challenges. one important benchmark for the whole process was the endorsement by the european council, in october 2010, of the recommendations by the task - force on economic governance led by president van rompuy. building on these recommendations and on a number of proposals put forward by the european commission, the eu has gradually reinforced its surveillance architecture with well - known initiatives such as : ( i ) the euro plus pact ; ( ii ) the european semester ; ( iii ) the six - pack ; ( iv ) the fiscal compact ; ( v ) the two pack. in march 2011, the euro area member states and 6 other eu countries agreed on the socalled euro plus pact. the pact, ( which is part of the new economic governance framework ), focuses on four key areas : competitiveness ; employment ; sustainability of public finances ; and financial stability. the additional commitments taken therein – also in areas of national competence – are included in the national reform programmes of the concerned member states. the eu also agreed on a new approach to economic surveillance and on a new policymaking calendar, setting up the european semester. the first european semester started in the first half of 2011. the new approach allows for a discussion of the economic and budgetary priorities at the same time every year, starting with the commisssion ’ s annual growth survey. bis central bankers ’ speeches a major step to fill some of the gaps of the stability and growth pact – and “ to give it more teeth ” – was the approval of legislative package, the so - called “ six - pack ”, which entered into force on 13 december 2011. the new legislation aims at strengthening both the preventive and corrective arm of the pact, setting minimum requirements for national budgetary frameworks, and preventing and correcting macroeconomic and competitiveness imbalances ( including the introduction of a new excessive imbalance procedure ) ii. enforcement has also been strengthened by recourse to'reverse qualified majority'voting 1. on 2 march 2012, the " treaty on stability, coordination and governance in the economic and monetary union " ( which includes the so - called “ fiscal compact ” ), was signed by twenty - five member states ( all but the uk and czech republic ). according to the treaty, the annual structural balance of the general government must be balanced or in surplus ( with a lower limit of – 0. 5 % of gdp at market prices ). these member states will have to enshrine this rule in their national legal

a debate which goes well beyond the portuguese situation. in general, the discussion has been rather simplistic. the arguments put forward typically suffer from time consistency problems and rest on a partial equilibrium analysis. therefore it is worth being clear and taking a complete and dynamic perspective. conceptually, the counter - cyclical use of budget policy, in particular by allowing the automatic stabilisers to work, finds broad consensus. it is also undeniable that budget consolidation always means austerity, insofar as it exerts a negative effect on economic activity in the short term. this negative effect will be stronger if the variables that generally dampen the recessive impact of budget consolidation – i refer to the interest rate, the exchange rate and external demand – are constrained in some way. this is the current situation : various countries are undertaking budget consolidation simultaneously ; interest rate levels in the main advanced economies are limited by the “ zero bound ” ; and the countries most affected by the sovereign debt crisis do not have an independent monetary policy. on the other hand, it is also generally accepted that above a certain threshold, which in the case of the advanced economies is estimated at around 90 % of gdp, public debt levels negatively affect economic growth in the short, medium and long term. this negative effect is explained by three factors : • firstly, by the greater uncertainty over macroeconomic developments resulting from unsustainable debt paths. uncertainty leads to postponement of investment projects and a bias towards investments with short - term returns, at the expense of projects bis central bankers ’ speeches which may potentially impact on economic growth, but whose returns tend to be long - term ; • secondly, by the increase in risk premia, which increases the economy ’ s financing costs and, in extreme cases, results in the interruption of financing ; • thirdly, by the fact that high debt levels constrain the counter - cyclical use of budget policy, which in the presence of hysteresis, may have lasting effects on the economy ’ s productive capacity, due to the depreciation of human capital and insufficient investment in physical capital. here i would like to take a moment to mention the following : it is odd that the intense public debate on the relationship between budgetary policy and economic growth, recently rekindled following publication of a box in the latest edition of the imf ’ s world economic outlook, has focused only on the size of the short - term budgetary multipliers, when