The Maastricht Question Revisited

Good morning, everyone,

It is a pleasure to welcome you to De Nederlandsche Bank — and to the Amsterdam Room.

For what I want to discuss this morning, a Maastricht Room might have been more appropriate. Unfortunately, we do not have one.

Maastricht is special to me personally. That’s where I studied economics. And it’s also where, in 1992, European policymakers laid the foundations for our monetary union.

Since then, the campus has changed. Europe has changed. But some of the economic questions still seem remarkably familiar.

When the Maastricht Treaty was signed one question already loomed in the background: how can a common monetary policy function effectively when fiscal realities differ across countries?

And you know better than I do that research often has a longer shelf life than policymakers would like to admit.

More than three decades later, many of the papers discussed at this workshop touch on different aspects of that same question.

Today, central banks face a combination of challenges that few would have anticipated: geopolitical tensions, volatile energy markets, pressure on supply chains, and inflation that has proven more persistent than many expected.

In such an environment, policymakers may find it necessary to tighten monetary policy to safeguard price stability.

Higher interest rates also raise borrowing costs for governments. In countries where debt levels are already elevated, this can create difficult policy trade-offs. It underscores an old lesson that was already relevant when the Maastricht Treaty was negotiated: monetary policy tends to work most effectively when accompanied by prudent fiscal policy.

Understanding these interactions is not just a policy challenge. It is also a research challenge. And that is precisely what brings us together today.

The post-pandemic inflation surge has taught us that supply-side disruptions can bring about persistently high inflation.

Global supply chain disruptions that resulted from COVID-related port closures choked off the supply of key intermediate goods, thereby raising input prices. These disruptions gradually rippled through the supply chain and eventually pushed up prices more broadly.

The energy crisis triggered by the Russian invasion of Ukraine aggravated inflationary pressures through direct and indirect effects, with some countries being more exposed to the energy price shock than others.

Although such shocks are not new, the recent experience has renewed interest in the role of sectoral conditions, production networks and input-output linkages in shaping the transmission of supply shocks through the economy. This renewed interest is clearly reflected in the workshop programme, with papers examining how tariffs propagate through supply chains, the role of trade policies and how geopolitical risks contribute to inflation heterogeneity across the euro area.

Today, some of these issues have once again moved to the forefront. Geopolitical tensions remain elevated, energy prices are still high, and global supply chains continue to face disruptions. Since the start of the war in Iran, euro area headline inflation has moved from 1.9% in February to 3.8% in September. At the same time, current conditions differ from those prevailing during the inflation surge of 2021 to 2023. Labour markets have cooled and firms appear better able to adapt to supply bottlenecks. Yet while the indirect and second-round effects of higher energy prices have so far remained more limited than during the previous inflation episode, the recent round of oil and gas price increases raises the risk that inflationary pressures will prove more persistent.

More generally, uncertainty about the economic outlook remains unusually high. It is difficult to assess how geopolitical developments, energy markets and global trade patterns will evolve, and how these developments may affect inflation going forward. At the same time, there is considerable uncertainty about the strength and timing of productivity gains from new technologies such as artificial intelligence and their implications for economic growth. Finally, while inflation expectations remain anchored, the recent inflation episode is still fresh in the minds of households, firms and financial markets and may have left scars on people’s inflation expectations.

In such an environment, central banks cannot always rely on a ‘look-through’ strategy. Indeed, they may need to lean against supply-driven price pressures to safeguard price stability and ensure that temporary shocks do not translate into more persistent inflation. But monetary policy does not operate in isolation.

Higher interest rates affect not only households and firms, but also governments. As borrowing costs rise, so do debt-servicing costs. This can reduce the fiscal space available to respond to adverse shocks and support economic adjustment.

Prudent fiscal policy can therefore play an important complementary role. When fiscal buffers are available, governments are better able to absorb the real consequences of adverse shocks while allowing monetary policy to focus on maintaining price stability. When fiscal space is limited, however, these policy trade-offs can become more difficult.

When public debt levels and fiscal deficits are particularly high, the interaction between monetary and fiscal conditions becomes especially important. Further increases in interest rates may raise concerns about fiscal sustainability and sovereign risk. Such concerns can spill over to broader financial conditions and ultimately affect borrowing costs faced by households and firms. As a result, the measures needed to restore price stability may also increase risks to broader macroeconomic and financial stability, making the policy trade-off more challenging.

These considerations illustrate that monetary policy may sometimes face difficult trade-offs between restoring price stability and preserving macroeconomic stability. Sound public finances cannot eliminate those trade-offs, but they can make them more manageable and help create an environment in which monetary policy can operate more effectively. They also highlight the importance of credible fiscal frameworks that help preserve fiscal space and support sustainable public finances over time. I am therefore happy to see that this workshop includes several papers on fiscal policy, including two that focus on the particularly timely case of France.

If the world continues to become more fragmented, the type of supply-side disruptions we’ve seen in recent years are likely to occur more often in the future. On top of that, climate change and extreme temperatures may also hamper our productive capacity and constrain supply. In other words, it is very likely that supply shocks will remain a dominant driver of inflation. Addressing these challenges effectively will benefit not only from a central bank that can pursue its commitment to price stability independently, but also from a fiscal framework that ensures long-run debt sustainability and allows for sufficient scope for fiscal stabilisation policies.     

Let me conclude by returning to Maastricht.

More than three decades ago, the Maastricht Treaty helped create the framework for Europe's monetary union. The world has changed, but the interaction between monetary policy, fiscal policy and economic integration remains central to its success.

The papers presented over the next two days examine that interaction from many different perspectives: fiscal policy, trade, geopolitics, inflation, competitiveness and economic adjustment. Together, they help us better understand the challenges policymakers face in an increasingly uncertain world.

I wish you a stimulating workshop and many fruitful discussions.

Thank you.