growth pact. this was intended to keep national fiscal policies in check. one of its tenets was that annual government budget deficits should not exceed 3 % of gross domestic product. a complex procedure was performed regularly to monitor member states ’ compliance with this limit. the penalties for breaching the deficit limit could be escalated all the way to financial sanctions. there is one more key building block in the edifice of the euro area alongside the stability and growth pact : the no - bail - out principle, which forbids member states from assuming liability for the debts of other member states. the guiding principle of monetary union was therefore individual responsibility : member states ’ individual responsibility for the consequences of their policies and financial market agents ’ individual responsibility for the consequences of their investment decisions. despite these rules, however, member states ’ borrowing has not been effectively contained. why not? mainly, because the rules of the stability and growth pact were not only circumvented but even bent. this was possible thanks to a crucial flaw in the system : countries that violated the deficit limit were not automatically punished. instead, the other member states voted on a sanction. and this – to quote the ecb ’ s former chief economist otmar issing, led to a situation in which sinners passed judgement on fellow sinners. this, of course, encouraged a “ you scratch my back and i ’ ll scratch yours ”. put differently : “ i won ’ t punish you today if you don ’ t punish me tomorrow. ” looking back, it must also be noted that the financial markets did not have the desired disciplining effect on fiscal policy. investors turned a blind eye to the misbehaviour of some member states for far too long. by the time the interest rates on government bonds started to rise, the horse – in this case, the greek minotaur – had already bolted. and, once the horse has bolted, the no - bail - out principle is gone with it. as i ’ m sure you will remember, no member state is allowed to assume liability for another ’ s debts. this principle was, at the very least, stretched quite far when assistance was granted to greece. this, however, was not entirely unjustified : the euro - area countries are now so closely integrated that problems in one country can spread quickly to envelop the entire euro area, in a bis central bankers ’ speeches phenomenon known as contagion. when push came to shove,

really are soaring once again – particularly in germany. in january 2017, goods and services in germany were 1. 9 % more expensive than one year earlier. in the euro area as a whole, too, the rate of inflation jumped to 1. 8 %. however, this is primarily due to higher oil prices and the fact that prices bottomed out one year ago. the effect of this rise will wash out of the inflation rate over the course of the year, provided oil prices do not continue to climb and there are no second - round effects. leaving the oil price effect to one side for a moment, domestic price pressures are still 7 / 9 bis central bankers'speeches comparatively low right now. core inflation, which excludes energy and unprocessed food, last stood at around 1 %. however, the eurosystem ’ s projections suggest that domestic price pressures – boosted by monetary policy – will also pick up gradually, pushing the inflation rate into the target range of below, but close to, 2 %, on a lasting basis in 2019. in my view, recent price developments clearly show that deflation – that is to say, a downward spiral of falling wages and prices, which was conjured up by some in the past and used to justify the purchase of government bonds – is now a mere blip on the distant horizon. even prior to this, i viewed the risk of a downward price - wage spiral as rather remote. against this backdrop, an expansionary monetary policy stance is appropriate for now. that said, one can certainly wrangle over whether we should be keeping the monetary policy gas pedal to the floor. the recent rise in inflation caused the real interest rate, ie the price - adjusted interest rate level, to further contract, which has made the monetary policy stance even more expansionary. what ’ s more, the only means of pursuing such a highly expansionary monetary policy stance is by implementing non - standard measures, most notably government bond purchases. however, the cost - benefit calculation of non - standard measures, in particular, is quite different from that of our standard monetary policy instruments. this is why i have always cast a critical eye on government bond purchases and said that, to my mind, such large - scale purchases serve purely as an instrument of last resort to be used, for instance, to avert deflation. quite apart from the fact that i neither see nor saw the risk of such a downward spiral arising, the major drawback of such purchases