The optimal fiscal and monetary policy mix in the euro zone

The traditional arrangement in the past was that both fiscal and monetary policies were countercyclical in the euro zone. Then euro-zone fiscal policy lost its countercyclical nature: it became procyclical, both in periods of declining activity (2011-2013) and in periods of growth (2016-2019 and in the future). A procyclical fiscal policy imposes strong constraints on monetary policy: in periods of weak activity, monetary policy has to become highly expansionary; in periods of growth, it has to continue to ensure public debt sustainability. Finally, monetary policy itself has become procyclical in expansion periods, to stimulate employment and to ensure debt sustainability (as above), which runs the risk of high financial instability ( non-stop rise in asset prices, etc.). The current situation (procyclical fiscal and monetary policies in the euro zone at least during expansion periods) therefore has serious drawbacks (the need for monetary policy to maintain the solvency of governments, financial instability). It would certainly be optimal to return to the past state where both economic policies are countercyclical. But this will face a lot of barriers: the very high level of public debt ratios , which prevents monetary policy from becoming countercyclical; new public spending needs (energy transition, innovation, healthcare, industry, education, etc.), which prevents fiscal policy from becoming countercyclical and which will probably require the new European fiscal rules to be very accommodating .