a target to be met sometime in the future. and by then things will have improved, or so we assume in our planning. now the structural balance will be an annual target which can only be deviated from in exceptional circumstances or in the event of a severe economic downturn. will the new fiscal compact mitigate the debt crisis? first and foremost, the new fiscal compact is aimed at preventing a recurrence of the present situation in the euro area – with a debt crisis in several euro area member states that is threatening to spread. here it could be argued that serious observance of the existing rules combined with responsible macroeconomic and macroprudential policies could have provided the same result. the fiscal compact and other initiatives will ensure that deviations are to a larger extent exposed – and addressed. bis central bankers ’ speeches so agreement between the euro area member states and other member states on the fiscal compact may help to boost market confidence in europe in general. but the present debt crisis should primarily be addressed through direct measures in the member states in question and via the international assistance programmes already in place. so what are the advantages of the compact? the main advantages of aiming for and realising a structural balance are that growth in government debt over the business cycle is curbed and that each member state has fiscal scope to stimulate its economy in a recession. the foundations must be laid when the economy is not under pressure. the fiscal scope is greater if the structural balance is positive. but it is important to realise that aiming for sound public finances is not enough. wage and productivity developments and other structural factors impacting on competitiveness, the labour market and the balance of payments must also contribute to a sustainable development. this is also an element of fiscal policy. viewed in a broader perspective, the fiscal compact – together with the new six - pack, which focuses on issues such as member states ’ broad macroeconomic development and tightens the sanctions regime against euro area member states – is a prerequisite for preventing future debt crises that bring the coherence of the euro area into question. like other eu member states, denmark has benefitted hugely from the european project, including the single market and the euro. this project cannot be rolled back without substantial costs. so it is very much in denmark ’ s interest that the european project does not strand. are there no drawbacks or reservations in relation to the fiscal compact? in an ideal world, i believe that each member state should be free to conduct responsible economic

nils bernstein : the fiscal compact speech by mr nils bernstein, governor of the national bank of denmark, at the hearing on the fiscal compact conducted by the european affairs committee of the danish parliament, copenhagen, 9 february 2012. * * * what is the essence of the fiscal compact? the new element is that there will be even more focus on the structural budget balance and that the commitment to fiscal discipline will be anchored in national legislation. the structural balance is the cyclically adjusted budget balance stripped of the effects of cyclical developments and special circumstances. in denmark ’ s case, special circumstances include pension yield tax, proceeds from north sea oil and this year also reimbursement of early retirement contributions. in future, it will be a requirement that the structural deficit for a single year does not, as a main rule, exceed ½ per cent of gdp, and that any substantial deviation will trigger an automatic adjustment mechanism to restore the structural deficit to balance or surplus. as i have already mentioned, these provisions are to be incorporated into national legislation. at a later point, the commission will issue guidelines for the content of the automatic adjustment mechanism. indications are that it will be an obligation to take action, not an automatic mechanism as such. the structural deficit is an expression of the “ sustained ” balance situation, be it a budget deficit or surplus. until now, the main focus area – besides observing the 3 - per - cent requirement for the actual budget balance – has been to ensure continuous annual improvement of the structural balance by at least 0. 5 per cent of gdp for member states not observing the medium - term objective of balance or surplus. in practice, one of the weaknesses has been that the adjustment process has been too slow. another weakness has been that the structural balance was overestimated in the good times before the financial crisis. the value of currentaccount deficits, housing bubbles and loss of competitiveness as indicators that output and employment were well above the underlying potential was underestimated. this pattern has exacerbated the deficit during the cyclical downturn so that, on aggregate, debt has increased over the business cycle. if the government budget must, as a main rule, be structurally in balance every year, this reduces the likelihood that the total debt grows over time. deficits in bad times must be matched by surpluses in good times. under the existing stability and growth pact, the structural balance has mainly been used to lay down a medium - term objective – that is,