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Thank you to the Coordination Team for inviting me to speak at this 2023 edition of the Warwick Economics Summit. I would like to congratulate the University of Warwick's Department of Economics on encouraging its students to run this initiative, which has benefited from the words of highly distinguished participants since 2002. I am honoured to join this group of speakers that have shared with you their views on various matters that are key not only to our present but also to our future. Allow me to add that I am particularly glad to be able to do so this year in person after the recent pandemic years.

In my remarks today I will address what I consider to be the key role that the fiscal governance framework of the European Union (EU) plays, or ought to play, and the ongoing review for its reform. I will also touch upon the European Commission's recent orientations for the reform of the fiscal rules that were published last November. Please note that my words today are merely one more voice in the ongoing debate involving academics and other policymakers on the reform of the EU's fiscal governance framework.

Introduction

The current economic context is one in which economic activity, even if more resilient that initially expected, is losing steam. A series of factors are responsible for these adverse economic dynamics and for the surge in inflation to levels that we had not seen for decades. Accordingly, central banks, including the ECB, have responded swiftly to the inflationary pressures, tightening financing conditions for both private economic agents and the government.

Moreover, these shocks have thrown into stark relief European vulnerabilities in key areas, such as the energy sector, as well as the considerable disparities among countries in their relative exposure to them.

And this is happening against the background of an increase in euro area public debt by almost 10 percentage points (pp) of GDP since the pandemic, leading to high debt-to-GDP ratios and high structural deficits in some countries that have shrunk the available fiscal space and represent an important vulnerability.

All these elements underline the importance of achieving the correct monetary and fiscal policy mix in order to face this complex context.

The current circumstances differ substantially from those prevailing at the outbreak of the COVID-19 pandemic. The pandemic confronted us with a severe, albeit temporary, exogenous shock, which was probably the biggest supply and demand shock we had faced in decades. In that context, a coordinated fiscal and monetary policy response was absolutely necessary to support the incomes of both households and firms, and to minimise the potential structural damage to employment, productive capacity and economic growth caused by the crisis.

The fiscal response had to rely on both national and supra-national policy actions of significant magnitude. In the current high inflation setting, however, the appropriate policy mix requires a tightening of the monetary policy stance and a fiscal stance that, at the aggregate, euro area level, is not at odds with this anti-inflationary stance. This means that government support measures should be temporary, targeted and tailored to preserving incentives to consume less energy.

In particular, measures should be gradually rolled back as energy prices fall. Otherwise, we are at risk of driving up medium-term inflationary pressures, which would call for a stronger monetary policy response.

In this regard, let me stress that achieving a fiscal stance that is consistent with the smooth operation of the Economic and Monetary Union (EMU) while delivering sustainable public finances is precisely the role of the EU's fiscal rules framework, or at least its key aspiration.