Isabel Schnabel: The shadow of fiscal dominance - misconceptions, perceptions and perspectives

Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the Centre for European Reform and the Eurofi Financial Forum on "Is the current ECB monetary policy doing more harm than good and what are the alternatives?" Berlin, 11 September 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Accompanying slides of the speech.

The euro has been built on the principle of monetary dominance.

This means that the European Central Bank (ECB) pursues its monetary policy objectives, as defined by its mandate in the European Treaties, without being constrained by other considerations. This principle was buttressed by granting the ECB statutory independence. The ECB is said to be one of the world's most independent central banks.

At the time of the Maastricht Treaty, high government debt was seen as a major threat to central bank independence, and it was feared that fiscal dominance could induce a central bank to deviate from its monetary policy objectives, endangering price stability.

This was not just idle speculation. History is full of examples of high government debt eventually being resolved through higher inflation and financial repression.