the market ’ s heightened sensitivity to credit risk started to impose high spreads on borrowers across a wide swathe of the euro area the needed policy response became more difficult to implement, especially given the implicit and explicit constraints of the ecb ’ s mandate. in addition, the distributional impact ( for example between countries ) of monetary policy actions was beginning to become evident. a regime which had been set up to deal with problems of moderate scale was now being required to deal with a financial and balance sheet crisis of severity unmatched since the 1930s. for some analysts, no attempt should have been made to use central banking tools to address problems not conceived of in the maastricht treaty. but for most it was clear that central banking tools did have to be used even if this was not explicitly envisaged in the treaty. although the treaty did wish to preclude certain types of destructive action that some misguided central banks had fallen prey to historically, its drafters did not envisage that the euro area would have less of a capacity to resolve emergent problems of macroeconomic stability. the ecb had to act, but without trespassing on matters that are properly the domain of national governments. this was especially challenging given the potential, as greece bis central bankers ’ speeches faced the need for a debt restructuring, of central banks ’ actions resulting in very evident and indisputable redistributions as between member states. getting the design of those actions right now presents an acute problem for the central bank. entirely new issues have presented themselves. previously there was no great difficulty in ensuring that the desired interest rate levels would be transmitted by market forces more or less uniformly throughout the euro area : that can no longer be taken for granted. the emergence of redenomination risk in market perceptions and its disruptive influence have generated undesired and damaging yield volatility. additional corrective action, as recently announced, is clearly necessary. in considering and taking such corrective action, the ecb has not only to ensure no compromise with its treaty mandate and obligation to maintain price stability, but must also avoid the appearance of partiality, and retain the confidence and respect of the body politic. it has been argued by some that the ecb could have moved further sooner ; history is of course littered with at least as many unhappy episodes consequential on hyperactive central banks and those which were destructively compliant with the desires of spendthrift governments and imprudent

device. the euro is a commitment device whereby member countries increased the cost of policy laxity with the intention of obtaining the benefits of enhanced credibility that policy would be disciplined. unfortunately, the discipline was nevertheless not maintained, and the commitment penalty has been correspondingly severe. bis central bankers ’ speeches let us recall that the euro was set up after 30 years of debate on how to reduce the disruptive impact of divergent monetary and exchange rate developments, including numerous devaluations, on real trade and investment integration in europe. it also reflected the chequered experience of many european countries in the 1970s and 1980s with surges of inflation in response to monetary and fiscal indiscipline. the lack of fiscal and monetary credibility resulted in high nominal and real interest rates and recurrent relapses. was there a way for these countries to acquire the credibility of the bundesbank? both of these problems could seem to be solved if a single currency was adopted and put beyond the reach of politicians with their tendency to succumb to a short - term policy perspective. in effect, a non - state currency. granting full independence from government in a democracy to a central bank meant that its mandate would have to be a focused one. central banks through history have occasionally acted beyond a narrow inflation targeting remit to address acute financial stability crises in the past ( as when the bank of england famously secured permission in a moment of panic to exceed the limitations of its charter – first in 1847 in the crisis that coincided with the great irish famine ). indeed, the exception that proves the rule was the us federal reserve ’ s passivity which, it is generally accepted, lengthened and deepened the great depression of the 1930s. but that experience was not really taken into account in maastricht treaty planning. by the time of that planning, deep systemic crises were probably seen as a thing of the past for the advanced economy in part because of improved legal and financial infrastructures and also because, since the time of keynes, fiscal policy was seen as having the tools to stem and reverse any aggregate demand declines that might occur. against this background, designing a mechanism which could cope with the moderate fluctuations of the normal business cycle and sporadic fiscal pressures and was sure to eliminate inflationary surges and exchange rate changes seemed safe and even prudent. for the mechanism to work, however, sovereign states had to go beyond declarations of intent. they had to design and adopt a commitment device. as a