Is there a need for a new fiscal framework in the Euro area?
The rules stipulated by the Stability and Growth Pact have proved impossible to enforce. However, to avoid unsustainable fiscal policies reappearing, and to prevent monetary policy from beingundermined by self-interested governments, there is still a need for a fiscal framework within the Euro Area. To achieve co-ordination between monetary and fiscal policies, this paper suggests anintertemporal assignment, where fiscal policy focuses on long-term objectives (e.g., social security, public provision of education and research) and monetary policies focus on short run objectives(macroeconomic stabilisation). Specifically, we suggest public debt targets as a practical way to achieve such a set up without compromising the independence of monetary policy. An excessivedebt protocol is proposed to give concrete form to this targeting arrangement, and as a mechanism to identify the stable region within which the debt target must operate. Making these factors explicitwould both improve the credibility of the Euro Area’s fiscal policies and reduce the risk premia in borrowing costs. However stabilising the stock of debt by fiscal means alone is not always possible.We therefore examine the role of “internal devaluations” as a means of circumventing those barriers. This framework provides the analytic support to underpin many of the innovations currently under discussion in Brussels.