lender - of - last - resort role for the eurosystem does not square with the institutional architecture. the monetary union differs from other currency areas in one crucial aspect : while monetary policy is a common undertaking, fiscal policy remains a national prerogative. evidently, the unsound fiscal policies of one member state can have repercussions on the union as a whole. conversely, the negative consequences of bad policies can be better externalised to the rest of the currency area, thereby undermining incentives for sustainable policies. to mitigate this risk, precautions were taken in the form of fiscal rules, the no - bail - out clause and the prohibition of monetary financing. the guiding principle was self - responsibility : bis central bankers ’ speeches member states are free to pursue their own fiscal policies. but they are subject to common rules and market discipline – and they are liable for their decisions. a lender - of - last - resort role would violate this principle of self - responsibility – in that same way as eurobonds in this setting are at odds with it. therefore, it would aggravate, rather than alleviate, the problems besetting the euro area. 3. separating banks and sovereigns if monetary policy cannot disentangle the euro area ’ s fiscal and financial conundrums, what can? central to any stable framework is a balance between liability and control : those who act must also be liable for their actions. substantial measures were taken to contain the sovereign debt crisis. these measures – notably the two european stability mechanisms, the efsf and the esm – stabilised the euro area in the short term by offering financial assistance in exchange for structural reforms. this approach of buying time for adjustment is bearing fruit : current account imbalances have improved structurally and fiscal deficits have been significantly reduced. but in the process, the balance between liability and control has been thrown out of kilter. while fiscal policy remains essentially a national domain, liability has been increasingly transferred to the european level. going forward, the balance between control and liability has to be restored – otherwise the hard - fought gains in fighting the crisis will come at the expense of new vulnerabilities. one possible option to balance control and liability would be a true fiscal union, i. e. a transfer of fiscal decision - making powers to the european level. in this scenario, control and intervention rights would be shifted to the european level. if this prerequisite were fulfilled, a greater

piling more and more stabilisation tasks on to monetary policy, stability will prove ever more elusive. what seems to be true in general holds especially within the specific setting of the emu. rather, we need to make sure that the functioning of emu as a whole is shielded from the failure of a constituent part – be it a bank or a sovereign. 2. monetary policy and the art of separation former italian prime minister mario monti once said : “ germans view economics as a branch of moral philosophy. ” i am not sure whether he meant this as a compliment. but john maynard keynes probably would have taken it as one. for him an economist must “ possess bis central bankers ’ speeches a rare combination of gifts … he must be mathematician, historian, statesman, and philosopher “. so, at the risk of confirming mario monti ’ s suspicions, i will seize this opportunity to be a keynesian. i will try to illustrate the economic rationale behind the bundesbank ’ s approach to monetary policy by borrowing from political philosophy. and maybe mario monti will let me get away with it after all, since it is a concept from political, rather than moral, philosophy. the concept i am referring to is michael walzer ’ s “ art of separation ”. according to walzer, liberties are created by walls – walls between the different spheres of society. in pre - liberal times, “ church and state, church - state and university, civil society and political community, dynasty and government, office and property, public life and private life, home and shop : each pair was, mysteriously or unmysteriously, two - in - one, inseparable. confronting this world, liberal theorists preached and practiced an art of separation. the wall between church and state creates a sphere of religious activity, of public and private worship, congregations and consciences, into which politicians and bureaucrats may not intrude. similarly, again, the separation of civil society and political community creates the sphere of economic competition and free enterprise, the market in commodities, labor, and capital ”. the walls of liberty concept can be applied to explain the success of independent central banks in fighting inflation as well. assigning central banks a specific responsibility and granting them independence gave central banks the freedom to concentrate on the one objective for which they had the tools to achieve it. many scholars, among them alberto alesina and larry summers1, have shown empirically that having an independent central bank amounts