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

the effective lower bound, and for a given level of inflation, there is a limit to the scope for expansionary monetary policy. the lower the natural rate, the less room there is for the central bank to provide monetary stimulus. on the other hand, a higher natural rate increases the scope for monetary policy to be expansionary. if we bring inflation back into the story, then higher inflation would also increase the yellow area in the figure, as it would push the ‘ real effective lower bound ’ more to the left. remember, the absolute lower bound is on nominal rates ; higher inflation therefore lowers the lower bound on real interest rates and in doing so creates more space for monetary stimulus. the effective lower bound is like the black hole of monetary policy. we cannot directly observe it. but we know that monetary space disappears if the natural rate approaches the lower bound. because that is the point beyond which the central bank ’ s interest rate cannot reach. so a low natural rate of interest is a challenge for central banks. and that is exactly what has happened. [ figure 3 ] figure 3. the natural rate of interest in the euro area has declined as you can see in this chart, empirical evidence suggests that the natural interest rate has been on a downward trend in the past few decades, both in europe and other parts of the world. estimates for the euro area put the current natural rate at, or even below, 0 %. several structural forces underlie this so - called secular decline in r *. think of ageing, rising inequality, higher risk aversion, weak productivity growth and lower investment demand. they all tend to lead to an excess demand for safe assets. because most of these trends are likely to continue in the future, the natural rate is expected to remain low for some time. this means that the effective lower bound will limit the central bank ’ s room for manoeuvre more often in the future. so spells of very low interest rates mean trouble for central banks. but they may be good news for governments. low interest rates tend to increase the impact of fiscal policy on the economy. in fact, recent empirical evidence shows that the impact of government spending on output is larger when the effective lower bound on interest rates is binding. intuitively, this makes sense. raising public expenditure in a low interest rate environment does lead to more private spending, because the nominal interest rate remains low and is expected to remain low. in fact, a fiscal expansion could actually have a crowd