28 November 1996
OPINION OF THE EUROPEAN MONETARY INSTITUTE
CON/96/14
on a consultation from the Council of the Euro pean Union under Article 104c (14) of the Treaty
establishing the European Community (the “Treaty”) on a draft EU Council regulation onspeeding up and clarifying the implementati on of the excessive deficit procedure.
1. The present consultation was initiated on 5th November 1996 by the Council of the European
Union which, for this purpose, transmitted to the EMI document COM(96) 496 containing the
text of the Draft Regulation and its explanat ory memorandum. The EMI is competent for this
consultation, in accordance with Articles 104c (14) and 109f (8) of the Treaty.
2. The objective of the Draft Regulation is to furt her specify the procedural provisions provided
for in Article 104c of the Treaty and in its Protocol n.5. Further im plementing provisions,
which have the scope to complement the one s of Protocol n.5 and of Council Regulation EC
n.3605/93, are felt to be necessary to ensure a sm ooth and effective application of the excessive
deficit procedure (EDP).
3. The Treaty recognises that budgetary disciplin e will be required in Stage Three of Economic
and Monetary Union to ensure price stability. St arting from Stage Three, the Treaty prohibits to
all Member States1 excessive government deficits and includes provisions necessary to prevent
and remedy excessive government deficits in Article 104(c). In order to safeguard theindependence of the ESCB in the conduct of its monetary policy, with the primary objective to
maintain price stability, Articles 104 and 104(a) rule out “monetary financing” of the publicsector as well as “privileged access”, and Article 104(b) states that the Community and the
                                                     
1 An exception for the United Kingdom is provided for in Protocol n.11.
2
Member States shall not be liable for or a ssume commitments of public entities of another
Member State. 
4. The EMI fully endorses the view that a lack of  fiscal discipline would negatively affect the
ability of the ESCB to achieve its primary objec tive to maintain price stability, both through a
direct demand effect and through an indirect effect on inflati on expectations. Directly, fiscal
imbalances can contribute to expanding aggreg ate demand, thereby obliging the central bank to
offset them in order to maintain price stab ility. As a result, the economy may face a sub-optimal
policy mix of higher deficits and higher interest  rates. Furthermore, high and persistent fiscal
imbalances typically raise the issue of sustaina bility and thereby indirectly fuel inflationary
expectations. In order to prevent negative re percussions, fiscal policies should be geared
towards achieving budgetary positions close to bala nce or in surplus and a convergence of high
debt ratios to the 60% reference value or below.
5. Fiscal discipline will be all the more important  given that budgetary policies will have to cope
with major challenges, in particular those resulting from high and persistent levels ofunemployment and unfavourable demographic patterns. It is indeed the sustainability ofgovernment budgetary positions  which will safeguard the Monetary Union against the risk thata situation arises in which an individual country is ultimately unable to service its debt from its
own fiscal revenues. The fiscal convergence crite ria are not to be seen as constraints on the
conduct of national economic policies, but as an essential mechanis m for preventing the
recurrence of the experiences of several Member States in the past, when unsustainable fiscal
developments adversely affected confidence, adde d risk premia to interest rates and hampered
the achievement of long-term non-inflati onary growth of output and employment.
6. Against this background the EMI endorses the objective of the EU Council regulation to
strengthen the credibility and effectiveness of the EDP under Article 104c, in particular byestablishing clear deadlines for the consecutiv e stages of the excessive deficit procedure,
defining the “exceptional and temporary” circum stances when the 3% reference value for the
deficit can be exceeded, laying down general rules governing the imposition of sanctions, andspecifying further the pecuniary sanctions to be imposed. While this framework should be as
transparent and precise as possible, and the pro cedures to be enshrined in the regulation should
be strong and credible and cont ribute decisively to a sound conduct of fiscal policies in Stage
3
Three, the EMI does not wish to express an opinion on the specific prov isions of the Draft
Regulation and on the institutional aspects of this question.
7 The EMI has no objection to its opinion being made public by the consulting authority.