The euro area has been subject to a series of very different shocks, some of which, such as the COVID-19 pandemic, were unprecedented. While the ECB’s reaction to these deflationary shocks was vigorous, it persisted too long with its expansionary measures and failed to see their inflationary impact when energy prices shot up. The future is likely to bring new challenges, but climate change might not be the most important threat to price and financial stability.

This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 15 February 2024.

Italy must be compliant ex post, and not only ex ante, with the new fiscal rules if it intends to guarantee the long-term sustainability of its public debt.

The ratification of the modified ESM treaty by the Greek parliament took place easily, and smoothly, without the usual political tensions. The text was submitted to the plenary on the 28th of June 2021 and a week later, on July 6th, it was adopted by a large majority. Only the Greek Communist Party and minor parties of the extreme left and right voted against it. It was practically a non-issue for the mainstream Greek political parties and Greek citizens. Why so?

The former managing director of the ESM discusses the long-term consequences of the Euro crisis and its aftermath.

Federal Reserve monetary policy has been more expansionary than the one predicted by the rule until the second quarter of 2022, then this tendency was reversed.  The evidence is very different for the case of the Euro area, where the observed policy rates are consistently below those predicted by the model and fluctuate outside the range compatible with the model-related uncertainty.

While American and European central bankers might prefer to focus on their progress in tamping down inflation, there is no use pretending that they did not play a significant role in creating the problem.

With the establishment of the ESM, the original form of the states' own responsibility for their budgetary policy (no bailout clause), which was central to Germany, has been permanently softened.

While banks are now profiting from the new interest rate scenario, the ultimate long-term effect of heightened interest rates on bank performance remains uncertain.

As the path to fiscal sustainability narrows, so does Italy’s political capital to credibly advocate a radical reform of EU fiscal rules. Italy's primary balance will need to improve by 0.9% of GDP each year in both 2025 and 2026: similarly sized improvements were recorded in only 3 of the 20 years before the pandemic (2 of which were at the height of the Eurozone crisis, in 2011 and 2012).

Given the common monetary policy in Europe, term premia on bonds issued by different countries are an immediate gauge of the heterogeneity in the transmission mechanism of monetary policy in Europe and of the need for intervention to protect the Euro area against it.