline even when nominal rates remain unchanged. this, in turn, will induce them to consume and invest more in the here and now. but why have central banks so far shied away from using forward guidance in this manner? one important reason may be the problem of time inconsistency. [ 11 ] let ’ s say that a father wants to make sure his son studies up on his latin vocabulary. it makes sense, then, to announce that he will quiz his son next thursday evening. but when thursday arrives and arsenal takes on