, there is little to suggest that the monetary policymakers ’ strengths lie in the fine - tuning of the business cycle. monetary policy is far better suited to the long - term safeguarding of price stability. in considering the appropriate policy mix in the monetary union, the terms of the stability and growth pact mean that the role of fiscal policy undoubtedly occupies centre stage. in the field of budgetary policy, several countries are having considerable difficulties in fulfilling their existing european commitments. these provide for a 3 % limit for the general government deficit ratio and, at the same time, a budgetary position that is in surplus or close to balance over the entire business cycle. since the deficit in germany, at 2. 8 % of gdp, already came quite close to the 3 % ceiling last year - mainly on account of the tax reform - the risk that it might now exceed that limit in the current year has become greater. furthermore, there are some doubts as to whether german fiscal policy will be able to deliver on the self - commitment - reaffirmed in spring - to achieve a budget position close to balance by 2004 unless there are further cuts in public payments. given the budgetary problems that also exist in other emu countries and in view of the weak cyclical situation, calls are increasingly being made for a relaxation of the fiscal policy rules in european monetary union. the main point of criticism about the existing provisions of the maastricht treaty and the stability and growth pact is their alleged inadequate cyclical flexibility. it is claimed, for example, that these rules force budgetary policy to act in a procyclical manner counter to the requirements of stabilising the economy. such criticism does not, however, take due account of the rules of the european stability and growth pact. it is, in fact, precisely the task of this pact to ensure that government budgets can “ breath ” during the business cycle without breaching the deficit limit of the maastricht treaty. such flexibility is to be achieved through a budgetary position which is at least close to balance over the medium term - in other words, when seen over the cycle as a whole. if that condition is met, the automatic stabilisers can develop their full effect within the 3 % margin. the fact that there is, even so, only a narrow “ safety margin ” from the limit in some countries should not be blamed on the fiscal policy rules. it is rather the case that there has been a failure over the past few

international standards act as a reservation wage. in germany, it is difficult, especially for low - skilled persons, to find a suitable job. the “ wedge ” between gross and net wages also led to the emergence of a considerable black economy. furthermore, the skills profile of those seeking work often fails to match that of the jobs on offer. unemployment would thus remain high even if the number of vacancies corresponded to the number of people looking for work. the german labour market is characterised by a high level of mismatch unemployment. the proposals of the hartz commission, which was set up by the previous federal government, and the embryonic reform of the labour exchanges, which is already under way, are an attempt to tackle that situation and to increase the efficiency of the job placement process. the most pressing tasks of labour market policy from my point of view can be split into three categories : first, measures to increase the supply of labour ; second, proposals on strengthening the demand for labour and, third, changes in the wage - formation process. one of the things to be examined with regard to increasing the labour supply is whether, say, the period of time for drawing unemployment benefits does not lead to people remaining in unemployment longer than is absolutely necessary. as i have mentioned, in empirical terms, it is evident from the perspective of the enterprises that the skills of the unemployed rapidly lose their value the longer unemployment continues. for that reason, purportedly generous arrangements may even become “ poverty traps ” for the unemployed. combining social assistance and unemployment assistance also has to be considered. neither of these types of state benefit is an insurance benefit. rather, they are granted according to specific need. they should therefore be merged. many experts agree that the demand for labour in germany also suffers from the very complex legal arrangements relating to work contracts. enterprises are so cautious in recruiting labour because it is so difficult to make redundancies. if there is to be a sustained decline in unemployment, some elements of the wage - formation process have to be subjected to more scrutiny. collective pay agreements should set only general framework conditions in order to take greater account of the individual situation in which firms find themselves. we should now admittedly not overlook the fact that initial cautious steps have already been taken towards making the german labour market more flexible. the strict principle of regionally agreed pay deals has already been relaxed somewhat by opt - out and opt - in arrangements. furthermore, the labour market has been made more adaptable with the extension