Lamfalussy was right: independence and interdependence in a monetary union. Speech by Benoît Cœuré, Member of the Executive Board of the ECB

Decision-makers in different policy areas act independently and are at the same time interdependent. Managing interdependence requires strong framework: “monetary dominance” is the framework in the euro area in which the central bank acts in independence and fiscal policies are constrained in the SGP.  The crisis in Europe has shown that policy interactions can be more subtle and involve also financial and structural policies. Monetary policy becomes more effective in impacting the real economy if other policies act in support. If not, it has less impact and expansionary policy has to last longer. An example for interdependence between monetary and financial policies (micro level) is if supervisors show too much forbearance to undercapitalized banks, central bank funding may end up being used to fill the gap. Fiscal policies can also become overburdened if they need to smoothen the economic cycle and at the same time stabilize the banking sector. Banking union has been there one answer to the crisis. European supervision helps align the governance of the financial sector with the aims of monetary policy. And the resolution leg creates rules that limit the link between fiscal policies and the banking sector; bail-in replaces bail-out by governments and taxpayers. The interaction between structural reforms and fiscal policies is clear: if product and labour markets are resilient and flexible, there is less need for fiscal intervention. Constantly refining fiscal rules while leaving structural policies at the national level makes little sense. If fiscal policies are to be freed from structural dominance, strong framework for both is needed. Today structural reforms are their own reward. Tomorrow sovereignty over structural reforms should be shared between countries, allowing for symmetric risk sharing.