You should have first set up a political federation, with a federal government and a federal budget. Then you could have introduced a single currency.” Two main arguments were put forward. First, without a federal budget of some significance the policy mix would have been very erratic, depending on the random behaviour of the different national fiscal policies of the member countries of the Monetary Union. And second, without such a federal budget it would be impossible to weather, with the help of the fiscal channel, asymmetric shocks hitting one particular member economy of the Monetary Union. These two economic arguments are perfectly valid and would have been sufficient to discourage the creation of the Euro had we not set up a profoundly original concept of national fiscal policy surveillance. It is this concept, the Stability and Growth Pact which guarantees the coherence and the consistency of the European Economic and Monetary Union (EMU), namely a single currency area without a political federation. On top of these fundamental economic underpinnings a number of other considerations are worth mentioning. In particular, a fiscal policy that is set according to rules, and is lived up to, adds to macroeconomic stability by providing economic agents with expectations of a predictable economic environment. This reduces uncertainty and promotes longer-term decision-making, notably investment decisions, and economic growth. In addition, sound fiscal policies can contribute to lower risk premia on long-term interest rates and thus support more favourable financing conditions for the entire economy.

The 3.7 percent annual rate of productivity growth the U.S. economy has averaged since the end of 2002 is well above most estimates of the underlying or structural rate of growth in productivity, which tend to be between 2.5 and 2.75 percent, estimates themselves that are much higher than those of a decade earlier and reflect the outstanding productivity performance of the U.S. economy in the last 10 years. Much of the source of the recent productivity growth seems to be in multi factor or total factor productivity—in other words, in increases in the efficiency of business processes and the use of technology. These developments in productivity growth are important, of course, because of their potentially favorable implications for inflation dynamics and for future income growth. Overall inflation has risen over the past two years, pushed up primarily by higher prices for energy and other commodities and industrial inputs. Inflation excluding food and energy, however, has been quite moderate, in part due to very modest growth in unit labor costs. Survey based measures of consumer inflation expectations at longer horizons have remained stable despite the large increases in energy prices, though some of them remain slightly above the 1.5 to 2.5 range for the CPI index that some have cited as a reasonable definition of price stability in the United States. These favorable developments in fundamentals have been accompanied by important developments in financial markets. Expectations of future inflation have fallen, and there appears to be confidence in continued stable, low inflation.