The massive, unprecedent fiscal and monetary stimulus undertaken by almost all governments and central banks in the last two years has prevented the 2008-2009 recession from turning into a second Great Depression. Policymakers and economists did not forecast the crisis, but they have been able so far to take it under control. So we should at least rejoice; the great depression of the 1930’s was not anticipated as well, but it was because of subsequent mistakes by authorities that it became so great!

This said, the current picture is not bright at all. GDP in many countries is well below its previous levels, and some of the likely causes of the crisis are still there, waiting for a long-term appropriate remedy.

A main concern for the next future consists in the ‘exit strategy dilemma’: on one side, early exit from public spending and monetary easing would slowdown the recovery and threaten deflation and long-term unemployment. On the other side, keeping a high deficit spending and an accommodating monetary policy would trigger concerns about fiscal sustainability and expected inflation, with the consequent increases in long-term rates and therefore in lending rates on personal and corporate loans, thus leading to a crowding out of consumption and investment from the private sector.

Mistakes in setting the exit strategy from public stimulus may result in a double-dip W-shaped type of recession, with a timid recovery followed by another deep crisis phase.

Most governments and central banks will have to decide how and when to cut public deficits and how and when to mop up liquidity. And above all, how to mix and blend these policy decisions. Timing will be crucial, and fiscal and monetary policy will need to coordinate toward the common goal of withdrawing intervention without damaging growth.

Unfortunately, the ECB does not have the flexibility to coordinate monetary policy with EU governments’ fiscal policy. The ECB is statutorily constrained by its inflation targeting mandate of keeping the inflation rate below 2% in the euro area. As a result, as soon as inflation will threaten to materialise - and this will happen as soon as the demand for money will normalise again and not be pushed up any longer by panic - the ECB will feel the urge to raise policy rates, independently of any established exit strategy and with no concern for the trend of recovery.

Furthermore, in a normalised situation the large budget deficits of governments will probably raise expected inflation, and the ECB will again be statutorily pushed to anticipate this by increasing rates, with the consequence of damaging recovery and neutralising the fiscal expansion itself.

The independence of the ECB from governments must of course continue to be guaranteed, but we should create the framework to let fiscal and monetary policy not to be in conflict, but to cooperate in smoothing crises and cycles. A compromise solution is at hand. Governments could reign-in the least productive part of their fiscal package, reducing debt accumulation, in exchange for a feasible and less rigid monetary policy. To do that, we would need in Europe a flexible ECB, allowed to be responsive to economic growth besides price stability, whether one believes or not, as we do, that this should be true in general and not only in times of crisis.

The ECB has by now reached a high degree of credibility that allows it to deal with the cycle without being thought as measuring against inflation. It is a cultural paradox and a policy mistake for Europe to continue adopting a strict monetarist approach to its monetary policy while, even in the place where monetarism was born - the USA, a much more flexible approach is currently in place.

The time has come to put the statute of the ECB in the new EU agenda, along with many other badly needed supply-side market reforms.

Filippo Calciano: Center for Operations Research and Econometrics, Université Catholique de Louvainla-Neuve, and Department of Economics, University of Rome III.

Gustavo Piga: Department of Economics and Territory, University of Rome Tor Vergata.