The policy mix in the euro area

In the absence of a political union, the Treaty on the European Economic and Monetary Union (EMU) defines an original policy mix model in which fiscal policy remains the prerogative of Member States while the single monetary policy is delegated to the European Central Bank, the independent federal institution at the centre of the Eurosystem. In this unprecedented configuration, the interactions between the centralised monetary policy and the fiscal policies coordinated under an intergovernmental system were complex from the outset and the policy mix has struggled to strike an unsteady balance across the events which have punctuated its development.

On an institutional level, another important point is that, by nature, the single monetary policy only concerns the euro area, while the framework for economic coordination, which in particular includes fiscal rules, encompasses the European Union as a whole. This gap has never been bridged and runs contrary to the definition and performance of a policy mix specific to the euro area.

This policy paper will first of all present the weaknesses of the economic branch of the EMU, its “Achilles’ heel” to quote Jacques Delors (2003). Secondly, it will review the various phases of the policy mix in the euro area, from 1999 to the major financial crisis of 2008-2009 and the ensuing euro area crisis, then from the ECB’s commitment in 2012 to preserving the integrity of the monetary area at all costs to the budgetary dominance that culminated during the Covid crisis, before the 2021-2022 inflation shock enforced a turnaround in monetary policy and a rebalancing of the policy mix. The last section of the paper will take a brief look at the proposals, such as those recently put forward by the European Commission, aimed at improving the euro area’s economic governance.