Box A: The Euro Area's monetary-fiscal policy interactions after 2020: A new normal?

Since the Covid-19 shock, there has been an increasing recognition among EU policy makers of the need for European wide economic recovery with a constructive consensus on the mitigation of the risk of moral hazard on public debt issuance. At the peak of the pandemic, EU leaders agreed to the EU Recovery and Resilience Facility (EU-RRF) with the goal of achieving longer term growth and economic convergence. For the first time, this opened up the idea of joint EU debt issuance at large scale to finance new (mainly green and digital) investments, side-lining the thorny issue of legacy debt. Yet, the EU-RRF remains far from a cyclical stabilization tool. As the ECB enters a tightening cycle, markets are signalling the EU-RRF is not enough to guarantee debt sustainability in the currency union. In response, the ECB came up with a new anti-fragmentation tool, the so-called Transmission Protection Instrument (TPI). In this box, we review the interactions and the potential complementarities between the new TPI and the ongoing implementation of the EU-RRF and discuss long-term implications for the Euro Area.