Blurred Boundaries Between Monetary and Fiscal Policy

The paper argues that the monetary policy response to the COVID-19 crisis has been appropriate in terms of the ECB’s primary objective. The concern over fiscal dominance is, however, valid as in a situation of rising inflationary pressure the ECB would have to choose between maintaining price stability on the one hand and public debt sustainability, financial stability and cohesion of the EMU on the other hand. Reform of the euro area institutional framework could mitigate this risk, either in the direction of a fiscal union or in the direction of full fiscal self-responsibility. This document was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 19 November 2020.