Standing policy coordination risks ECB credibility, Makhlouf warns
Central Bank of Ireland Governor Gabriel Makhlouf warned that standing policy coordination between fiscal and monetary authorities risks eroding central bank credibility. Speaking in Aix-en-Provence, he stated that Eurozone stability depends on adherence to distinct institutional mandates.
Rules over standing deals
Addressing the setup of one monetary policy across twenty-one fiscal authorities, Makhlouf recalled Mario Draghi's 2012 pledge and the creation of tools like Outright Monetary Transactions, PEPP, and TPI.
These instruments resolve market fragmentation without funding public deficits, preserving monetary transmission.
Highlighting the 2024 Stability and Growth Pact reform and active Excessive Deficit Procedures, Makhlouf called national debt paths a key litmus test.
Drawing from his leadership of the New Zealand Treasury from 2011 to 2019 and his current ECB Governing Council role, he acknowledged joint policy alignment during major shocks like the 2011 Christchurch earthquake and the pandemic, but insisted such coordination must remain situational.
Public legitimacy and single safe assets
Central bank credibility relies on transparent communication cultivated over three decades.
Makhlouf observed that fiscal authorities face a distinct challenge: spending benefits are immediate, while fiscal indiscipline imposes diffuse, delayed costs.
Without public legitimacy, statutory rules cannot survive political cycles.
While a centralized fiscal capacity with a single safe asset would support euro area architecture, price stability ultimately depends on twenty-one member states maintaining fiscal discipline across all economic phases.
Mandate purity over political expediency
Makhlouf rightly highlights the risk of using central bank tools to mask fiscal deficiencies.
Yet, relying solely on national discipline ignores how quickly rules-based frameworks collapse under political pressure.
Until the euro area builds a true central fiscal capacity, the ECB will remain trapped as crisis manager of last resort.