then obviously this will reduce aggregate demand. and insofar as this affects price stability, it has to be compensated for by the central bank. monetary policy has the duty to respond to fulfil its mandate – as the ecb is doing today. the lesson is that dominance is always a multidimensional problem. there is a triangle of monetary, fiscal and financial policies that requires a strong coordination framework. and the banking union has gone a long way to providing this. to begin with, the move to european supervision helps align the governance of the financial sector with the aims of monetary policy – or put differently, it reasserts monetary dominance. 7 the european supervisor has stronger incentives to uncover weak banks, which helps reduce the risk of financing so - called “ zombie banks ”. and it is also able to use macroprudential policies to temper swings in the leverage cycle – for example through the release of countercyclical capital buffers. this means that monetary policy transmission should be more immune from disruption, and interest policy should not be overburdened over the cycle with the objective to avoid and then eliminate asset price bubbles. at the same time, the resolution leg of banking union – the bank recovery and resolution directive and the single resolution mechanism – creates a set of rules that will in principle provide separation between fiscal policies and the banking sector. see for example brunnermeier, m., and y. sannikov ( 2013 ), “ the i theory of money ”, mimeo. see speech by cœure, b. on “ monetary policy and banking supervision ”, frankfurt, 7 february 2013. bis central bankers ’ speeches bail - in of private creditors will replace bail - out by governments and taxpayers. and this will in turn mean that the public sector has lower contingent liabilities towards banks, creating more space for fiscal policies to act counter - cyclically alongside monetary policy in a downturn. structural dominance nevertheless, the loss of fiscal space that many countries have experienced during the crisis – and the knock - on effects for monetary policy – cannot solely be explained by bank bailouts. as has long been recognised, going back to the literature on optimal currency areas8, there is also an important interaction in a monetary union between fiscal and structural policies at the national level. if an economy has resilient product and labour markets and adjusts more quickly to shocks, there is less need for expansionary fiscal policies. but if inefficiencies are high

and the economy adjusts more slowly, fiscal policies need to be more expansionary, and for longer, and this can in turn generate spillovers on other participating economies and on the single monetary policy. to give an example of this interaction, ireland and spain were two countries that experienced relatively similar shocks emanating from the financial and construction sectors. both saw their primary deficits deteriorate by around 13pp of gdp between 2007 and 2009. however, by 2012 ireland had reduced that deficit by more than 7pp of gdp, whereas in spain the primary deficit was less than 2pp lower. this certainly reflected stronger consolidation efforts in ireland as part of its adjustment programme. but it also reflected the faster adjustment in prices and wages in the irish economy, which helped unemployment to begin stabilising in late 2010, while in spain it rose until early 2013. of course many other factors were at play as well, but the point is that economic flexibility matters for the size and duration of deficits. and what this implies is that, if structural reforms do not happen, there can be a form of “ structural dominance ” over fiscal policies. when a shock hits fiscal policies are forced to do all the heavy lifting to stabilise the economy and, over time, fiscal space becomes progressively exhausted. indeed, this is one explanation for why the stability and growth pact ( sgp ) rules have not been as effective as we hoped. there is a correlation between the ease with which countries comply with the rules and their progress on structural reforms. effectively, through lack of reforms some countries have put themselves in a position of excessive deficit dependence, which then makes the difficulty and costs of meeting their obligations higher. the conclusion, therefore, is that constantly tinkering with our common fiscal rules while leaving governance of structural policies entirely at the national level makes little sense. if fiscal policies are to be freed from structural dominance, then we need an equally strong framework in both domains. and it is fair to say in the eu context that the macroeconomic imbalance procedure ( mip ) has less teeth and has not benefited from the same level of ownership and political attention than the stability and growth pact. we could also envisage some complementarities between the two. for example, it does make sense to take into account structural reforms when assessing compliance with the sgp, as the commission now intends to do. 9 this is because structural reforms not only for a review see mckinnon, r. ( 2001 ),