. it is sometimes claimed that even the current eu fiscal rules do not work. however, evidence from recent years tells a different story. slide 3 – fiscal deficit in the eu countries, budget deficits have been reduced during the recent period when fiscal policy supported by the reformed rules has been effectively applied. this is not to say that the rules are perfect. perfect rules may not even exist. creating rules that ensure optimal countercyclical fiscal policies and fiscal sustainability is inherently difficult. still, i would argue that eu fiscal rules can work, do work – and they can and must also be further improved. in the future, the economic and monetary union can work smoothly only if the public finances of all member countries are credibly on a sustainable footing. a functional combination of fiscal policy rules and market discipline is necessary to achieve this. fiscal rules should be sufficiently well - designed and simple to ensure that, in normal circumstances, we can expect that they will be adhered to when budgets are prepared. rules that support sustainability have become commonplace since the 1990s. according to the imf, nearly 100 states apply national or supranational fiscal rules. fiscal rules have been linked with a more steady development of budget deficits. when fiscal rules operate correctly, they do indeed support the conduct of responsible fiscal policy, long - term sustainability of public finances, and the objective of keeping public debt financing costs low. the goal of the eu ’ s fiscal rules is to ensure the sustainability of public finances and, within that framework, to enable sufficient fiscal room for manoeuvre to stimulate the economy in a member state in recession. not enough attention was paid to the level of public debt before the financial crisis. during the ensuing recession, debt levels rose sharply due to stimulus measures and weak macroeconomic developments. in the most vulnerable countries, risk premiums rose sharply. this led to a negative spiral in which a number of countries ultimately had to tighten fiscal policy, even though economic conditions were difficult. this should be avoided in the future. the eu ’ s fiscal rules have last been revised relatively recently, in 2011. while the body of rules has produced results, it has become rather extensive and sometimes inconsistent. interpretation of the rules, with all the flexibility options, has become complex and difficult to predict. more simple fiscal rules would probably serve debt sustainability better, and also increase transparency and facilitate ex - post verification of policies. in the best case scenario, the predictability of fiscal policy and its credibility in

##tails no permanent costs in terms of lower economic growth or job losses, for instance. research however stresses the importance of a number of price rigidities affecting the economy, which weaken the ability of monetary policy to control short - term inflationary developments and possibly cause interest rate movements to exert even major temporary effects on overall demand and economic growth. the conclusion from this has been that it is worthwhile for monetary policy to aim at price stability over the medium term, but not to strive for a short - term steering of the price level, which would require the conduct of a very aggressive, stop - and - go interest rate policy, leading to unnecessary shocks to employment and economic growth. in situations where price stability is exposed to threats from fluctuations in overall demand, monetary policy aimed at price stability also directly evens out cyclical fluctuations. historical experience shows that consistent monetary policy aimed at price stability has brought about beneficial effects. in the last decade, inflation and its costs have been brought down significantly the world over. meanwhile, monetary policy has been able to make an ongoing contribution to growth and it has been possible to formulate monetary policy so as to have a dampening effect on cyclical fluctuations. the difference with regard to the widespread economic instability of the 1970s is absolutely startling. the global average rate of increase in consumer prices has fallen from about 14 % in the period from 1980 to 1984 to less than 4 % in the period from 2000 to 2005. at the same time, a number of countries have witnessed a definite moderation in inflation and output volatility. this experience denies the idea of a contradiction between price stability and stability in the real economy. although the orientation of monetary policy towards curbing inflation has clearly been a major international success, it must be admitted that monetary policy has not been the single determinant of the strongly falling inflation. another driving force with a similar effect has been the much discussed globalisation. tightening international competition has changed corporate pricing behaviour and also trade unions'objectives of negotiation towards a more moderate stance. this has led to the weakening of the wage - price spiral in a number of old industrial countries. monetary policy institutions another area where the interaction between monetary policy theory and monetary policy practice is clearly visible is the development of institutions. since the end of the 1980s, an increasing emphasis has been laid on central bank independence within the institutional arrangements for monetary policy. this derives from the fact that credibility has been understood to constitute a precondition for a successful monetary policy. central bank