Stability and Growth in Europe: Towards a Better Pact

The fiscal policy framework of EMU is in a state of crisis. Since the start of EMU, fiscal conditions in some member states have slipped considerably beyond the limits set by the Maastricht Treaty and the Stability and Growth Pact. It is clear that the preventive arm of the Stability and Growth Pact has failed to preclude excessive deficits.

There is no shortage of proposals to reform the current fiscal framework in this crisis situation. None of these proposals offers a convincing solution to the problem at the heart of the current crisis: How to balance the need for effective long-run fiscal stability in EMU with the need for short-run flexibility of fiscal policy in the member states.

The authors propose the creation of a Sustainability Council for EMU, an independent body with the sole statutory task of safeguarding the sustainability of public finances in the euro area, regularly and openly reporting to the public and the European Parliament its assessment of the member states' fiscal policies. Its mandate is the counterpart of the ECB's principal task of maintaining price stability. However, the Sustainability Council has no operative role in fiscal policy; it relies solely on the pressure of informed public opinion to discipline national governments. The use of the instruments of fiscal policy is entirely left to the national governments, and the Sustainability Council can only be conceived as a judge of national public finances.