Makhlouf: Clear mandates crucial for euro area fiscal, monetary policy

In 2012, Mario Draghi's 'whatever it takes' pledge, backed by Outright Monetary Transactions (OMT), stabilized bond markets amid euro breakup fears.

Though OMT was never used, it demonstrated the central bank's role when sovereign solvency doubts threatened monetary union.

Subsequent fragmentation risks during the pandemic led to the Pandemic Emergency Purchase Programme (PEPP), and rising rates in 2022 prompted the Transmission Protection Instrument (TPI).

Governor Makhlouf noted that these instruments manage sovereign market disruptions to ensure monetary policy transmission across the euro area, rather than directly financing deficits.

The EU has addressed this through a rules-based approach, with the 2024 Stability and Growth Pact reform aiming for credible national fiscal commitments.

The effectiveness of country-specific consolidation paths, especially with Excessive Deficit Procedures in place for several Member States, will be the litmus test.

Drawing on his experience running the New Zealand Treasury from 2011 to 2019 and now sitting on the ECB's Governing Council, Governor Makhlouf offered insights into the fiscal-monetary relationship.

New Zealand operated a 'consensus assignment' model, where monetary policy took the primary stabilisation role and fiscal policy focused on sustainability and building buffers.

This model, though not formally coordinated, relied on clarity of mandate and institutional independence.

Makhlouf acknowledged that for large shocks, some alignment of fiscal and monetary policy is appropriate, citing the Christchurch earthquake and the pandemic response.

However, he cautioned that this type of coordination must not become a standing expectation of fiscal support, as it would undermine central bank credibility and its ability to meet its price stability mandate.