sgp for the sustainability of public finances and for the stabilisation role of fiscal policy in europe. ultimately, it is the implementation of the revised rules that will provide the definite answer. the outlook for fiscal policies in many countries ( as reflected in plans and forecasts ), the excessive deficit procedure ’ s loss of some “ teeth ” and the unchanged incentives for compliance and strict implementation suggest that one should be sceptical. at the same time, governments have unanimously stressed their commitment to sound fiscal policies. what can we really expect as a result of the agreed reform of the pact? in trying to assess the possible implications of the changes, it is useful to distinguish between the sgp ’ s preventive and corrective arms. it is also useful to recall the lessons from past experience and from political economy regarding the main characteristics of good fiscal rules. to be meaningful and effective, fiscal rules should be based on a sound economic rationale and be sufficiently flexible to allow for appropriate policy responses. but good fiscal rules should also be sufficiently simple, clear and enforceable. seen from this perspective, some of the changes introduced into the preventive arm strengthen the economic underpinnings of the sgp and address certain past criticisms of the rules. these changes include : ( i ) country - specific medium - term objectives that take into account potential growth and debt levels ; ( ii ) the benchmark of a 0. 5 % annual adjustment with more consolidation in good times but possibly less in bad times ; ( iii ) the definition of the medium - term objectives and the adjustment path in cyclically adjusted terms ; and ( iv ) the netting of temporary measures. by allowing broader economic conditions and specific budgetary positions to be taken into account to a greater extent than in the past, such changes have the potential to strengthen fiscal coordination and surveillance, and thereby also the contribution of the sgp to fiscal sustainability and stabilisation. but this potential strengthening of the preventive arm and the associated benefits will only materialise if these changes are accompanied by a renewed political commitment to enforcing the rules. moreover, a downside risk is that these changes might make the rules more complicated and less transparent. in particular, problems of definition and measurement ( e. g. estimating potential output and measuring the costs and benefits of structural reforms ) could make surveillance and implementation difficult. a potential weakness in the pact ’ s preventive arm is a bias towards negative output gaps or “ bad times ” ( that would require less adjustment )

, coupled with the provision that medium - term objectives do not necessarily have to be reached within the horizon of a country ’ s stability programme. in sum, the preventive arm of the pact, as recently revised, provides a useful framework for surveillance and benchmarking of sound fiscal policies and the reform might strengthen the pertinent provisions. however, if it is implemented in a minimalist fashion, the required adjustment and fiscal policy paths may not be consistent with determined consolidation, sufficient safety margins and adequate debt reduction. as regards the corrective arm, it should be recalled that the original sgp aimed to strike a balance between the quasi - automatic application of the excessive deficit procedure and the inherent room for discretion in the procedures and in the role of the ecofin council. this combination of automaticity and discretion was intended to deter ( and, if necessary, ensure the prompt correction of ) excessive deficits. and this, in the opinion of the ecb, would anchor expectations of fiscal discipline in emu. the reform of the sgp ’ s corrective arm makes decisions on the existence of excessive deficits and on the setting of deadlines for correcting them less automatic and more explicitly conditional on discretion in the assessments of the underlying economic and budgetary situations. the reform even relaxes certain rules. for example, the softening of the exceptional circumstances clauses and the list of other relevant factors are indicative of the increased discretion and potential relaxation of fiscal discipline. it can, of course, be argued that this enhanced flexibility in assessing the existence and correction of deficits by itself does not impose a looser application of the procedure compared with what was done in the recent past. yet it can facilitate a more lax implementation, which could imply higher and more protracted deficits for a member country and the euro area as a whole. this is a cause for serious concern. ii. implications for the interaction of fiscal and monetary policy the second set of questions i would like to address is as follows : what are the implications of the sgp reform for the interaction of fiscal and monetary policy? and what role should the european central bank play in this context? given the impact of fiscal policies on key macroeconomic variables, it goes without saying that fiscal policies can have significant implications for monetary policy. indeed, the danger that unfettered fiscal policies could create tensions in emu and undermine macroeconomic stability, in general, and monetary policy, in particular, is the raison d ’ etre for the sg