democratic legitimacy. the european parliament could, for instance, assemble in a variety of compositions. going for intergovernmental rather than federal solutions thus generates path dependencies. following the intergovernmental path in monetary policy would have led to the implementation of the uk ’ s proposal back in 1990 of parallel competing currencies rather than a single currency. the perceived lack of input legitimacy in the current institutional set - up also implies a high standard of output legitimacy ; that is, policy - makers need to generate outcomes that are in the voters ’ interest. if they fail to do so, they risk putting the stability of monetary union into question. rules versus discretion – a question of space and time? a monetary union is stable as long as its members find it more beneficial to be in that union rather than outside it. this stability is easier to achieve if everybody plays by the same rules. in a monetary union, economic well - being is not simply a domestic question. member states ’ economies influence each other, which is why a monetary union is more attractive if all its members are prospering. accordingly, europe ’ s decision - makers have given themselves common rules to guide fiscal and economic policies. bis central bankers ’ speeches these rules have repeatedly been broken. this suggests that while decision - makers favour a common set of rules to generate trust and credibility among member states, they have sometimes preferred more flexibility than the rules allow. in essence, we are facing an issue of time - inconsistent preferences : in the long run, governments have an interest in strict rules that foster trust and credibility among member states. in the short run, they might well prefer more discretionary decision - making that allows them to flexibly adapt their policies to circumstances. in addition, election cycles sometimes encourage myopic policy choices that are not necessarily in the union ’ s long - term interest. this is especially relevant in the eu ’ s multilevel governance framework with staggered election cycles at the various national and subnational levels. i respect that governments are bound by their voters ’ will. that will might well differ between jurisdictions in general, and between creditors and debtors in particular. at the same time, i see a risk that governments are making it too easy for themselves when they claim that they cannot make any further concessions at international level because of domestic political pressures. survey data shows that an unquestioning belief in opinion polls is not necessarily in the longterm interest of voters. for instance, support for the euro

rates at extended maturities, if they are not explicitly renewed. in spite of the separation principle, however, some commentators have raised concerns that the large amount of liquidity currently available to euro area banks will turn into broad money and credit, and eventually into a source of inflationary pressure. non - standard measures have indeed resulted in a sizable expansion of the ecb balance sheet. in the more of four years between mid - 2007 and end 2011, the eurosystem balance sheet relating to monetary policy assets6 grew from 438 eur billion euros to a temporary peak on 25 june 2010 of 985 billion euros, and has decreased since then to currently 923 billion euros. this corresponds to a rate of growth of close to 110 %. however, it should also be noted that the rate of growth of total eurosystem balance sheet between end - november 2007 and end - november 2011 was 88 %, whereas for the federal reserve ’ s was 219 % and for the bank of england was 191 %. central bank reserves are held by banks and are not part of money held by the non - financial sector, hence not, per se, an inflationary type of liquidity. there is no acceptable theory linking in a necessary way the monetary base created by central banks to inflation. nevertheless, it is argued by some that financial institutions would be free to instantly transform their loans from the central bank into credit to the non - financial sector. this fits into the old theoretical view about the credit multiplier according to which the sequence of money creation goes from the primary liquidity created by central banks to total money supply created by banks via their credit decisions. in reality the sequence works more in the opposite direction with banks taking first their credit decisions and then looking for the necessary funding and reserves of central bank money. as claudio borio and disyatat from the bis put it : “ in fact, the level of reserves hardly figures in banks ’ lending decisions. the amount of credit outstanding is determined by banks ’ willingness to supply loans, based on perceived risk - return trade - offs and by the demand for those loans. ” 7 in modern banking sectors, credit decisions precede the availability of reserves in the central bank. as charles goodhart pointedly argued, it would be more appropriate talking about a “ credit divisor ” than about a “ credit multiplier ”. 8 one can obviously monitor developments in monetary and credit aggregates to check if the concern regarding inflationary risks is justified.