evaluate clearly how the government is doing in relation to a long - term norm. the idea of being on or off target is quite easy to grasp, and if the process is transparent, experts and the public alike will learn to trust the figures. in this area most countries still have a lot to do. it is a pity that government accounts, which affect everyone in a compulsory way, are less transparent, less well audited and less understood as the accounts of companies listed on the stock exchange, which only affect very few people and at their own risk. sweden has a target of a 2 per cent surplus for the public sector over the business cycle, a figure that includes pension savings and that, given an ageing population, is in fact akin to targeting a balanced budget over the cycle. this target is present in the debate of every budget. the national institute of economic research comments on the target and helps the public to understand it. this keeps the government accountable not only in the normal political sense but also in relation to the targets agreed upon. the political debate is in a sense being taught to keep the long term in view. the public then knows from the national debate that fiscal discipline is good for the country and if “ accountants ” or other nations in brussels criticise your budget policies, there is a greater chance of the criticism being interpreted as a help towards fiscal soundness. the swedish trade unions, for example, are among the most vocal defenders of our budget target. however, the framework might still not be strong enough - the 2 per cent over - the - cycle target has been slipping somewhat out of view given that the government, as i mentioned, is focusing more on the short term recently. sweden would perhaps need an even more formal external fiscal evaluation. this leads to an important conclusion for the pact. perhaps the solution to regain credibility is neither to water down the pact, nor to impose even stricter rules centrally. the solution is perhaps to build from below - to complement the european level with national frameworks in the respective european nations so that they come to internalise the need to balance their budget over the cycle and to ensure that the same transparency exists on the fiscal side as on the monetary side. while pressure from fellow finance ministers has apparently not worked well enough, the present attempts at national processes with transparent targets have a better track record. why not have all eu countries commit themselves to establishing independent bodies with the responsibility of enhancing transparency by conducting independent forecasts of the countries ’ deficits

therefore by definition meet with less of a monetary policy response than it would if monetary policy had been national. furthermore the nature of the political set - up makes it more difficult for the ecb to comment on individual national budgets. this means there will be a strong temptation to “ free ride ” by expanding the budget at the expense of fellow european nations. but the dilemma goes further - given that it is rational for others to expand their budgets it becomes rational for your own country to do so too - even if your instinct is not to “ free ride ”. otherwise you might rationally expect to end up among the small minority that does not expand and at the same time still have the tighter monetary policy that results from everyone else expanding. this is the classic “ prisoner ’ s dilemma ” from game theory. the conclusion is that it is necessary to have rules for fiscal policy that limit deficits and debt when monetary policy is united and fiscal policy divided, and that these rules need to be followed. but the conclusion is also that the pressure to over - expand is as strong during an upturn as during a downturn. in fact this is what we have seen in the euro zone during the heyday of the late 1990s - a much too expansionary fiscal stance in some euro zone countries, which led to tighter monetary policy and thus an incentive for others to weaken fiscal discipline. the euro zone then started the downturn with large deficits, considering the earlier boom, instead of surpluses. what the pact then required, a 180 - degree turnaround in fiscal policy to a tighter stance, reinforcing the downturn, was considered by some as stupid. in fact it was the lack of savings during the boom that was stupid. thus, we would need rules not only like the stability pact, for a maximum deficit in a downturn, but equally some forceful rule for fiscal rectitude in good times. those rules are difficult to state as clearly as the 3 per cent limit, but one way ahead could be to define annual targets for actual net lending based on the predicted output gap. but why didn ’ t we see these problems from the beginning? perhaps because we were fortunate to have something that can work as a temporary replacement for rules : clear objectives, strong leadership and the market as a quickly reacting judge. this existed not so long ago in europe. the objective was to join the euro zone and achieve the convergence criteria. the leadership was provided by germany both in terms of its economic size