ecb ’ s willingness, on specific terms and conditions, to act as buyer of last resort of government debt. this eliminated speculative risk premia and helped restore the transmission of monetary policy. yet in the aftermath of the crisis, binding budgetary restrictions still forced countries to cut public spending and raise taxes. this not only hurt economic growth, but also shifted the burden of macroeconomic stabilization onto the shoulders of the ecb. to make matters worse, this happened in an environment of persistently low interest rates that, as we have seen, makes traditional monetary instruments much less effective. as countercyclical monetary policy at the euro area wide level was unable to offset procyclical fiscal policies at the national level, the recession was prolonged and the subsequent recovery was off to a slow start. [ figure 5 ] figure 5. monetary and ﬁscal policy in the euro area were misaligned the following chart illustrates the lack of coordination between monetary and fiscal policy in the euro area during and after the european sovereign debt crisis. the bars show the change in the primary budget balance as a percentage of potential output for the euro area as a whole. positive numbers indicate a discretionary fiscal tightening, negative numbers indicate fiscal loosening. the red bars indicate the years when fiscal policy was procyclical and green bars the years in which fiscal policy was countercyclical. while fiscal policy was initially countercyclical during the global financial crisis, it turned procyclical during much of the european debt crisis. this reflected choices in fiscal policy that were often understandable from a national perspective. but, at a european level, these choices led to an aggregate fiscal stance that was not supportive to economic recovery. monetary policy, on the other hand, was steadily accommodative during those years, as evident from the ecb ’ s expanding balance sheet. in the chart, this is shown by the solid white line. so during most of the sovereign debt crisis, monetary and fiscal policy behaved out of sync, rather than working in tandem to stabilize the economy. now let ’ s look in the same chart at what happened more recently, during the covid crisis. this time, the policy response was entirely different. both monetary and fiscal policy responded to the crisis with unprecedented heft and synchronicity. what helped, of course, was the much more symmetric nature of this crisis compared to the previous one. every country in europe was hit in a similar fashion, and in every

environment is such a good idea, why aren ’ t governments doing this all the time? well, first of all, macroeconomic stabilization is not the only objective of fiscal policy. there are lots of other legitimate economic and political objectives, like for example redistributing income. and there are important constraints as well. i will come to speak about debt sustainability in a moment, when we look at the euro area. but there are also, what economists famously call, the implementation and transmission lags. this simply means it takes time, for example, to design and implement a good subsidy policy for the purchase of electric cars. and then it takes time before people actually buy more electric cars. these time lags often prevent fiscal policy from providing the necessary stimulus at the time it is needed, and not when the recovery is already well underway. and even if fiscal policy were not subject to any lags, governments would still face the issue of coming up with the right fiscal package. are we going to cut labor income taxes or are we going to invest in the digital highway? or a little bit of both? it isn ’ t easy. as a finance minister, witteveen was no doubt very aware of that. so when i say that persistently low interest rates strengthen the case for more countercyclical fiscal policy, i ’ m not saying this should be the new compass for the ship of state to sail by. other considerations are as important as ever. what i would like to argue is that the macroeconomic stabilization function of fiscal policy has become more important, and should therefore attract more prominence when weighing the various objectives of fiscal policy. fiscal - monetary coordination in the euro area now that we have covered the theory, let ’ s see what actually happened in the euro area. the consensus view before the global financial crisis of 2008 prescribed a clear division of tasks between monetary and fiscal policy. according to this view, an independent central bank should be tasked with stabilizing prices, which would normally have a countercyclical element to it. fiscal policy should focus on achieving public debt sustainability. this division of tasks was meant to ensure that fiscal problems were not resolved by having the central bank ‘ inflate away ’ public debt. also, discretionary fiscal stabilization policy was generally seen as very difficult to implement, for the reasons i just mentioned. fiscal authorities were therefore advised to take on a more passive role and let the automatic stabilizers do their job. this pre -