euro area. it grew compared to the previous quarter because increases in total expenditure exceeded those in total revenue. this shows that the initially positive effects of inflation on public finances can easily revert : over time, spending pressures can intensify, offsetting or even overtaking the benefits on the revenue side. so far, while government bond yields are obviously rising in response to policy rate increases, sovereign spreads have remained relatively compressed. however, with growth expected to reduce, government interest payments increase, and the central bank progress in its quantitative tightening, the sustainability of public debt cannot be taken for granted. 2 / 4 bis - central bankers'speeches the least desirable scenario is one in which markets start questioning sovereign's creditworthiness again. in europe we know only too well the financial distress that can result in such cases, and the deep and long - lasting scars it can leave to the economy. sound management of public finances, firmly based on counter - cyclicality, debt sustainability, and the promotion of growth can help avoid adverse outcomes like this in the future. we should also not under - estimate the damage such episodes do to trust in the euro itself. of course, central bank pursuit of price stability is the other pillar on which trust in the currency rests, something i return to at the end. appropriate governance arrangements could help to put public finances on a sounder long - term footing and reduce the tensions between fiscal and monetary policies. these tensions are not new. even in the short history of the euro area, our macroeconomic performance has suffered from fiscal procyclicality, as well as from episodes of fiscal sustainability problems in some member countries. sustainable fiscal positions and countercyclical fiscal policy are necessary conditions for the realisation of price stability and macroeconomic stability. and yet, the macroeconomic governance framework that was in place over the first two decades of the euro proved insufficient to promote them. the importance of making the framework a better fit for the task, cannot be overemphasised. i believe that the european commission's views, released late last year, 2 correctly identify the key elements of the reform in'improving national ownership, simplifying the framework and moving towards a greater medium - term focus, combined with stronger and more coherent enforcement '. if the new framework is able to implement these principles effectively, greater transparency and credibility, together with an improved enforcement mechanism, could drastically improve fiscal discipline and provide for a more solid anchor for public debt sustainability. a simplified

gabriel makhlouf : monetary and fiscal policy in times of inflation remarks by mr gabriel makhlouf, governor of the central bank of ireland, at the dubrovnik economic conference, dubrovnik, 27 may 2023. * * * the current macroeconomic environment is a complex one for policy makers. the outlook for inflation continues to be too high for too long : this means there is more ground to cover for central banks. monetary policy must be brought to levels sufficiently restrictive to bring inflation back to target in a timely manner. meanwhile fiscal policy must adjust its priorities to tackle the challenges of the major economic transitions involved in climate change, ageing populations and geo - economic fragmentation. but the increased cost of living generates political pressures that could slow this necessary adjustment. monetary policy fights inflation mostly through two channels : first, by reducing aggregate demand, and second, by anchoring the expectation of future inflation to its target. at times like this – when inflation is already far too high – expansive fiscal policy risks undermining both of these mechanisms. primarily by increasing aggregate demand, but also by signalling that the government is counteracting the effects of policies aimed at reducing inflation, potentially increasing inflation expectations. this is why i and others have previously called for cost of living supports to be targeted – i. e. at those most vulnerable to energy price shocks, temporary – so as not to add to persistent price pressures, and tailored - thus enabling further resilience to maintain sustainable growth in living standards. fiscal policy can be a major force for good, when it provides the stable foundation for a thriving economy, but it can also cause great harm by adding to inflationary pressures, which would inevitably call for an even stronger monetary policy response. monetary and fiscal policies need to work together to shore up macroeconomic stability. the coherence of monetary and fiscal policy is essential for macroeconomic stability. during the pandemic, we have seen how powerfully combined monetary and fiscal efforts helped our economies quickly get out of recession. but it is not only during downturns that monetary and fiscal policy need to coordinate their actions to effectively complement each other. an adequate policy mix is just as essential at times like this, when we must fight inflation. at a minimum, fiscal policy should avoid directly contributing to the building up of inflationary pressures. but preferably, fiscal authorities should support the disinflation effort by gradually bringing down high public debt, while also calibrating their policies to make