economy is very complicated, and in many cases not fully understood. the famous black box monetary economists talk about. finally, the problem of time inconsistency applies to monetary policy as well. monetary authorities may be tempted to create unexpected inflation to stimulate the economy in the short run. eventually, economic agents will revise their expectations and the result will not be a higher growth rate, but a higher rate of inflation instead. hence, playing the monetary piano is perhaps even more difficult than playing the fiscal violin. fiscal policy co - ordination against this background, let ’ s turn to discussing economic policy co - ordination in the context of emu, starting with the co - ordination of fiscal policies. as i have already argued, playing the fiscal violin is very difficult. by definition, it is even more difficult to prevent fifteen eu fiscal violinists to play out of tune. do my critical observations rule out any co - ordination, at any time? no, under certain special circumstances, fiscal policy co - ordination can be welfare - improving. this assertion is based on a conventional game - theoretical model : fiscal policy - makers maximise independently of each other - a welfare function in which the spillovers of their actions to other players are neglected. the joint welfare of the economies involved increases if fiscal policies are subsequently co - ordinated and policy makers take into account the consequences of their actions on the other players of the game. however, given the caveats mentioned, we have to conclude that the scope for active fiscal policy - making is limited. only in very specific circumstances, the ecofin council should consider the possibility of fiscal policy co - ordination. for instance, when there is a risk of overheating or a common recession, or when the euro area is faced with a persistent balance - of - payments deficit. the basis for the co - ordination of fiscal policies is the multilateral surveillance procedure provided for in article 103 of the ec treaty. in my view, it is possible to elaborate the so - called broad guidelines of the economic policies of the member states, which the ecofin council adopts in conformity with article 103, and include fiscal policy co - ordination. so far, these broad guidelines have been very broad indeed. in the future, they should address individual countries more specifically. when a member state does not comply with the broad guidelines, specific policy recommendations can, and should, be given to the member state concerned. when appropriate, these recommendations should be published. the multilateral surveillance

laid down in article 103 allows for this. indeed, this procedure provides sufficient additional scope for fiscal policy co - ordination that has not yet been applied to the extent possible. it should be emphasised that this kind of fiscal policy co - ordination should fit within the limits set by the pact for stability and growth. this pact requires member states to strive for a budgetary position which is on average in balance or in surplus. it prevents unduly lax fiscal policies and, if they might occur, provides an effective instrument for putting an end to an excessive deficit. in other words, the stability pact prevents spillovers from lax fiscal policies to the interest rate level of the euro area as a whole and to the single monetary policy of the ecb in particular. the policy mix let ’ s suppose we have more or less managed to get the fiscal violins to play in tune. now we want to introduce the monetary piano. we have two possibilities there. the easy option is to instruct the monetary piano player to play always the same notes. whatever happens. this is equivalent to economic policy co - ordination in an environment of fixed exchange rates. in the case of - 3fixed exchange rates, there is no room for monetary fine - tuning, since monetary policies are determined by exchange rate policies. by definition, the burden of adjustment falls on budgetary policies. let me illustrate this by giving the example of my own country. monetary conditions in the netherlands are currently relatively easy, taking into consideration credit expansion, the business cycle, asset prices and the inflation rate. since dutch monetary policy is first and foremost directed towards maintaining the guilder - deutsche mark peg, other policies should be geared to preventing the economy from overheating. i would hope in particular that the fiscal authorities decide to reduce the budget deficit further, which currently stands at about 2 % of gdp, and thereby approach balanced budget within the next four years, that is during the next term of government. denmark will achieve a budget surplus this year already. the second option is to give our monetary piano player the opportunity to tune in to the fiscal violins. one of my all - time favourites is tschaikovsky ’ s violin concerto. a splendid combination of piano and violin, but one of the most difficult concertos to play, i am told. indeed, this is equivalent to economic policy co - ordination in an environment of flexible exchange rates. in the case of flexible exchange rates, the desired policy mix can be obtained either by adjustment on the fiscal,