coming under threat. the prospect of being able to spread the consequences of unsustainable policy across the entire monetary union might weaken the incentives to run sound policies, in particular a healthy budgetary policy. this is why institutional safeguards were put in place before the euro was launched : the stability and growth pact, the no bail - out clause, and the ban on monetary financing of governments. unfortunately, however, these safeguards were unable to prevent public debt from ballooning in some euro - area countries. the crisis played a role in this, but also that the fiscal rules were repeatedly violated and the capital markets didn ’ t sanction these breaches because the no bail - out clause lacked credibility. when doubts about the debt sustainability of some euro - area member states surfaced during the sovereign debt crisis, the urgently - taken rescue measures helped to prevent the crisis from escalating. but they did so by mutualising fiscal liability on a substantial scale. economic and fiscal policies, on the other hand, essentially remained a national prerogative, though the fiscal 5 / 9 bis central bankers'speeches rules have admittedly been adapted. as a result, the balance between liability and control has been thrown out of kilter. however, striking an even balance between liability and control is crucial for the functioning of emu. theoretically, there are two possible ways to restore this balance : deeper integration, or more individual national responsibility on the part of the member states. the first solution would be to create a fiscal union with centralised decision - making powers. while a fiscal union would not guarantee sound fiscal policymaking, it could certainly mitigate the deficit bias of individual member states. and interestingly, even for karl otto pohl, the former bundesbank president who was a member of the delors commission, the “ fiscal union approach ” was the intuitive one : “ in a monetary union with irreversibly fixed exchange rates, the weak would become ever weaker and the strong ever stronger. we would thus experience great tensions in the real economy of europe. for this reason alone, monetary union without the simultaneous integration in fields like fiscal policy as well as regional and social policy is completely inconceivable. " but let ’ s be honest here : recent political developments show that a fiscal union approach is not on the cards : the outcome of the brexit referendum and maybe at least partly the outcome of the italian constitutional referendum have laid bare the scepticism about the european project and

broadbent ( 2013 ), ‘ conditional guidance as a response to supply uncertainty ’. 4. see krugman ( 1999 ), ‘ it ’ s baaack : japan ’ s slump and the return of the liquidity trap. ’ brookings papers on economic activity, no. 2 : 137 – 87. 5. carney ( 2015 ), ‘ from lincoln to lothbury : magna carta and the bank of england ’. 6. on this point see also feroli et al. ( 2017 ), “ language after liftoff : fed communication away from the zero lower bound ”, research in economics 71, 452 – 490 ; and swanson and williams ( 2014 ), “ measuring the effect of the zero lower bound on yields and exchange rates in the u. k. and germany ”, journal of international economics 92, supplement 1, s2 – s21. 7. remember that the nominal rate of interest is the real rate plus expected inflation ( πe ). so the “ neutral ” nominal rate is something like i * = r * + πe. broadly speaking, policy will be contractionary ( expansionary ) if the official interest rate is higher ( lower ) than i *. 8. woodford and others have argued that qe works mostly because it signals something about future interest rates. see, for example, woodford ( 2012 ) ‘ methods of policy accommodation at the interest - rate lower bound ’, presented at jackson hole. for an overview of the transmission channels of qe see broadbent ( 2017 ) ‘ the history and future of qe ’ and bailey et al ( 2020 ) ‘ the central bank balance sheet as a policy tool : past, present and future ’, bank of england staff working paper no. 899. 9. there ’ s a formal description of the model, and how charts 4 - 6 were generated, in an appendix at the back. 10. in this simple model, monetary policy affects inflation pretty much immediately. in the real world it takes time. lags between policy and its effects are another reason why perfect stabilisation isn ’ t possible. 11. del negro, giannone and patterson ( 2015 ) ‘ the forward guidance puzzle ’. federal reserve bank of new york staff report n. 574. 12. lagarde ( 2021 ), press conference on the ecb monetary policy statement on 22 july 2021. 13. ‘ norges bank ’ s monetary policy handbook ’