question for policymakers at the current juncture : what is the most appropriate policy mix in the face of these old and new shocks hitting our economies? my main message is twofold : first, it is fiscal policy that has to be in the lead in mitigating the macro - economic consequences of this prolonged public health emergency. efforts that monetary policy can support by keeping financing costs low for all borrowers second, the macro - economic implications of the unprecedented corona shock and continuing elevated levels of uncertainty require coordination of efforts from all policy areas. most importantly in this context, between monetary and fiscal authorities. unlike the period of the european sovereign debt crisis, the current constellation of policies has been characterized by a massive easing of both fiscal and monetary policy. looking forward, however, i see two possible scenarios that we may wish to avoid. the first scenario is one in which, in the aftermath of the public health crisis, fiscal authorities withdraw their support for the economy too early, in the aftermath of the public health crisis. this would entail a further stretching of monetary policy to its borders and beyond, as inflation may continue to remain below target. the second scenario is the one depicted recently by charles goodhart, in which the downward trend of inflation is reversed on the back of a reversal of demographic and globalization trends, rising labor bargaining power, and rising interest rates. he argues that the covid - 19 pandemic may accelerate this reversal. if inflation indeed were to rise sharply and debt were to be stuck at high levels, monetary policy would be caught between a rock and a hard place. this could end up a test for safeguarding monetary dominance and avoiding a regime of fiscal dominance. the next generation eu covid - 19 recovery package could play an important role in steering away from these two scenarios. by conditioning the funds on growth - enhancing structural reforms, the package may further reinforce efforts to have fiscal and monetary policy optimally interact ; a crucial ingredient to avoid the two scenarios and to return towards a good post - corona equilibrium. only then will we be able to effectively stabilize the economy, prevent long - term ( hysteresis ) effects and pave the road for a sustained recovery. and with this, let me conclude.

ecb ’ s willingness, on specific terms and conditions, to act as buyer of last resort of government debt. this eliminated speculative risk premia and helped restore the transmission of monetary policy. yet in the aftermath of the crisis, binding budgetary restrictions still forced countries to cut public spending and raise taxes. this not only hurt economic growth, but also shifted the burden of macroeconomic stabilization onto the shoulders of the ecb. to make matters worse, this happened in an environment of persistently low interest rates that, as we have seen, makes traditional monetary instruments much less effective. as countercyclical monetary policy at the euro area wide level was unable to offset procyclical fiscal policies at the national level, the recession was prolonged and the subsequent recovery was off to a slow start. [ figure 5 ] figure 5. monetary and ﬁscal policy in the euro area were misaligned the following chart illustrates the lack of coordination between monetary and fiscal policy in the euro area during and after the european sovereign debt crisis. the bars show the change in the primary budget balance as a percentage of potential output for the euro area as a whole. positive numbers indicate a discretionary fiscal tightening, negative numbers indicate fiscal loosening. the red bars indicate the years when fiscal policy was procyclical and green bars the years in which fiscal policy was countercyclical. while fiscal policy was initially countercyclical during the global financial crisis, it turned procyclical during much of the european debt crisis. this reflected choices in fiscal policy that were often understandable from a national perspective. but, at a european level, these choices led to an aggregate fiscal stance that was not supportive to economic recovery. monetary policy, on the other hand, was steadily accommodative during those years, as evident from the ecb ’ s expanding balance sheet. in the chart, this is shown by the solid white line. so during most of the sovereign debt crisis, monetary and fiscal policy behaved out of sync, rather than working in tandem to stabilize the economy. now let ’ s look in the same chart at what happened more recently, during the covid crisis. this time, the policy response was entirely different. both monetary and fiscal policy responded to the crisis with unprecedented heft and synchronicity. what helped, of course, was the much more symmetric nature of this crisis compared to the previous one. every country in europe was hit in a similar fashion, and in every