ECB’s Panetta: fiscal-monetary co-ordination no danger to independence

Fiscal-monetary policy co-ordination should not imperil central bank independence as long as it remains consistent with the inflation target.

In a speech today (June 28) Fabio Panetta, executive board member at the European Central Bank, assessed how central banks and governments actions can work together to foster the recovery from the Covid-19 pandemic.

“The experience we have gained since the great financial crisis shows that situations in which monetary and fiscal policies should work together are not exceptional,” he said. “These situations can arise more frequently than we previously thought, especially in an environment of structurally low interest rates.”

The official warned against withdrawing stimulus too soon. “If we are to succeed in escaping that [liquidity] trap and sustainably reflating the economy, there needs to be the confidence that combined policy support will not be withdrawn prematurely,” said Panetta.

The ECB board member argued greater fiscal-monetary co-ordination will not necessarily lead to less central bank independence.

“Achieving price stability requires acknowledging that monetary and fiscal policies cannot ignore each other,” he said. “What ensures monetary dominance is that such interactions remain consistent with the central bank’s goals, not those of the fiscal authority.”