The European Central Bank in the New Normal: Organizing Fiscal Support for Monetary Policy

Within the Economic and Monetary Union (EMU) the responsibility for monetary policy lies with the European Central Bank (ECB). EMU was designed without a fiscal counterpart to the ECB that could assist monetary policy with stabilizing the euro area economy. This paper reviews how euro area governments could cooperate to establish fiscal framework conditions in support of monetary policy that are similar to those found in other currency areas. First, they could create a central fiscal capacity to ensure a euro area economic policy stance that is consistent with the orientation of monetary policy. Second, member countries could introduce a safe sovereign asset for the eurozone to anchor financial integration, secure an even monetary transmission, and facilitate the implementation of monetary policy. Third, euro area governments could commit when necessary to recapitalize their national central bank and (indirectly) the ECB to underpin the credibility of large balance-sheet operations.