the interaction between monetary and fiscal policies in the pandemic crisis and beyond remarks by ignazio visco governor of the bank of italy the ecb and its watchers xxii hybrid event, 17 march 2022 coordination between fiscal and monetary policy has been a key factor at a global level over the last two years, to contrast the consequences of the pandemic crisis and to support the recovery as the state of emergency began to subside. in these brief remarks, i will first focus on the similarities and, more specifically, the differences between the policy mixes implemented in the united states and in the euro area, and then on how i see the situation evolving in light of the russian invasion of ukraine. in essentially all countries, following the outbreak of the pandemic, governments stepped in to strengthen health systems and support household income and credit to firms ; fiscal policies everywhere were strongly facilitated by the accommodative stance of monetary policy. in the us, however, fiscal measures were especially bold : the public debt - to - gdp ratio rose by 25 p. p. in 2020 - 21, to over 130 per cent. in the euro area, instead, the debt ratio increased by 15 p. p., to slightly less than 100 per cent, despite a much deeper decline of nominal gdp in 2020 ( by 4. 8 per cent, against 2. 2 in the us ) and a slower recovery last year ( 7. 5 versus 10. 1 per cent in the us ) ; it was, until the outbreak of the russia - ukraine war, on a steady downward trend. at the same time, concerns over the impact of structural changes to growth potential led to the launch of the recovery and resilience programmes associated with the next generation eu initiative. the extraordinary support to households provided by the us fiscal policy is particularly evident when comparing the dynamics of gdp to household disposable income ( figure 1 ) : in 2020, just as the former recorded its sharpest collapse in real terms in the entire postworld war ii period ( - 3. 4 per cent ), real household disposable income grew by over 6 per cent, its largest rise since the mid - 1980s. in the euro area, on the other hand, it declined, even though by a much smaller extent than gdp ( - 0. 6 versus - 6. 4 per cent ). the different dynamics of household disposable income across the two economies translated into very diverse effects on consumer and

programmes ; by demographic trends which are beyond the control of policy makers, especially population ageing ; and by the implementation of acquis - related obligations. i dwell at some length on this issue because the state of public finances is currently the only significant impediment to malta ’ s membership of the euro area. while it is encouraging to know that we have been able to reduce the fiscal deficit / gdp ratio from 11 % in 1998 to its current level of around 6 %, getting to the maastricht reference value of 3 % by 2006, as the government plans to do, will require unrelenting efforts and a greater emphasis on expenditure - cutting. this is not only because taxation levels are already relatively high for an economic downturn, but also because of the tradeoffs involved in pursuing further fiscal consolidation. indeed, the government ’ s resolve to trim the deficit will be a key determinant of the degree of exchange rate stability that it will be possible to achieve during erm ii. this, in turn, will depend on how much economic operators, taxpayers and recipients of social benefits and other transfer payments are prepared to give up today in exchange for sustainable public finances tomorrow. in the final analysis, therefore, the success of the euro strategy will hinge on consensus being reached on the implementation of the necessary reforms. in this context, discussions are underway in the malta council for economic and social development with a view to reforming the pension and health systems, currently two major sources of pressure on public finances. if the social partners do indeed take ownership of the reforms, the credibility of the country ’ s overall economic strategy will be considerably enhanced. agreement on the reforms is also important because in an erm ii context the room for manoeuvre available to central banks is restricted. the implied commitment to a high degree of exchange rate stability - and for countries like malta which have experienced limited day - to - day exchange rate movements, the concept of stability has taken on a very specific meaning - means that monetary policy cannot be used for demand management purposes. the onus of adjustment must then fall on fiscal and structural policies. the implementation of effective policies must also be ensured because the financial markets will be quick to spot any incoherence between a country ’ s exchange rate and its underlying economic condition. since market behaviour, however, also has the potential to produce volatility to a degree unwarranted by the economic fundamentals, the exchange rate stability assessment at the end of the