eu has strictly limited risk sharing arrangements between member states and none between the national banking systems. now, in the crisis, the divergence of the euro area economies has dramatically increased and the ecb could easily end up becoming such a risk sharing mechanism. the ecb or the eurosystem cannot become a mechanism for sharing fiscal risks between the member states. this is because its monetary policy and its independence could be compromised. the risks taken by the eurosystem must therefore be limited to what is required by monetary policy and by the goal of ensuring the transmission of the monetary policy to all parts of the euro area. there are very good reasons for not monetizing budget deficits in countries with a national currency. there are even more reasons for not doing so in a monetary union such as the euro area. before the crisis, it was too often argued that current account positions between members of a currency union are meaningless, and that there cannot be balance - of - payments crises within a currency union. the last couple of years have proven the fallacy of this view. the sovereign debt crisis carries all the hallmarks of a balance - of - payments crisis. it goes without saying that a central bank whose job it is to equalize monetary conditions between the crisis countries and the safe - haven countries will inevitably face a formidable task. it can only succeed if the imbalances within our currency area are solved, in the medium term, by real adjustments, including budgetary adjustment. the ecb is protected by its institutional independence. but as the crisis has demonstrated, this independence needs to be complemented by economic policies that avoid the build - up of serious imbalances within the currency area. all in all, the tradeoffs the ecb has dealt with during the crisis have been difficult. the challenge has been to do what is necessary to maintain a sufficient functioning of monetary policy transmission mechanism for the single monetary policy to operate, while at the same time avoid creating significant moral hazard and avoid making monetary policy a vehicle of fiscal transfers. the path between the two is narrow, and only time will tell whether we succeeded. conclusions the evolution of economics is driven by crises. the breakdown of the bretton woods system and the inflationary years of the 1970s gave impetus to an era of rapid progress of monetary economics. the result was a vast literature on central bank credibility, independence, transparency and price stability mandate. at the beginning of the new millennium, the development of monetary economics reached its culmination.

erkki liikanen : monetary policy in unconventional times speech by mr erkki liikanen, governor of the bank of finland, at an european central bank colloquium in honour of mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, frankfurt am main, 16 may 2012. * * * session 1 – panel discussion on non - standard measures and monetary policy : what have we learned from recent experience? it is now nearly five years since the start of the financial market turmoil. during these five years, many dimensions of monetary policy have changed. i will touch on three such dimensions. each of them deals with links between monetary policy in the modern narrow sense and issues that, before the present crisis, were thought to be clearly distinct from it. during the last three or four years we have had to think thoroughly about the following : • the link between price stability and financial stability, • the link between monetary policy stance and its implementation, and • the link between monetary policy and fiscal policy. financial stability and price stability let me start from the relationship between financial stability and price stability. here, the crisis has inspired a lot of rethinking. some commentators, such as paul degrauwe1, have gone so far as to suggest that the crisis has revealed inflation targeting as a “ fallacy ”. others, such as lars svensson2 maintain their belief in strict, forecast - based inflation targeting. it may be useful to think of the relationship between financial stability and price stability as a continuum of views that falls between two extremes : at one extreme, financial stability would be elevated to the position of a new, additional objective for monetary policy, alongside with price stability. monetary policy would be about finding the right balance between financial stability considerations and price stability considerations. the other extreme is what used to be the prevailing view before the crisis ; namely, that price stability should remain the single ultimate monetary policy objective, and financial stability should enter monetary policy consideration only indirectly, to the extent it affects price stability. i don´t think that the price stability objective has failed. if a conflict has emerged between financial stability and some conceptions of inflation targeting, this cannot be held against ecb ’ s monetary policy strategy, which has always taken a medium - term view and takes monetary analysis and credit expansion explicitly into account when setting monetary policy. this is visible even today. the ecb has repeatedly stressed the importance of preventing a contraction in bank lending,