public finance. finally, i would like to address some misunderstandings about the pact. it is often said that the major drawback of the pact for stability and growth is that it takes away all flexibility and sovereignty in the budgetary area. this is not correct. as soon as a structural budgetary position of close to balance is reached, any negative cyclical development is allowed to feed into the deficit, that is, up to the 3 % limit, agreed upon in the maastricht treaty six years ago. calculations show that this gives ample room for the so - called automatic stabilisers to do their job. that is to say, if in times of economic fortune member states establish sound fiscal positions, they will have sufficient budgetary room to react adequately to economic downturns. in this respect, the pact for stability and growth is nothing more than the communal equivalence of the dutch saying ” save first, spend later ”. thus, budgetary flexibility is explicitly part of the pact. as regards sovereignty, it has to be recalled that only the level of the deficit will be restricted. no limits or guidelines will apply to the size or composition of government receipts and expenditures. the sovereignty of national parliaments will remain fundamentally intact. in my opinion, it is even of the utmost importance that this sovereignty will remain intact : if the stability and convergence programmes are to be credible, they have to be supported by the national parliaments. some critics of the pact claim that it allows for too much flexibility. to them, i would like to emphasise that the pact for stability and growth will introduce a high degree of automaticity in the assessment of member states ’ budgetary policies. only under exceptional circumstances – such as occurred in less than 6 % of the cases in the past 35 years – may member states be allowed a budget deficit above the 3 % - reference value of the maastricht treaty ; even then this excess will need to be temporary and limited. thus, the pact constitutes a careful balance between flexibility and automaticity, and between prevention and deterrence. as you might know, the details of the pact for stability and growth are now being worked out. i expect that at its june 1997 meeting in amsterdam, which will be hosted by de nederlandsche bank, the european council will reach full agreement on this most important issue. to conclude, from a central banker ’ s perspective, the crucial issue for stable and sound economic developments is the impact of stability. more specific, what

than quadrupling of the average unemployment level. also in the netherlands, rapid increases in government debt were attended by increasing unemployment levels. these recent experiences show that accommodative fiscal policies are not a guarantee for reducing unemployment. j. m. buchanan, “ the deficit and american democracy, center for study of public choice ”, george mason university, 1984, mimeograph, pp. 8 - 9. let me now briefly discuss the second issue – what are the elements of the pact for stability and growth? the pact for stability and growth will take the form of two regulations, and a political resolution from the european council. the resulting regulatory framework represents a judicious balance between prevention – via the strengthening of the surveillance of budgetary policies - and deterrence – via the establishment of a dissuasive set of rules. the pact will oblige member states ( or the “ ins ” ) to submit stability programmes. in these programmes, medium - term budgetary targets will be stipulated, which should be set close to balance or even at a small surplus. non - euro member states ( or the “ pre - ins ” ) will submit convergence programmes. furthermore, the pact will include a sanction mechanism that will be used when countries fail to meet the 3 % reference value. if the council of ministers judges that a member state has an excessive deficit, sanctions would, as a rule, be imposed in the calendar year following the year in which the excessive deficit was recorded or identified. the sanction would consist of a non - interest - bearing deposit between 0. 2 % and 0. 5 % of gdp. in the case of the netherlands, this would imply a maximum fine of somewhat over 3 billion guilders. the third element of the pact, the european council resolution, will reflect the political commitment to a strict and timely application of all the provisions of the pact. thus, the resolution will provide firm political guidance to the parties who will implement the pact for stability and growth. both regulations, together with the resolution, constitute an important framework for stability. if the countries adhere to the provisions of the pact, they will observe a safety margin in respect of the fiscal deficit to make sure that, even in times of cyclical adversity, the deficit will not exceed the 3 % - reference value of the maastricht treaty. the stability pact aims at ensuring that countries, once they have joined emu, will continue to abide by the rules for sound