. germany and france breached it in 2002. it now seems that the netherlands and the united kingdom joined france and germany in 2003, and the european commission predicts that in 2004 italy, portugal and greece may also exceed the 3 % limit. thus half of the euro area countries now find that they have no budgetary room for manoeuvre and most of them have to consolidate their public finances during a period of still relatively weak economic growth. those who criticise the rules of the stability pact argue that they are not flexible enough and that the eu should look for a better set of fiscal rules. but this is easier said than done. i acknowledge that the rules of the pact may not be perfect. i would stress, however, that the pact ’ s rules and procedures are much more flexible than commonly perceived. moreover, we also need to keep in mind that a lot of thought went into the design of the existing rules. the arguments presented in the ongoing debate are not new. they were all known when the treaty was drafted. many of the alternatives now proposed were also considered in the past, and it was felt that they involved problems of their own. i am therefore sceptical whether these alternatives would be an improvement on the current rules. economic theory suggests a number of desirable properties for fiscal rules. fiscal rules should be simple, transparent, flexible and enforceable. the problem is that a fiscal rule designed to exhibit one of these desirable properties will often, as a result, exhibit less of another. there is, typically, a trade - off to be faced. this is often a trade - off between what is theoretically right and what is operationally feasible in the real world. and it is natural that academic economists tend to favour the former, while policy - makers, including central bankers, also take into account the latter. these trade - offs become even more acute in a multinational environment of twelve countries. these considerations only strengthen my conviction that revising these rules is not likely to help us very much. having said this, i do not deny that the implementation of the rules and procedures of the existing fiscal framework could be improved. and in some respects improvements have been or are in the process of being made. a good example is the assessment of the long - term sustainability of public finances. according to the maastricht treaty, member states ’ debt levels should be kept below 60 % of gdp or at least be declining towards this level at a satisfactory pace. this provides a useful bench

##mark against which to assess the long - term health of the public finances. but a comprehensive assessment of long - term sustainability clearly needs to go beyond reliance on a single indicator. it also needs to be forward - looking taking into account future liabilities, especially as regards spending on pensions and health care, which can be expected to increase substantially as a result of ageing populations. the measurement of such liabilities is, however, shrouded with methodological difficulties and subject to a high degree of uncertainty. the commission and the member states have made considerable efforts to address methodological issues and to draw up comparable measures of long - term sustainability. moreover, in recent years, sustainability has been as an integral part of the assessment of member states fiscal plans in the context of the stability and growth pact. this progress is welcome and should continue. ultimately, however, a certain degree of judgement, or “ discretion ”, when assessing long - term sustainability cannot be avoided, given the complexities involved. assessments of long - term sustainability do not therefore lend themselves to be summarised in terms of a single debt variable that could serve as the basic benchmark for multilateral surveillance. for this reason, such assessments should preferably be seen as providing additional information, as a complement to or as a means of better implementing the eu ’ s current fiscal rules rather than as an entirely different or new approach. in other areas too, the implementation of the eu ’ s fiscal rules is being or could be improved. the problems now faced by a number of governments reflect, to a large extent, a failure to strengthen the public finances during periods of robust growth. in this context, fiscal surveillance has been complicated by the difficulty of identifying budgetary trends. and there is no doubt that, in recent times, there has also been a lack of political willingness on the part of some member states to abide by the rules and to apply peer pressure on others to do so. it would therefore help if we can strengthen incentives to reach sound budget positions in good times. it would help if we continue to work on and improve our analysis of structural budget balances. and it would help if we can find ways of bringing more pressure to bear on member states that deviate from the fiscal rules. but, once again, such improvements do not require the pact itself to be changed. they can be made within the existing framework. by changing the rules of the pact in the ways suggested by some economists, we might solve some problems.