Second, emergency assistance to countries was provided, without strict conditionality and at favourable interest rates, through the SURE and the Pandemic Credit Line of the ESM. Third, the NGEU provided funds to countries, earmarked for investments in digital capacities and the fight against climate change, in exchange for the implementation of structural reforms. This brief historical review can be summarised as follows: beyond its foundational components (independent monetary policy, focus on national debt sustainability, nobail-out clause), the framework has been continually adapted to a changing environment. 1  See Efstathiou, K., and Wolff, G. B. (2019). What drives national implementation of EU policy recommendations?. Bruegel Working Papers and “Country-specific recommendations: An overview September 2020”, European Parliament Briefing. 2 Stability and Growth Pact. 3  Let me now come back to the present and first discuss some unpleasant fiscal arithmetic. The main idea in the Treaty for the conduct of domestic fiscal policies was that excessive deficit and debt levels were to be avoided. In this regard, it is well known that, over the long term, and for a given inflation rate, the primary balance that allows a given government debt-to-GDP ratio to be stabilised depends on the differential between the real interest rate and the real output growth rate, the so-called “r-g” gap. The wider this gap, the higher the primary balance needed to maintain a stable medium-term government debt-to-GDP ratio. Over the period 1995-1999, the r-g differential was positive and close to 2 percentage points.

Under the Maastricht Treaty, the design of EMU had two core elements: an independent common central bank targeting price stability, and a framework to coordinate national fiscal policies. The former was entrusted with monetary policy, while the latter was based on a set of fiscal rules geared towards ensuring that national fiscal policies did not endanger the price stability mandate. This meant that Member States could no longer rely on monetary policy to stabilise asymmetric economic shocks (domestic, or common with highly uneven domestic effects), while the exchange rate could not act as an adjustment mechanism between countries. Instead, they had to rely on additional adjustment channels, such as capital and labour mobility, and, especially, countercyclical fiscal policy. 1  In addition, the set of fiscal rules included in the Treaty acknowledged that the fiscal behaviour of one country would affect the rest of the members and the monetary union as a whole. In particular, unsustainable fiscal policies in one country could generate economic and financial instability across the monetary union and influence the single monetary policy. Thus, the Treaty stipulates that Member States should avoid excessive deficits, and that the European Commission should monitor public finances to identify significant deviations that could endanger the macroeconomic and financial stability of the monetary union. In practice, the Protocol operationalises these principles by means of two quantitative reference values: 60% for the ratio of government debt to GDP and 3% for the budget deficit-to-GDP ratio.